Over the summer, EIOPA published its peer review report on outsourcing (the Report). It looked at the performance of national supervisory authorities (NSAs) across Europe in supervising outsourcing by (re)insurers between January 2016 and December 2020. The aim of the review was to identify gaps, areas of improvement and best practice with a view to promoting consistent and effective supervision. At a high level, the 150-page Report shows that European (re)insurers are making increased use of outsourcing, primarily driven by technology. The level of penetration of outsourcing varies significantly between Member States. The Report observes that this difference explains why the Member States’ supervisory frameworks are also at differing stages of maturity.
Positive Assessment for CBI
The Report was generally favourable in its overall assessment of the Central Bank of Ireland’s (CBI) supervisory approach to outsourcing. In recent times, the CBI has extensively focussed on outsourcing. The Report provides some interesting insights into how EIOPA rates the CBI’s supervisory approach as compared with its European counterparts. In particular, EIOPA acknowledged that the CBI was one of the few NSAs to operate a robust assessment at notification together with an intensive ongoing supervision process. In contrast, the majority of NSAs focus their supervision on the notification stage, while others operate a lighter notification process along with more intensive ongoing supervision.
Recommended Actions for CBI
Along with other NSAs, it seems the CBI has some homework to do this September. In addition to highlighting examples of best practice (which are already being taken onboard by the CBI), the Report recommends action by the CBI in the following two areas.
- Boundaries between delegated authority arrangements (e.g., MGAs) and intermediation
EIOPA expressed the view that a clearer distinction must be drawn in relation to the boundaries between the outsourcing of delegated authority to underwrite and settle claims and that of (re)insurance distribution. The Report recommended that the CBI (and other NSAs) define and share with the market a clearer approach to distinguishing between intermediation (which is not regarded as outsourcing) and delegated authority arrangements (which is regarded as outsourcing) and also to clarify when the latter is considered to be the outsourcing of a critical function (CIFA).
EIOPA added that it expects the relevant NSAs to ensure a greater degree of consistency of application and oversight. It said that particular regard should be paid to the outsourcing of such functions to Managing General Agents (MGAs) noting that this is an area where they may provide further guidance to effectively ensure the convergence of supervisory practices. It seems that the CBI already has its homework in hand in this regard as the latest edition of its Insurance Newsletter (see article here) addresses this topic at length in the context of reporting on its thematic inspection of (re)insurers’ governance and oversight of underwriting MGAs. The CBI outlines the main deficiencies identified arising from the inspection process and explains how it expects (re)insurers to improve from a governance perspective going forward.
- Documentation and Information management
EIOPA recommends that the CBI (and other NSAs) establish “a comprehensive, accessible and structured set of information, typically in the form of a register” relating to outsourced functions and service providers at undertaking and market level. EIOPA indicates that this is necessary to enable NSAs to identify potential risks, namely concerning concentration issues, in addition to ensuring that the supervision of outsourced key functions or other CIFAs to the same service providers is prioritised. As most readers will be aware, the CBI’s work to address this recommendation is ongoing and many (re)insurers are preparing to file their first outsourcing register with the CBI by the 13 October deadline.
Communication by CBI
It is noteworthy that the CBI received a ‘best practice’ commendation for its communication of supervisory expectations to the market, in consideration of the number of guidance papers, reports, discussion papers and studies published. Notwithstanding that its homework from EIOPA is well underway, it seems inevitable that Irish (re)insurers can continue to expect ongoing communication and engagement from the CBI in respect of this regulatory hot topic.
Further Analysis by EIOPA
The Report clearly indicates the likelihood of EIOPA having more to say on certain aspects of outsourcing supervision in the near future. The Report states that EIOPA is planning:
- to analyse in more detail the benefit of developing further guidance for all NSAs on the distinction between (re)insurance distribution and outsourcing by an insurer; and
- to consider whether the MGA concept needs clarification to ensure sufficient convergence and supervision across all Member States.
Significantly, EIOPA also indicates that it may develop guidance to help supervisors conduct assessments of the corporate substance of (re)insurers and otherwise, identify ’empty shells’.
It will be interesting to see how EIOPA progresses this further analysis as any additional guidance may well prove impactful for Irish (re)insurers.
If you wish to discuss the topics discussed in this article, please contact any member of the Insurance team or your usual William Fry contact.
Contributed by Catherine Carrigy & Frank Hanly