Service companies – The next regulatory frontier in re / insurance?
The Central Bank of Ireland (CBI) recently released a consultation paper (CP144) on its proposal to ‘Guidelines for the use of service companies for staffing purposes in the insurance sector ‘. The actual consultation will only close on November 6. However, we believe industry participants can expect the CBI to issue the proposed guidelines on time without significant changes. Indeed, the publication of CP144 followed that of an earlier discussion paper in which the CBI raised many of the same issues, so it seems determined to legislate in this area.
In CP144, the CBI went ahead of other European regulators in proposing a specific framework for the use of recruitment methods for service companies in the insurance sector. Some industry players see it as another layer of unnecessary regulation that raises barriers to entry into Ireland above those of other homes. The CBI argues that the use of service entities can create operational and other risks that need to be managed appropriately. However, there is little or no evidence in CP144 or the previous discussion paper that this is the case. Unfortunately, industry responses to the 2019 CBI Discussion Paper did not appear to strongly oppose the need for formal guidance, so the path was relatively clear for the CBI to proceed as it did. did.
To issue guidelines in this area, the BCI relies on its general obligation to supervise the internal governance systems of reinsurers under Article 41 of the Solvency II Directive. In line with the CBI themes of “build resilience ” and “Strengthen consumer protection”, he argues that the terms of staffing service entities should not:
Deteriorate the quality of governance systems of re / insurers
Unduly increase operational risk
impair the ability of the CBI to monitor the company’s compliance with its obligations, or
Undermine service to insureds.
Summary of guidelines
The proposed guidance will apply to all reinsurers that enter into recruitment arrangements involving service entities, but not to arrangements between captive reinsurers and captive management companies for the provision of captive services. Reinsurers must:
Have strong governance structures and processes that adequately reflect and take into account the staffing arrangements of the service entity
Appropriately integrate personnel arrangements into the risk management system (including, where applicable, ORSA) and the company’s internal control framework
Demonstrate that there is effective oversight, management and control taking into account the nature, scale and complexity of the business and enterprise
Be able to demonstrate how the board of directors has considered, reviewed and familiarized itself with the specific arrangements the company proposes to enter into or has already entered into and provide details of its deliberations and decisions in this regard upon request
Be able to demonstrate compliance with all requirements, legislation and other prudential expectations relevant to agreements, which include, among others, general requirements of governance, fitness and probity and, where applicable, requirements of outsourcing
Ensure that the provisions do not create obstacles to the supervision and resolvability of the company.
The CBI has explicitly stated that it will be up to the board to properly oversee all activities of the re / insurer, whether staff are directly employed or engaged under a staffing agreement with a group service entity. Decisions to enter into a large or significant staffing agreement with a service provider should be made at the board level.
Where a staffing arrangement exists, it should be governed by a formal written contract and clearly state the basis of the arrangement in terms of structure, roles provided and respective responsibilities of both parties. The CBI expects the written agreement to contain clauses requiring prior notification to the re / insurer of any new activity taken over by the service provider which may be likely to affect its provision of services to the reinsurer / reinsurer. .
As part of its normal risk management framework, the CBI expects a reinsurer to perform and document an appropriate risk assessment on an endowment agreement before it becomes effective. Business continuity measures must ensure a level of protection comparable to that which would exist if the personnel were directly employed by the company. Reinsurers will need to exercise appropriate and proportionate due diligence with respect to any possible personnel arrangement. The draft guidelines set out the areas of due diligence that should be covered.
The CBI expects reinsurers to provide appropriate information about an endowment agreement both at the start and whenever there is a material change in the agreement. This can either be on initial authorization or as part of a regular monitoring report. This notification obligation is in addition to the re / insurer’s obligation to notify any major subcontracting under Solvency II regulations when this would also be applicable.
Reinsurers would be well advised to review their existing staffing arrangements against the proposed guidelines and identify any gaps in documentation, processes and procedures to ensure they are able to meet CBI expectations. . Our experienced team can assist you with gap analysis reviews of this nature in a thoughtful and cost effective manner.