The Central Bank of Ireland (CBI) recently published a consultation paper (CP144) on its proposed ‘Guidance for the use of Service Companies for Staffing Purposes in the Insurance Sector’. The consultation itself does not close until 6 November. However, we believe that industry participants can expect the CBI to issue the proposed guidance in due course without material changes. This is because the publication of CP144 followed that of an earlier discussion paper in which the CBI raised most of the same issues, so it seems determined to legislate in this area.
In CP144 the CBI has moved ahead of other European regulators to propose a specific framework for the use of service company staffing arrangements in the insurance industry. Some industry participants see this as another unnecessary layer of regulation raising the barriers to entry in Ireland above those of other domiciles. The CBI argues that the use of service entities can create operational and other risks that need to be appropriately managed. However, there is little or no evidence in CP144 or the earlier discussion paper that this is the case. Unfortunately, the industry responses to the CBI’s 2019 discussion paper did not appear to argue strongly against the need for formal guidance, so the way was left relatively clear for the CBI to proceed as it has done.
To issue guidance in this area, the CBI relies on its general duty to supervise re/insurers’ systems of internal governance under Article 41 of the Solvency II Directive. In keeping with the CBI's themes of "strengthening resilience" and "strengthening consumer protection", it argues that service entity staffing arrangements should not:
Impair the quality of the re/insurers’ systems of governance
Unduly increase operational risk
Impair the CBI’s ability to monitor the undertaking’s compliance with its obligations, or
Undermine service to policyholders.
Summary of Guidance
The proposed guidance will apply to all re/insurers who engage in staffing arrangements involving service entities, but not to arrangements between captive re/insurers and captive management companies for the provision of captive services. Re/insurers are expected to:
Have robust governance structures and processes which adequately reflect and take the service entity staffing arrangements into account
Integrate the staffing arrangements appropriately into the risk management system (including, as appropriate, the ORSA) and internal control framework of the undertaking
Demonstrate that there is effective oversight, management and control taking into consideration the nature, scale, and complexity of the undertaking and the business
Be able to demonstrate how the board has reviewed, considered, and become comfortable with the specific arrangements the undertaking proposes to enter or has already entered and provide details on their deliberations and decisions in this regard upon request
Be able to demonstrate compliance with all relevant requirements, legislation, and other supervisory expectations that are relevant to the arrangements, which include, inter alia, general governance requirements, fitness and probity, and as appropriate, outsourcing requirements
Ensure that the arrangements do not create impediments to the supervision and resolvability of the undertaking.
The CBI has stated explicitly that it will be the board’s ultimate responsibility to properly monitor all activities of the re/insurer, irrespective of whether staff are directly employed or engaged through a staffing arrangement with a group service entity. Decisions to enter a significant or material staffing arrangement with a service provider are expected to be made at board level.
Where a staffing arrangement exists, it should be governed by a formal written contract and clearly set out the basis of the arrangement in terms of structure, roles provided and the respective responsibilities of both parties. The CBI expects the written agreement to include clauses requiring prior notice to the re/insurer of any new activities assumed by the service provider that might be capable of affecting its service delivery to the re/insurer.
As part of its normal risk management framework, the CBI expects a re/insurer to conduct and document an appropriate risk assessment on a staffing arrangement prior to its commencement. Business continuity measures must provide for a comparable level of protection to that which would exist if the staff were directly employed by the undertaking. Re/insurers will be expected to conduct appropriate and proportionate due diligence in respect of a prospective staffing arrangement. The draft guidance sets out the areas of due diligence that will be expected to be covered.
The CBI expects re/insurers to give appropriate information on a staffing arrangement both at commencement and whenever there is a material change to the arrangement. This can be either on initial authorisation or as part of regular supervisory reporting. This notification obligation is in addition to the re/insurer’s obligation to notify any material outsourcings under the Solvency II Regulations where that would also be applicable.
Re/insurers would be well advised to review their existing staffing arrangements against the proposed guidance, and to identify any gaps in documentation, processes, and procedures to ensure that they are able to deliver on the CBI’s expectations. Our experienced team can help with gap analysis reviews of this nature in a sensible and cost-effective way.