Central Bank of Ireland publishes Consultation Paper and Guidance on the Use of Service Companies for Staffing Purposes in the Insurance Sector

On 6 August 2021, the Central Bank of Ireland (CBI) published a Consultation Paper seeking stakeholders’ views on its proposed Guidance on the Use of Services Companies for Staffing Purposes in the Insurance Sector (the Guidance).

The Guidance sets out the CBI's expectations of Irish (re)insurance undertakings that have entered or propose to enter arrangements with separate legal entities for the provision of extensive staffing to the undertaking.

In this note, we summarise the Guidance and reflect on its potential relevance to affected Irish (re)insurers and their groups.

Background to the Guidance

The Guidance follows on from the publication of the CBI's Discussion Paper 9 (DP9) in November 2019 and the CBI's stated concerns regarding the risks that service company staffing arrangements can pose to undertakings and policyholders. Both DP9 and the Guidance focus heavily on the responsibility of the boards of undertakings to ensure that appropriate governance structures and risk management systems are in place.

Key Requirements / Expectations

The CBI expects that where an undertaking uses a service company staffing arrangement, this should not impair the quality of the system of governance of the undertaking or unduly increase operational risk. The arrangement must not impair the ability of the CBI to monitor compliance of the undertaking with its obligations or undermine service to policyholders. 

The CBI expects undertakings to comply with a range of measures, including:

• To conduct appropriate and proportionate due diligence and to be able to demonstrate to the CBI that it has considered a range of matters including whether the service company holds the appropriate authorisation or registration and can meet its obligations in both normal and stressed scenarios
• To integrate the staffing arrangement into the risk management system (including, as appropriate, the Own Risk and Solvency Assessment (ORSA) process) and internal control framework of the undertaking
• To ensure that its business continuity planning measures factor in the staffing arrangement and  provide for a level of protection that is comparable to a scenario where the staff are employed directly by the undertaking
• To ensure compliance with the Fitness and Probity requirements, where a staffing arrangement includes the provision of staff to perform Pre-Approval Controlled Functions (PCFs) or Controlled Functions (CFs)
• To ensure that the staffing arrangement does not act as a barrier or impediment to the resolvability of the undertaking, by ensuring operational continuity in a resolution or failure event
• To demonstrate how the undertaking's board of directors has reviewed, considered and become comfortable with the specific arrangement the undertaking proposes to enter, or has already entered, and to provide details on their deliberation and decision upon request from the CBI 
• To ensure that the arrangement does not create impediments to the supervision of the undertaking

The Role of the Board

The CBI notes that the board of the undertaking is ultimately responsible for the proper monitoring and oversight of all activities of the undertaking, irrespective of whether staff are directly employed or engaged through a staffing arrangement. Decisions to enter a staffing arrangement with a service provider are expected to be made at board level and the board is expected to approve the arrangement.

Boards will be required to ensure that the protections provided to policyholders and other beneficiaries on an ongoing basis (and in stress scenarios) are not adversely affected by the arrangement. Oversight mechanisms must be in place to provide for a board review of the arrangement at appropriate intervals and timely management information is to be provided to the board to enable it to do so.

Substance

Importantly, the CBI expects that "sufficient substance" is maintained in the undertaking at all times, so that the undertaking does not become an "empty shell" or "letter box entity". Furthermore, entering into a staffing arrangement with a service provider must not impede the undertaking’s ability to meet the conditions it must comply with in order to remain authorised.

Basis of the staffing arrangement

The CBI expects staffing arrangements to be governed by a legally binding written contract or agreement setting out the basis of the arrangement. The contract should note the structure of the arrangement and the respective responsibilities of both parties, with due regard for the responsibilities of those in PCF or CF roles. The contract is also expected to provide a clear outline of how conflicts of interest will be managed together with business continuity provisions to ensure the continuity of services to the undertaking in a stress scenario.

Conflicts of Interest

In relation to the duty of fidelity of staff or conflicts of prioritisation or commitment, in circumstances where staff are required to work across multiple entities, the CBI expects undertakings to address these potential conflicts in its written conflicts of interest policy and in the written agreement between the services company and the undertaking. 

Under a staffing arrangement, it must be clear that staff hold a duty of fidelity to the undertaking and that they must act in the interests of that undertaking. However where staff are shared across multiple entities, the CBI expects that this should not compromise the staff’s ability to properly carry out their responsibilities for the undertaking. Where the arrangement is a hybrid arrangement i.e. combines the provision of staffing and the performance of outsourced activity by the service company for the undertaking, the responsibility for overseeing the delivery of that other activity by the services company is assigned to a person directly employed by the undertaking.

Reporting to the CBI

The CBI expects an undertaking to provide it with appropriate information on a staffing arrangement at both commencement and whenever there is a material change to the arrangement. It notes that a staffing arrangement may be entered in to at authorisation stage and therefore the information is expected to be included in the undertaking’s business plan. Or, if the arrangement is entered into at a later stage, relevant information is expected to be provided as part of the next narrative Regular Supervisory Report following commencement of the arrangement.

Scope of Guidance

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. 

Next Steps

The CBI has launched a consultation process seeking submissions on the proposed Guidance from interested stakeholders by 6 November 2021.

In the meantime, (re)insurers which currently have such staffing arrangements in place should consider whether to make a submission.  Undertakings should also take the necessary steps to review service company arrangements and ensure they are updated to align with the CBI's expectations, in particular in light of the substance aspect of the Guidance.  The CBI has noted that it expects undertakings to have conducted such reviews and completed any necessary updates within 12 months of the implementation of the Guidance.

For more information please contact James Grennan, Laura Mulleady and Sinéad Lynch, Insurance & Reinsurance Partners, or any member of ALG's Insurance & Reinsurance team.

Date published: 12 August 2021