09 02 2022 Insights Insurance

Central Bank Guidance on the Use of Service Companies by Insurers

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In January 2022 the Central Bank of Ireland (“CBI”) its “Guidance on the Use of Service Companies in the Insurance Sector” (“Guidance”). This Guidance was published alongside a Feedback Statement which reflects the submission that were made to the CBI in response to Consultation Paper (CP144) which was published on the same topic in 2021.

Focus of the Guidance

The Guidance relates to the practice of insurance or reinsurance undertakings (“undertakings”) who have entered into, or are seeking to enter into, arrangements for the use of separate legal entities for the provision of extensive staffing to the undertaking. The CBI is focused on these staffing arrangements due to their potential, if not effectively managed, to threaten the operational resilience of undertakings regulated by the CBI.

It should be noted that the Guidance does not apply to arrangements entered into between captive (re)insurance undertakings and captive management companies for the provision of extensive captive management services, due to the specificity of the captive (re)insurance model.

CBI’s Expectations

The central idea behind the Guidance is that where an undertaking engages in a staffing arrangement this should not:

  1. impair the quality of the system of governance of the undertaking;
  2. unduly increase operational risk;
  3. impair the ability of the Central Bank to monitor compliance of the undertaking’s obligations;
  4. undermine services to policyholders.

The Guidance outlines in detail the obligations on the undertaking and the role of the board in ensuring compliance with the Guidance.

The CBI expects an undertaking to have robust governance arrangements in place which adequately reflect and take the staffing arrangement into account. It also expects undertakings to integrate the staffing arrangement into the risk management system. The CBI also expects firms to be able to demonstrate how the board has reviewed, considered and become comfortable with the specific arrangement the undertaking proposes to enter, and to be able to provide details on their deliberation and decision. Undertakings will also be expected to be able to demonstrate compliance with all relevant legislation and other supervisory expectations of relevance to the arrangement. In addition, undertakings will also need to ensure that the arrangement does not create impediments to the supervision and resolvability of the undertaking.

Formalised Staffing Arrangement and Risk Considerations

The CBI requires that the basis of the staffing arrangement must be in writing and must address specific elements which have been identified by CBI. Risk assessments should include the identification and assessment of all material risks likely to arise from the specific arrangement proposed and should outline the approach to the management and monitoring of those risks.

Role of the Board

Helpfully the Guidance spells out five distinct areas of consideration for boards to utilise when assessing staffing arrangements involving the use of service companies.

Due Diligence

In relation to due diligence, undertakings are expected to conduct additional due diligence when engaging in staffing arrangements which include, but are not limited to:

  1. fitness and probity tests;
  2. the ability of the service provider to meet its requirements and contractual obligations in relation to service quality and reliability, security and business continuity, in both normal and stressed circumstances;
  3. conflicts of interest;
  4. group policies and procedures; and
  5. the capabilities of the service provider and whether it holds the appropriate authorisation or registration, where required, to perform proposed activities.

Internal Reporting

As part of its expectations that staffing arrangements receive appropriate oversight and consideration at board level, undertakings are expected to have the necessary structures and mechanisms in place to ensure timely and appropriate management information for the board to facilitate those deliberations.

Reporting Obligations to CBI

The CBI expects an undertaking to provide it with information when a staffing arrangement commences as well as whenever there is a material change to an existing arrangement. Where a relevant staffing arrangement is being entered into post-authorisation, undertakings are expected to provided information on that arrangement as part of the Regular Supervisory Report (“RSR”) or the next summary RSR.

Practical Considerations

Timeframe for Implementation

Firms have 12 months from the date of the Guidance (Jan 2022) to take the required actions.

Existing Staffing Arrangements

In respect of staffing arrangements which are already in place, the CBI expects undertakings to review such arrangements and ensure they are updated and augmented to align with the expectations set out in the Guidance. The CBI expects undertakings to have conducted that review and augmentation, where appropriate, within 12 months of the implementation of the Guidance.

Ongoing Supervisory Engagement

Undertakings should note that supervisors at CBI are likely to engage with undertakings in respect of the requirements set out in the Guidelines as part of their normal supervisory engagement.

AUTHOR: Sean Dempsey

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