Context
The European Insurance and Occupational Pensions Authority (EIOPA) has published a Supervisory Statement to strengthen the supervision and monitoring of insurance undertakings’ and intermediaries’ activities when using governance arrangements in third countries.
Key points to note
EIOPA has previously emphasised that EU-based undertakings or intermediaries should not resemble empty-shell companies that do not have an appropriate level of corporate substance within the EU. This can arise from situations where undertakings or intermediaries use third country branches to disproportionately perform essential functions or activities. Given that such governance arrangements may lead to poor risk management, ineffective decision-making and pose operational, reputational, and financial risks – also to policyholders – EIOPA has decided to clarify its supervisory expectations.
To improve supervisory oversight and to ensure that similar risks are treated in a similar way regardless of the legal form of the governance arrangements, the supervisory expectations laid out in the statement follow the principle of substance over form.
Within the Feedback Statement EIOPA defends the validity of item 3.2 which, in the Supervisory Statement, reads:
“EIOPA is of the opinion that the purpose of a branch of an undertaking or an intermediary should be primarily to serve the market in which it was established. As a result, branches established in third countries with the sole objective of supporting undertakings and intermediaries based in the EU should be avoided.”
The content of items 3.3 – 3.6 are aimed mainly at third country regulators, but the message is clear – EIOPA doesn’t want work being done for an EU based intermediary if that work is being done by a branch of that EU intermediary in a third country – which the UK now is. Clearly, EIOPA doesn’t want significant insurance distribution work being carried out potentially outside of its jurisdiction:
- “3.3 To address any potential concerns regarding lack of adequate technical expertise or specialist risk coverage in the EU, supervisory authorities are encouraged to promote relocation or secondment of staff from the third country branch to the EU undertaking or intermediary and/or cede part of the insurance risk by way of reinsurance to a reinsurance undertaking headquartered and authorised in a third country.
- 3.4 The third country branch should neither perform regulated functions or activities in such a way that leads to the undertaking or intermediary being disproportionally dependent on the arrangement in a third country for its activities in the EEA nor should the operation of that branch materially impair the system of governance, increase operational risk or undermine policyholder protection. An example of where the undertaking or intermediary would be “disproportionately dependent” on the arrangement in a third country for its activities in the EEA, would be an undertaking or intermediary which is unable to demonstrate to the home EU supervisory authority when requested, that, in the event of sudden loss of access to the branch, it can continue operating normally, and without undermining policyholder protection. In any event, a case-by-case assessment of whether or not there is “disproportionate dependence”, would always be necessary by the home EU supervisory authority.”
Next actions
None – for information and awareness.