Licensing Specter Haunts Europe

The European Union is undoubtedly one of the most momentous mergers in history.

The success of many (most?) mergers is dependent on a well-executed integration plan. Full integration of the EU’s members is, however, likely to be perpetually incomplete, with Britain’s exit from the union perhaps evidence of that failed integration. It clearly is one of the greatest merger failures of our era.

The EU’s view of the rules that apply in a post-Brexit world will impact the insurance industry in Britain. But, as Chris Croft, CEO of the London & International Insurance Brokers Association (LIIBA) and a good friend of The Council, notes, those ramifications will not be limited to Britain-based brokerage firms. In a post-Brexit world, from the EU perspective, there is no longer a difference between London and, for example, New York, he says.

The emerging flashpoint is over licensure—when must you be licensed in the EU if you are placing coverage for an EU-based risk? In the course of navigating your own acquisitions, verifying regulatory compliance, including adequate licensure, is a standard due diligence item. In the United States, every state has largely adopted the National Association of Insurance Commissioners’ Producer Licensing Model Act. Under that act, individuals must be licensed if they are “selling, soliciting or negotiating” insurance in a state.

Those requirements have been read as applying where the customer with whom you are working is located. There is an express licensure exception that applies, for example, when a broker is making a placement for a client whose principal place of business is in another state, a risk in that state is insured under the policy being placed, and the broker is licensed in that state.

In the non-admitted markets, the insurers, by definition, are not licensed to offer coverage in the state in which the risk(s) being insured are located. In a series of cases culminating in the 1962 Todd Shipyards case, the Supreme Court held that the due process clause of the Constitution dictates that a state has no authority to regulate or tax an insurance transaction if the insured went out of state to purchase coverage from an insurer that is not admitted to do business in that state.

Despite those opinions, states attempted to regulate surplus lines transactions by regulating the brokers and by attempting to impose taxes on the proportionate share of the premiums associated with the risk being insured in each state. Each state, of course, imposed different tax rates and different allocation rules, making compliance a significant (and expensive) undertaking for surplus lines brokers.

The 2010 Wall Street Reform Act included the “Nonadmitted Insurance and Reinsurance Reform Act,” which essentially codified the spirit (if not the letter) of the Todd Shipyards line of authority by decreeing as a matter of federal law that the only state regulations and taxation requirements that apply to the broker’s placement of a surplus lines policy are, generally, the rules of the insured’s “home state” (i.e., the state in which the insured is domiciled), which also generally will be where the broker’s contact with that insured will be.

Even under this regime, the insured remains free to go to a non-admitted insurer outside the U.S. marketplace without U.S. broker assistance, and then the only rules that apply to the placement would be a “direct placement” tax imposed on the insured by the insured’s “home state.”

Back to the post-Brexit EU.

As Croft explains it, “When EIOPA [the European Insurance Occupational Pensions Authority] published its recommendations around the implications of Brexit in February 2019, only one—recommendation nine—directly applied to distribution. What recommendation nine essentially says (or what it has certainly been interpreted to say by the individual EU regulators) is this: if you have a contract where both the policyholder and the risk are located in the EU, then it doesn’t matter where you sit in any distribution chain nor where you are geographically at the time; if you deliver a service that falls within the definition of “insurance distribution” in Insurance Distribution Directive (IDD), then you are delivering that service within EU. And Article 16 of IDD makes clear that you need to be authorized [i.e., licensed] in the EU to do that.”

At some level, this is not all that different from the U.S. regulatory requirements—with one fundamental exception: the European Union does not recognize a non-admitted marketplace. Under Solvency II, an insurer generally must be licensed in the EU to insure a risk there. To make things even slightly more complicated, there are EU physical location requirements that must be satisfied by both insurer and intermediary in order to qualify to be licensed to insure such risks.

Croft notes that there are now a number of anecdotal examples of U.S. brokers placing coverage for EU clients that encompass EU-based risks. If all of the broker’s activities are taking place in the United States with client representatives located in the United States, our general expectation would be that the applicable state rules apply and not the EU rules. As Croft notes, “If they continue to service this business (and if they don’t set up an EU subsidiary like our London-based brokers have had to do), then technically they are breaching the EU’s regulatory perimeter by doing so.”

For firms with a London presence, the U.K. regulatory authorities have committed to enforcing the EU licensure requirements. For U.S. firms with no U.K. presence, it is unclear how exactly the EU regulatory obligations could be enforced or whether the U.S. courts would apply the same due process restrictions upon which the Supreme Court relied in the Todd Shipyards cases to similarly limit EU member-state authority over surplus lines transactions if they are confronted with such a challenge.

As you navigate the post-Brexit world and your own acquisitions, it may be worth noting both the Brexit integration lessons as well as the “clarified” EU licensure obligations and consider how you want to deal with the latter, if at all.