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Brexit Continues To Shape The Regulatory Landscape As EIOPA Consults On The Use Of Third-Country Branches – Insurance Laws and Products



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On 1 August 2022, the European Insurance and Occupational
Pensions Authority (EIOPA) published a
consultation paper setting out a draft supervisory statement on the
use of governance arrangements in third countries (Draft
Statement
). 

Context 

The stated aim of EIOPA’s Draft Statement is to ensure the
appropriate supervision and monitoring of compliance of insurers
and intermediaries with the requirements of the Solvency II
Directive and the Insurance Distribution Directive in terms of
their governance arrangements in third countries (i.e. countries
outside the EEA). Though EIOPA makes explicitly clear that the
Draft Statement is equally relevant in respect of all third
countries, it is undoubtedly those EEA head-officed insurers and
insurance intermediaries that structured, and indeed restructured,
their business and staffing arrangements in the aftermath of Brexit
around the establishment of a UK third-country branch which will be
paying particular heed to this development. The outcome of this
consultation process remains to be seen (responses due by 31
October 2022); however, it seems likely that further challenges may
lie ahead for those firms who sought to facilitate continued access
to UK-based staffing resources, particularly
underwriters. 

Key Takeaways 

In the introduction to the Draft Statement, EIOPA reiterates
that it had previously stressed the need for insurers not to
display “the characteristics of an empty shell” but
rather demonstrate an appropriate level of corporate substance
proportionate to their business which should allow for (a) suitable
oversight of governance arrangements to ensure effective
decision-making and risk management and (b) proper supervision by
the relevant regulator. The Draft Statement goes on to state that a
particular governance arrangement which raises concerns is where a
branch (or similar) is used to conduct regulated activity such as
underwriting in respect of EEA policyholders as this, amongst other
risks, has the potential to impair policyholder protection (though
the Draft Statement does not elaborate on this concern). 

The Draft Statement also articulates EIOPA’s belief that the
purpose of a branch, or a similar governance arrangement in a
third-country, of an insurer or intermediary, should be primarily
to serve the market in which it was established. Consequently,
EIOPA’s view is that governance arrangements established in
third countries “with the sole objective of
supporting entities based in the EU, should be
avoided”. 

The Draft Statement also indicates that any third-country branch
arrangement involving regulating activity should not be conducted
in a way that leads to the relevant insurer or intermediary
being “disproportionately
dependent”
 on the third-country arrangement to
support its activities in the EEA. EIOPA states that the
arrangement should also not materially impair the system of
governance, increase operational risk or undermine policyholder
protection. These themes will be very familiar to readers
acquainted with the ongoing regulatory focus on outsourcing and
operational resilience. Although the Draft Statement explicitly
acknowledges that third-country branch arrangements do not
constitute outsourcing, EIOPA appears to regard the risks involved
as similar and may well recommend that they be addressed in a
similar way. Additionally, it is clear from the Draft Statement
that a key concern of EIOPA is to ensure that on-site inspection
rights for supervisory authorities are in no way impaired.

What’s Next? 

The deadline for submissions to the consultation process is 31
October 2022. This topic is likely to prove controversial for some
industry participants across the EEA, and therefore, it is likely
to garner plenty of feedback for EIOPA to consider. One of the most
interesting (and instructive) aspects of the Draft Statement is the
impact assessment annexed to the end of the document. It sets out
the three potential policy options for stakeholders to consider,
namely:

  • Policy Option 1 – no action to be taken. In other words, the
    Draft Statement would not be issued in any form.

  • Policy Option 2 – a detailed supervisory statement is
    issued. It is proposed that such a statement would set out the
    specific functions or activities that should be located locally
    (i.e. inside the EEA).

  • Policy Option 3 – a principles-based supervisory
    statement would be issued (i.e., along the lines of the current
    Draft Statement, which does not detail the specific
    functions/activities to be conducted inside the EEA). 

EIOPA’s cost/benefit analysis in the impact assessment
refers positively to “enough flexibility” being conferred
on supervisory authorities. It acknowledges that too prescriptive
an approach may constrain the activities of EEA insurers and
intermediaries and impact policyholder protection. Nevertheless, it
remains to be seen what the preferred course will be once the Draft
Statement is finalised. 

From an Irish regulatory perspective, the Central Bank of
Ireland has typically adopted a reasonably robust approach to
corporate substance and the related themes under discussion in the
Draft Statement. As such, many Irish-based insurers and
intermediaries may not be over-awed by many of the points being
made by EIOPA. However, we would encourage all impacted insurers
and intermediaries to consider the scope of the activities of their
UK branches in light of the Draft Statement and engage with the
consultation process to ensure their views are heard. 
 

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

POPULAR ARTICLES ON: Insurance from Ireland

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The European Insurance and Occupational Pensions Authority (“EIOPA”) has launched a three-month long public consultation regarding a draft supervisory statement on differential pricing practices.



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