The Standard Formula: A Guide to Solvency II – Chapter 3: Cross-Border Services and Overseas Branches | Insights

See all chapters of A Guide to Solvency II.

Introduction

(Re)insurance is a global business. It is common for (re)insurance groups to operate in a range of jurisdictions via:

i. locally incorporated and authorised subsidiaries,

ii. local branches of third country subsidiaries, or

iii. the cross-border provision of insurance, reinsurance or other insurance-related services.

In this chapter, we deal with items (ii) and (iii) in relation to both direct insurance as well as reinsurance,⁷⁸ focussing on the regimes in place in the European Economic Area (EEA) and the UK for a range of participants/combinations as follows:

EEA (re)insurers doing business within the EEA.
- The cross-border provision of services⁷⁹ within the EEA by EEA (re)insurers (referred to as “freedom of services passporting”).
- The establishment of branches within the EEA by EEA (re)insurers (referred to as “freedom of establishment passporting”).
- The conduct and supervision of EEA (re)insurers exercising rights to freedom of services or of establishment passporting.
Third country (re)insurers doing business with (or in) the EEA.
- The cross-border provision of services into the EEA by non-EEA (re)insurers (referred to as “third country (re)insurers”).⁸⁰
- The establishment of branches in the EEA by third country (re)insurers (referred to as “third country branches”).
Non-UK (re)insurers doing business with (or in) the UK.
- The cross-border provision of services into the UK by non-UK (re)insurers.
- The establishment or operation of branches in the UK by non-UK (re)insurers.

These permutations inevitably require an examination of:

Solvency II,⁸¹ both in relation to the EU and its interactions with all third country (re)insurers (including, post-Brexit, the UK).
The EU’s attitude towards the UK following Brexit.
The UK’s attitude towards the EU, and indeed the rest of the world, following Brexit.
Relatedly, the UK’s efforts to establish bilateral arrangements with other key third countries — in particular, the United States and Switzerland — following Brexit.

Inevitably, there is a political component to consider, with, on one hand, the UK broadly attempting to make a success of Brexit by keeping access to its insurance markets open to international participants and, on the other hand, the EU seeking to maintain its integrity. We therefore also consider the respective publications of the European Insurance and Occupational Pensions Authority (EIOPA) and the UK (including the Prudential Regulation Authority’s (PRA’s) proposals to further liberalise the UK position and implement certain reforms as set out in their recent consultation papers).

1. EEA (Re)insurers Doing Business Within the EEA

Solvency II requires that EEA member states subject the taking-up of insurance or reinsurance activities to prior authorisation.⁸² Authorisation requirements are implemented as a matter of the local laws of an EEA member state, albeit subject to harmonisation.

A (re)insurer authorised under the laws of one EEA member state can provide (re)insurance services in another member state by providing services on a cross-border basis or setting up a branch (the set-up of which is not subject to full local authorisation requirements).⁸³

Freedom of Services Passporting

Direct Insurers

Where an EEA-authorised direct insurer wishes to exercise passporting rights without setting up a branch, the direct insurer must notify the supervising authority of its home member state, indicating the insurer’s proposed coverage of certain liabilities or risks.⁸⁴

The supervisory authority of the direct insurer’s home member state should, within one month of receiving the notification, inform the direct insurer of the contents of — and communicate to the supervising authority of the member state into which it intends to provide services — the following:

A certificate attesting that the direct insurer covers the solvency capital ratio (SCR) and minimum capital requirement (MCR).
The classes of insurance that the direct insurer has been authorised to offer.
The nature of the risks or commitments that the direct insurer proposes to cover in the host member state.

Direct insurers can begin offering cross-border services on the date that they are informed that the communication to the relevant authority of the non-home member state has been made. If the supervising authority in the home member state does not agree to communicate the required information, it must let the direct insurer know of its reasons for the refusal by the end of the one-month period referred to above. The direct insurer has the right to then apply to overturn the decision in a court in its home member state.⁸⁵

If the direct insurer’s situation changes and the contents of the initial communication become inaccurate, the direct insurer will need to adhere to the communication procedure referred to above once again.⁸⁶

Reinsurers

Though there are no notification requirements for the passporting of reinsurers, a reinsurer must adhere to the legal and regulatory requirements to which it would be subject to as a reinsurer in the host member state.⁸⁷ If a reinsurer does not comply with such provisions, the supervising authority in the host member state will require the reinsurer to rectify the problem and report these findings to the supervisory authority in the reinsurer’s home member state.

If the reinsurer continues not to comply with local rules, then the supervisory authority in the host member state can take measures against the reinsurer, for example by barring them from entering into and honouring any new reinsurance contracts within the host member state.⁸⁸

Freedom of Establishment Passporting

Solvency II allows insurance undertakings authorised in an EEA state to provide insurance in another EEA state by setting up a permanent establishment in that other EEA state, which does not separately require local authorisation.⁸⁹ This is otherwise known as “freedom of establishment passporting,” with passports being available to both insurers and reinsurers, albeit with different rules applying to each entity type.

A “branch” is defined as “an agency or a branch of an insurance or reinsurance undertaking which is located in the territory of a member state other than the home member state.”⁹⁰ This process entails notifying the supervising authority in its home member state, including informing it of the details of the scheme of operations.⁹¹ The home state regulator will then notify the host state regulator.

Only activities carried on “within” the territory of an EEA state are subject to prior authorisation. This can capture services provided both on a cross-border basis and by a branch. The notion of “within” requires looking at the location of risks for a given insurance contract. Solvency II differentiates between the following types of risks:⁹²

For property insurance, the risk is where the property is situated.
For vehicle insurance, the risk is where the vehicle is situated.
For travel, the risk is where wherever the policyholder was situated when the policy was entered into.
In all other cases, the risk is wherever the policyholder is situated, or for non-natural legal persons, the establishment of the policyholder, to which the contract of insurance relates.

Conditions for EEA (Re)insurers Establishing an EEA Branch

A (re)insurer must notify the supervising authority in its host member state of the following information:

The member state within the territory of which it proposes to establish the branch.
A scheme of operations setting out, at least, the types of business envisaged and the structural organisation of the branch.
The name of a person who possesses sufficient powers to bind, in relation to third parties, the insurance undertaking.
The address in the host member state from which documents may be obtained and to which they may be delivered, including all communications to the authorised agent.⁹³

The home state supervisory authority must, within three months of receiving the information referred to above, communicate that information to the supervisory authority in the host member state and confirm that the (re)insurer covers the SCR and MCR.⁹⁴ This is so that the supervisory authority of the member state is confident in the adequacy of the system of governance, the financial situation of the (re)insurer and that the proposed authorised agent has the requisite qualifications, experience and integrity.

If the home supervisory authority declines to relay this information to the host member state, it must explain its reasoning to the (re)insurer within the three-month period. If it fails to do so within this statutory period, its failure or delay can be questioned by the (re)insurer in the home member state’s courts.

The supervisory authority of the host member state has two months from receiving the information referred to above to inform the supervisory authority of the (re)insurer’s home member state of any conditions under which the branch’s business should be pursued before the (re)insurer’s branch can start business.

If any such conditions are imposed, the (re)insurer must be informed of these requirements, after which the branch may start pursuing its business. If there is no communication of any condition at the end of the two-month period, the branch can commence its business with the understanding that there are no applicable conditions.⁹⁵

General Good

(Re)insurers carrying on business in another member state (whether through a branch or provision of services) must comply with conditions imposed by the host member state “in the interest of the general good,” a somewhat vague principle that can be interpreted differently per member state.⁹⁶ There is no definition under Solvency II of “general good.”

However, the European Commission has provided some general guiding principles, stating it must:

Come from within a field that has not been harmonised at the EEA level.
Pursue an objective of the general good.
Be non-discriminatory.
Be objectively necessary.
Be proportionate to the objective pursued.
Not duplicate rules to which the provider of services is already subject in its home state.⁹⁷

Solvency II prohibits host member states from requiring the following of passporting (re)insurers:

systematic notification of general and special policy conditions, scales of premiums or, in the case of life assurance, the technical bases used in particular for calculating scales of premiums and technical provisions, or the forms and other documents that an insurance undertaking intends to use in its dealings with policy holders; or
prior notification or to obtain the approval of proposed increases in premium rates, except as part of general price-control systems.⁹⁸

These conditions are analysed in more detail in the Interpretative Communication and have also been the subject of cases heard at the European Union Court of Justice.

Conduct and Supervisory Responsibility

The home member state supervisory authority retains the responsibility for prudential supervision of the passporting (re)insurer, whereas the passporting (re)insurer must comply with the conduct rules of the host member state.

Where the host supervisory authority establishes that a (re)insurer is not complying with the applicable legal provisions, the host supervisory authority will notify and require remediation from the (re)insurer. Where such action is not taken, the supervising authority of the host member state must inform the supervising authority of the home member state, which must ensure the passporting entity’s compliance.⁹⁹

The host member state can take steps to penalise the behaviour of the passporting entity if necessary, including preventing that undertaking from engaging in new insurance contracts in the host member state.¹⁰⁰

2. Third Country (Re)insurers Doing Business Within (or in) the EEA

Cross-Border Services – Direct Insurance

A third country direct insurer (which, post-Brexit, includes the UK) may not write risks in the EEA without the requisite local authorisation. As the UK is no longer part of the EU, UK (re)insurers can no longer provide business to EU policyholder customers either on the basis of freedom of services passporting or freedom of establishment passporting. UK-incorporated (re)insurers have in response had to undertake significant Brexit transition steps in order to continue to service EEA policyholders.

Such transition steps have included:

The identification of affected customers (see Section 2 above on what activities are considered to be “within” an EEA member state).
The setting up and authorisation of new EEA-based (re)insurers.
Transferring or otherwise migrating customers to locally authorised EEA entities.

Note that a third country branch authorised in an EEA member state is authorised to provide services in the home state of authorisation but cannot itself benefit from passporting. Only EEA-incorporated subsidiaries of (re)insurers are entitled to such passporting rights.

Cross-Border Services – Reinsurance

There is more scope for a third country reinsurer to write reinsurance risk in the EEA. Solvency II is not prescriptive in this regard; it provides only that an EEA member state may not impose requirements on a third country reinsurer such that the requirements are more favourable than for EEA reinsurers.¹⁰¹

Members states must apply their own requirements for third country reinsurers, and there are a range of approaches — from a requirement for minimum rating, a requirement for collateral or even outright prohibition — depending on the member state in question.

Note, however, the particular treatment of reinsurers subject to regulatory regimes deemed “equivalent” for these purposes. See Chapter 2 of The Standard Formula: A Guide to Solvency II.

Third Country Branches – Direct Insurance

Conditions of Authorisation

An undertaking with its head office outside the EU must obtain authorisation to carry out direct insurance business in the EU. (This requirement is specific to undertakings carrying out direct insurance business.) The following requirements apply to the insurer in question:¹⁰²

It is entitled to pursue insurance business under its national law.
It establishes a branch in the territory of the member state in which authorisation is sought.
It undertakes to set up, at the branch’s place of management, accounts specific to the business that it pursues there, and to keep there all the records relating to the business transacted.
It designates a general representative, to be approved by the supervisory authorities.
It possesses, in the member state in which authorisation is sought, assets of an amount equal to at least half of the absolute floor prescribed in Article 129(1)(d)¹⁰³ in respect of the MCR, that absolute floor being:
It deposits, in respect of the MCR, one-fourth of the relevant absolute floor described in the bullet above as security (with an EEA-authorised credit institution that has acknowledged that it does not have, or will not exercise, any rights of set-off of claims it may have against the undertaking if it chooses to, or is forced to, wind down).¹⁰⁶
It undertakes to cover the SCR and MCR in accordance with the requirements referred to in Articles 100¹⁰⁷and 128.¹⁰⁸ Note that streamlined rules apply in the case of branching (re)insurers that are authorised in more than one member state, provided there is mutual agreement among all the relevant member states.¹⁰⁹
It communicates the name and address of the claims representative appointed in each member state other than the member state in which the authorisation is sought (where the risks to be covered are classified as “motor vehicle liability,” other than carrier’s liability).
It submits a scheme of operations in accordance with the provisions in Article 163.¹¹⁰
It fulfils the governance requirements of Solvency II.¹¹¹

Third Country Branches – Reinsurance

Solvency II does not provide separately for third country branches that conduct only reinsurance business (as opposed to insurance or mixed insurance/reinsurance branches). Generally, the treatment of third country reinsurers is at the discretion of member states, provided that member states may not treat such reinsurers more favourably than EEA entities.¹¹² Member states may impose additional restrictions as a matter of national law and regulation. The requirements to treat third country branches “no more favourably” than EEA reinsurers applies also here (see footnote 102).

3. Non-UK (Re)insurers Doing Business With (or in) the UK

Cross-Border Services – Direct Insurance

Any non-UK insurer newly doing direct business in the UK must now obtain UK authorisation. EEA (re)insurers may now only provide services to UK policyholders if authorised in the UK or by utilising the temporary permission and financial services contracts regimes until full UK authorisation is obtained (see further below). Accordingly, the Solvency II provisions on passporting are no longer of relevance, with the PRA’s rules covering third country branches assuming greater significance.

Cross-Border Services – Reinsurance

There is more scope for a third country reinsurer to write UK reinsurance risk. The PRA does not apply specific requirements for a minimum rating or a requirement for collateral, although such features are likely to improve the credit that a UK cedant is able to take in respect of the reinsurance asset. We discussed this topic in Chapter 2 of this series.

Third Country Branches

A (re)insurer with its head office outside the UK seeking to carry out direct or reinsurance business in the UK must obtain authorisation by the PRA under Section 19 of the Financial Services and Markets Act 2000 (FSMA). By March 2021, 30 international insurers had established branches in the UK.

The UK has largely retained Solvency II’s specific principles and conditions for third country branches.¹¹³ These requirements can be found in the “Third Country Branches” part of the PRA Rulebook, which was amended post-Brexit to reflect certain necessary adjustments. Further, parts of Article 162 have already been adopted under UK law by virtue of the FSMA and the Variation of Threshold Conditions Order thereunder.¹¹⁴

The principal requirements that a third country (re)insurer carrying on (re)insurance business in the UK must meet are:

The threshold conditions set out in Schedule 6 (Threshold Conditions) of the FSMA,¹¹⁵ in relation to non-UK (re)insurers, which are:
- It must have a representative who is resident in the UK and who has authority to bind it in its relations with third parties and to represent it in its relations with the PRA and the courts in the UK.
- It must be a body corporate entitled under the law of the place where its head office is situated to effect and carry out contracts of insurance.
- It must have in the UK assets of such value as may be specified (discussed further below).
- Unless the regulated activity relates solely to reinsurance, it must have made a deposit of such amount and with such a person as may be specified (discussed further below).
It must maintain, at a place of business in the UK, all records relating to the activities carried on from the third country branch.
Unless a pure reinsurance branch, it must hold in the UK assets to cover the branch SCR and must deposit as security in the UK with a UK bank assets of an amount equal to at least one-quarter of the absolute floor of the MCR.
It must calculate a branch MCR and a branch SCR and cover each of the branch MCR and branch SCR with eligible own funds.¹¹⁶
It must establish adequate branch technical provisions.
It must comply with rules as to how branch assets and liabilities are valued and how branch own funds should be classified.
It must have a branch scheme of operations that adheres to the informational requirements set out in Article 163(1) and (2).¹¹⁷

Branch Own Funds and Financial Resources

The PRA provides further guidance on branch own funds, stating the following:

It expects third country (re)insurers to comply with the EIOPA Branch Guidelines¹¹⁸ and to comply with the “Third Country Branches” part of the PRA Rulebook in light of such guidelines.
It expects third country (re)insurers to maintain financial soundness at branch level, to ensure that branch policyholders enjoy the same level of protection as the policyholders of an insurer established in the UK.
Only those assets that are available to pay the claims of branch policyholders in the event of a winding-up should be included in the calculation of branch assets (either in priority to other creditors or exclusively).
It expects to receive an analysis from the (re)insurers of the applicable winding-up regime analysing the priority given to branch policyholders and how the assets of the third country (re)insurer would be distributed to those policyholders.¹¹⁹

Third country (re)insurers with a UK branch are also required to maintain adequate worldwide financial resources.¹²⁰ The branch must also provide the PRA with enough information to make an informed assessment as to the adequacy of such financial resources. If the home regime of the (re)insurer is similar to the PRA regime, the branch may be able to rely on financial resources per its home state regime, subject to regulatory reporting of the same to the PRA.

However, if the home regime is significantly different to the PRA regime, the PRA will be required to assess the adequacy of its financial resources with the principles that apply to UK (re)insurers.¹²¹

Governance

Third country branches must comply with the governance requirements of Provisions 1, 2.2 to 2.6 and 3 to 7 of Conditions Governing Business, modified as set out in Provisions 7.2 and 7.3 of “Third Country Branches” of the PRA Rulebook. These deal with:

General governance requirements, including the need to have written policies in relation to risk management, internal control, internal audit and, where relevant, outsourcing, which should be subject to the prior approval of the governing body.
Fitness and propriety requirements in respect of persons performing a key function.
Risk management.
Actuarial function.¹²²

PRA Approach to Third Country Branches

On 28 March 2018, the PRA published a Supervisory Statement setting out its approach to branch authorisation and supervision.¹²³ This was published in the run-up to the UK’s withdrawal from the EU, with the PRA contemplating the implications of the exit for EU (re)insurers who had previously operated on a freedom of establishment basis.

The PRA states that, when considering applications from a (re)insurer for authorisation as a third country branch, it will consider regulatory equivalence and its ability to supervise the insuring entity.¹²⁴ The PRA must be satisfied that the below factors are cumulatively met:¹²⁵

The supervision regime in the (re)insurer’s home jurisdiction must be “broadly equivalent” to that of the UK.
The (re)insurer is capable of being supervised effectively by the home supervisor.
The whole (re)insurer is able to meet the applicable “Threshold Conditions” for (re)insurers under FSMA.
There is sufficient supervisory cooperation with the home supervisor.
UK policyholders of the (re)insurer will be given the appropriate priority in an insolvency.
The (re)insurer is able to meet all relevant PRA rules.
The protected amount potentially covered by the Financial Services Compensation Scheme (FSCS) in respect of the branch can be covered (more on this below).
The failure of the branch would not lead to broader instability in the UK.¹²⁶

The PRA emphasises that the overall “supervisability” of a (re)insurer operating through a branch, and the extent and quality of cooperation with the home supervisor, are key tenets in its assessment. “Supervisability” is a holistic assessment, which will consider the governance arrangements of a branch and third country (re)insurer as a whole.

The PRA expects third country branches to have under £500 million in insurance liabilities covered by the FSCS. Although this is not a hard threshold, the PRA is likely to require a third country (re)insurer to authorise a subsidiary when such a limit has been surpassed. As a consequence, many larger branches are expected to end up subsidiarising, if they have not done so already.

However, the PRA will consider the branch’s medium-term strategy, business plan and forecast in assessing the FSCS-protected liabilities threshold and then make an informed judgment of whether such liabilities are likely to fall above or below the limit. Whether the third country (re)insurer operates as a branch or subsidiary does not have a consequent impact on the potential cost to the FSCS of a default, as eligible policyholders of authorised insurance entities in the UK fall within the ambit of the FSCS.

The PRA therefore considers that the level of FSCS-protected liabilities is a strong indicator of the impact of a branch’s failure on both policyholders and FSCS levy payers.¹²⁷

The PRA applies most of its third country branches rules to pure reinsurance branches, noting that (as stated above) pure reinsurance branches are exempt from some requirements in the UK.

Recent PRA Consultation Papers

In 2023, the PRA published a number of consultation papers on significant reforms for third country branches in the UK. These consultation papers form part of the UK’s “Edinburgh Reforms” announced in December 2022.

June 2023 Consultation Paper

Most significantly, the PRA has proposed to remove the need to calculate and report third country branch capital requirements.¹²⁸

This includes proposals that non-UK (re)insurers no longer be required to account for a branch SCR and a branch MCR. Further, the PRA is proposing to abolish the SCR localisation requirement for third country branches — that is, the requirement to hold assets in the UK to cover the branch SCR, and the requirement to establish and report branch risk margins on balance sheets.

Here, the PRA seeks to capture the reality that a third country branch should not be viewed as an independent entity severable from its wider legal enterprise. This perhaps indicates that the PRA will exercise greater scrutiny over entities holistically (including over their home regimes). This also means that third country branches will not have to comply with both home state and UK rules, which will alleviate them of the doubling up of requirements, thereby making the UK more attractive as a jurisdiction to do business in.

The PRA continues its focus on protecting policyholders with these reforms. The PRA will still depend on home state authorities to check that these third country insurance undertakings are properly regulated and overseen. Moreover, the PRA will still require third country firms to show that they maintain “adequate worldwide financial resources.” The proposed date for the implementation of these reforms is 31 December 2024.

October 2023 Consultation Paper

In a further consultation paper,¹²⁹ the PRA sets out its proposals to consolidate and formalise existing PRA policies. The three main proposals are as follows:

Introduction of a new statement of policy (SoP) that would replace SS2/18 on branch authorisation and international (re)insurer supervision. Though this would retain the PRA’s current approach in most respects, the SoP will expand and clarify the PRA’s approach in areas that could benefit from further information.
Amendment of SS44/15 on third country insurance and pure reinsurance branches. The PRA proposes to make amendments to existing texts, updating the information it publishes on its expectations relating to notifications, Own Risk and Solvency Assessment reporting, systems of governance, Senior Management Functions and outsourcing/operational risk.
Amendment of SS20/16 on reinsurance and counterparty credit risk to clarify that it is applicable to third country branch undertakings and amend the provision so that it is consistent with the language used in the PRA Rulebook.

The proposed period for the implementation of these proposals is by Q2 2024.

4. Impact of Brexit on EU/EEA (Re)insurers Operating in the UK

Contingency Arrangements Implemented by the UK Government

The UK’s withdrawal from the EU meant that EEA (re)insurers with UK operations could no longer rely on passporting rights for continued market access. Accordingly, the UK government set in place two contingency arrangements:

The Temporary Permissions Regime (TPR).
The Financial Services Contracts Regime (FSCR).

Temporary Permissions Regime

The TPR acted as a transition mechanism for EEA firms that operated in the UK on the basis of passporting rights to continue to do so whilst awaiting and applying for full UK authorisation — i.e., to subsidiarise in the UK.

This scheme ended on 30 December 2023, and the FCA expected any firms remaining in TPR that did not have, by this time, filed active applications for full permission under Part IV of the FSMA either to apply to cancel their temporary permission or indicate that they expected to enter the FSCR.

Financial Services Contracts Regime

The FSCR is an additional transition mechanism for EEA (re)insurers that did not wish to enter the TPR or seek UK authorisation. It allows such EEA (re)insurers to run off their existing regulated business in the UK. But unlike the TPR, it does not allow for (re)insurers to write new businesses in the UK. Instead, it enables EEA (re)insurers that previously passported into the UK to wind down their UK business in an orderly fashion.

The FSCR itself also consists of two regimes: the Supervised Run-Off regime (SRO) and Contractual Run-Off regime (or CRO), as follows:

The SRO applies to firms with a UK branch (i.e., which formerly operated under a freedom of establishment passport) that did not enter the TPR (meaning such (re)insurers did not intend to seek authorisation for the specific passporting entity), as well as (re)insurers that have exited the TPR.
The CRO applies to firms without a UK branch (i.e., which formerly operated under a freedom of services passport) that did not enter the TPR. These firms entered the CRO automatically by operation of law after the end of the Brexit transition period.

The FSCR allows (re)insurers to use the SRO or CRO for five years after entering into such arrangements. Notably, insurance contracts within scope of the CRO are exempt from regulation for 15 years (i.e., until end of 2035). These regimes will cease to apply to any firm whose home authorisation is cancelled, and such firms are required to notify such cancellations to the FCA or PRA.

5. Bilateral Arrangements Post-Brexit

EU-US

In 2017, the EU and the United States (acting via the Federal Insurance Office) entered into a bilateral agreement (EU-US Covered Agreement). The agreement addresses three principal areas:

1. Group supervision. The agreement allows reinsurance groups operating in each others’ market to be subject to worldwide prudential insurance group oversight only by the home supervisors. Essentially, this precludes EU insurance supervisors from applying Solvency II group-level solvency and capital standards to US insurance groups.

2. Reinsurance supervision. The agreement prohibits a US state regulator from imposing on an EU assuming reinsurer either collateral or local presence requirements that it does not also impose on a local US assuming reinsurer as a condition to a reinsurance agreement, and vice versa, subject to certain financial and contractual conditions.

3. Exchange of information. The agreement encourages both parties’ supervisory authorities to cooperate in exchanging information in accordance with the practices set out in the memorandum of understanding that is annexed to the agreement.

UK-US

In 2018, the UK and the US entered into an arrangement very similar in effect to the EU-US Covered Agreement.

UK-Switzerland

In 2023, the UK and Switzerland entered into what is known as the Berne Financial Services Agreement,” which provides market access to financial services firms in both jurisdictions without the need for local authorisation. This is particularly important as, from the start of 2024, Switzerland requires all non-Swiss firms to establish a base before providing services to Swiss customers. The UK is the only country that will be exempt from this requirement.

The agreement applies, inter alia, to select lines of non-life insurance business. It does not apply to life, accident, health and most liability insurance streams (including monopoly insurance and business interruption insurance). The agreement only applies to larger corporate clients and professional policyholders.¹³⁰

UK-incorporated (re)insurers may, from the start of 2024 and subject to limited conditions, establish a base in Switzerland and provide services to Swiss consumers without having to set up a locally authorised branch or subsidiary, and vice versa. These arrangements are based on deference: Switzerland will defer to the domestic authorisation and prudential measures of the UK, and vice versa.

_______________

78 We will address insurance mediation in a subsequent chapter.

79 In this chapter, “services” may be taken to include all insurance-related services (including (re)insurance), unless the context requires otherwise.

80 Following Brexit, the UK is a “third country” with respect to the EEA, and vice versa.

81 Directive 2009/138/EC (Solvency II) as on-shored by the European Union (Withdrawal) Act 2018, implemented through the PRA Rulebook. Unless otherwise specified, any and all references to articles and recitals in the rest of this chapter refer to the articles and recitals under the Solvency II Directive.

82 Recital 8 Solvency II.

83 EIOPA, formerly the Committee of European Insurance and Occupational Pensions Supervisors, in 2008 published the “General Protocol Relating to the Collaboration of the Insurance Supervisory Authorities of the Member States of the European Union” in relation to these arrangements. In 2000, the European Commission published an interpretative communication, “Freedom To Provide Services and the General Good in the Insurance Sector” (2000/C43/03) (the Interpretative Communication), containing guidance on the difference between a branch and the provision of services.

84 Article 147.

85 Article 148.

86 Article 149.

87 Article 158.

88 Ibid.

89 Article 15(1).

90 Article 13(11).

91 Article 145.

92 Article 13(13).

93 Article 145(2).

94 Article 146(1). SCR refers to the amount of regulatory capital that a (re)insurer is required to hold for it to be considered sufficiently protected against unexpected losses on a one-in-200-year failure basis. MCR is the threshold below which a firm’s financial resources should not fall without warranting supervisory intervention in the form of withdrawing authorisation.

95 Article 146.

96 Article 180.

97 See Interpretative Communication.

98 Article 154.

99 Article 30(3).

100 Articles 155 and 158.

101 Article 174.

102 Article 162(2).

103 Article 129(1)(d).

104 Annex I (Classes of Non-Life Insurance).

105 Article 73(5).

106 Paragraph 1.45 of EIOPA Guidelines on the supervision of branches of third country insurance undertakings (EIOPA-BoS-15/110).

107 Article 100.

108 Article 128.

109 Article 167(1).

110 Article 163.

111 Articles 41 to 50.

112 Article 174.

113 Article 162.

114 Financial Services and Markets Act 2000 (Variation of Threshold Conditions) Order 2001 (SI 2001/2507).

115 Schedule 6 (Threshold Conditions) Financial Services and Markets Act 2000.

116 Requirements (C) and (D) are the subject of the reforms proposed in the June 2023 PRA Consultation Paper.

117 “Third Country Branches” part of the PRA Rulebook.

118 EIOPA Guidelines on the supervision of branches of third country insurance undertakings (EIOPA-BoS-15/110).

119 3.3, 3.4 PRA Supervisory Statement SS44/15 — Solvency II: Third-Country Insurance and Pure Reinsurance Branches.

120 13.1 “Third Country Branches” part of the PRA Rulebook.

121 PRA Supervisory Statement SS44/15.

122 See 2-7 Conditions Governing Business part of the PRA Rulebook.

123 PRA Supervisory Statement SS2/18 — International Insurers: The Prudential Regulation Authority’s Approach to Branch Authorisation and Supervision.

124 2.1 PRA Supervisory Statement SS2/18.

125 2.3 PRA Supervisory Statement SS2/18.

126 2.1, 2.10 PRA Supervisory Statement SS2/18.

127 PRA Supervisory Statement SS2/18.

128 PRA Consultation Paper CP12/23 — Review of Solvency II: Adapting to the UK Insurance Market, dated June 2023.

129 CP21/23 — The PRA’s Approach to the Authorisation and Supervision of Insurance Branches, dated October 2023.

130 Defined as “enterprises” that meet two of these three criteria: (i) net turnover in excess of 40 million Swiss francs, (ii) balance sheet total in excess of 20 million Swiss francs, or (ii) with over 250 employees.

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