EIOPA publishes Supervisory Statement on the use of governance arrangements in third countries
On 3 February 2023, EIOPA published a Supervisory Statement on the use of governance arrangements in third countries to perform functions or activities (the Statement). The adoption of the Statement follows a public consultation by EIOPA which took place in 2022. The full Statement can be accessed here.
The Statement is addressed to national competent authorities including the Central Bank of Ireland, and aims to ensure appropriate supervision and monitoring of the compliance of insurance undertakings and intermediaries with the requirements of the relevant EU legislation in relation to their governance arrangements in third countries. While addressed to national competent authorities, the Statement should be considered carefully by (re)insurance undertakings and intermediaries that rely on third country branches to support their businesses, as the Statement will inform the approach of EU regulators going forward.
The Statement follows previous Brexit-related statements addressing, for example, the potential for outsourcing arrangements to deplete the corporate substance of EU entities, with repercussions for the adequacy of their management and on effective supervision by EU 27 supervisors. In the Statement, EIOPA places emphasis on an appropriate level of corporate substance within insurance undertakings in the EEA, proportionate to the nature, scale and complexity of the undertaking's business. EIOPA indicates that corporate substance includes having an appropriate presence of board members and key function holders in the member state of the insurer's head office and a level of staff established in the EEA which is relative to the nature and amount of business being underwritten within the EEA. EIOPA notes that while issues in relation to the use of governance arrangements in third countries were initially identified in the context of Brexit, these concerns are equally relevant for any reliance on third country establishments.
Notably, the Statement makes particular reference to undertakings or intermediaries using a branch in a third country for regulated functions or activities such as underwriting to serve policyholders within the EEA. EIOPA noted that arrangements like this could impair risk management and effective decision making and could impair proper supervision by competent authorities.
In relation to the supervision of governance arrangements, the following are key points:
- The use of a third country branch should not compromise an undertaking or intermediary having the appropriate level of corporate substance within the EEA.
- The purpose of a branch of an undertaking or an intermediary should be primarily to serve the market in which it is established and branches established in third countries with the sole objective of supporting undertakings and intermediaries based in the EU should be avoided.
- Supervisory authorities are encouraged to promote relocation or secondment of staff from the third country branch into an EU insurer or intermediary in order to avoid any concerns regarding a lack of technical expertise or specialist risk coverage within the EU.
- An undertaking or intermediary should not be disproportionately dependent on a third country branch for its activities in the EEA, nor should the operation of the branch materially impair the system of governance, increase operational risk, or undermine policyholder protection. An example of disproportionate dependence is an undertaking or intermediary being unable to continue operating normally, and without undermining policyholder protection, in the event of sudden loss of access to the third country branch.
- EIOPA expects that any regulated functions or activities be overseen and controlled from the undertaking or intermediary itself, in a manner that ensures that the entity is complying fully with all of its obligations stemming from relevant EU law.
- When authorising new business and when undertaking ongoing supervision, supervisory authorities should request that undertakings that are using such governance arrangements (i.e. relying on third country branches), provide sufficient justification and rationale as to why their structuring can safeguard the ability of the supervisory authority to undertake proper supervision. Likewise, the same should be considered for intermediaries in the context of their professional and organisational requirements under the IDD.
For advice or for further information on this topic please contact James Grennan, Partner, Laura Mulleady, Partner, Sinéad Lynch, Partner or any member of the A&L Goodbody Insurance & Reinsurance team.
Date published: 9 February 2023