Irish Central Bank issues guidance on insurers’ use of service companies

The new guidance (16-page / 455KB PDF), issued in January, is accompanied by the CBI’s feedback on submissions that it received on a draft, included in Consultation Paper 144. It remains largely unchanged from that draft.

The guidance is applicable to both insurance and reinsurance undertakings. References to “insurers” in this article should be read as referring to both insurers and reinsurers.

Irish insurers and reinsurers frequently rely on group service companies for their staffing arrangements, as having staff employed through a single group company can have significant operational benefits. While the staff member would have their employment contract with the service company and that company would have responsibility for paying salaries etc., on a day-to-day basis the staff would be subject to the direction and control of the insurer. This is often referred to as a “secondment arrangement” or the “deployment model”.

These types of staffing arrangements do not necessarily fall under the definition of outsourcing in the EU’s Solvency II Directive. However, the CBI is of the view that, if not effectively managed, these arrangements may “threaten the operational resilience” of regulated entities, so triggering its general duty under Solvency II to supervise insurers’ internal governance systems. In addition, sometimes an intra-group staffing arrangement may be accompanied by the provision of additional outsourced services by a services company to an insurer, which is referred to by the CBI in its guidance as a 'hybrid arrangement'.

The CBI is not looking to prohibit intra-group staffing arrangements and, in practice, we are not aware of a staffing arrangement impacting an insurer in this way to date. Rather, the guidance sets out the CBI’s expectations about how insurers are to manage the risk.

The CBI expects that if an insurer uses a staffing arrangement, it should not:

• impair the quality of the insurer’s system of governance;
• unduly increase operational risk;
• impair the CBI’s ability to monitor the insurer’s compliance with its obligations; or
• undermine service to policyholders.

Complying with the guidance

For both existing and proposed staffing arrangements, insurers must:

• integrate the staffing arrangement into its risk management system – including, where appropriate, the own risk and solvency assessment (ORSA) process;
• ensure that sufficient substance is maintained in the insurer itself in order to avoid it becoming an 'empty shell' or 'letter box’ entity. In practice, this typically means that at least some senior management are employed directly by the insurer;
• demonstrate to the CBI that the board has reviewed, considered and become comfortable with the staffing arrangement;
• undertake appropriate due diligence in respect of a proposed staffing arrangement;
• document the staffing arrangement by having a written contract which sets out the basis for the arrangement in terms of structure, roles provided and the respective responsibilities of both parties;
• manage conflicts of interests, particularly where staff are required to work across multiple businesses within the same group;
• ensure that its business continuity measures provide for a comparable level of protection to that which would exist if staff were directly employed by it;
• comply with the CBI’s Fitness & Probity regime.

Before a staffing arrangement is entered into and whenever there is a material change to the arrangement, taking account of these considerations, the insurer must notify the CBI.  Information about the staffing arrangement should be included as part of the insurer's Solvency II Regular Supervisory Report. For hybrid arrangements, where a staffing arrangement is accompanied by a Solvency II critical or important outsourcing to a group company, the insurer will need to comply with the existing Solvency II obligation to notify the CBI.

Employment law considerations

We have frequently encountered scenarios where staffing arrangements entered into between group companies are not documented or else are documented at a high level only. Such scenarios will not meet the CBI’s expectations. To ensure sufficient objectivity, and notwithstanding that group companies will often be subject to overarching group-wide policies, staffing arrangements entered into between group companies should be approached and documented as if they were being entered into between unrelated parties.

The CBI is also keen to see conflicts of interest managed appropriately. Staff in the insurance industry subject to these types of staffing arrangements commonly provide their services to more than one group entity. This potentially can lead to a conflict of interest. The CBI expects this to be addressed in the written agreement.

For insurers receiving the services, a particular point to consider in this context is whether their existing service agreements contain any means by which to remove a staff member if there is a concern regarding their ability to properly carry out their responsibilities. Service providers will also need to understand what obligations are placed on them to replace employees as the need arises.  If the same staff member is to be provided to multiple insurers within the same group, particularly with respect to PCF roles, each insurer would need to be satisfied that the person can dedicate the required level of time commitment to the performance of the role.

What should insurers do now?

The CBI expects insurers to read the guidance in conjunction with the relevant Solvency II regulations and guidance.

By 31 January 2023, insurers must review their existing staffing arrangements and ensure that they are updated and augmented, if necessary, to align with the CBI's expectations. Where an insurer is planning to enter into a new staffing arrangement, it would then need to take the guidance into account.

If, after carrying out the review, an insurer determines that an existing or proposed staffing arrangement is not aligned with the guidance, the CBI expects the insurer not to use that staffing arrangement. That insurer may need to consider alternative staffing structures.

There are a number of types of staffing structures that may be used. In our experience, the most common tend to be secondments or dual employment contract arrangements. We would, however, recommend insurers to consider what their requirements are from a tax and regulatory perspective as well as the employment implications of the structure before determining the most appropriate alternative structure.