Out-Law Analysis 8 min. read

What Irish insurers should consider when establishing a ‘third country’ presence

Insurers headquartered in Ireland can set up operations in countries throughout the European Economic Area (EEA) on the basis of regulatory approvals granted by the Central Bank of Ireland (CBI), but the position is more complex in respect of the UK post-Brexit and other ‘third countries’.

There are existing requirements of insurance law and regulation to meet, and tax, employment, and company law issues to consider too. Irish headquartered insurers can also expect EU regulatory policy on third country branches to evolve in the months ahead.

The impact of Brexit

Prior to Brexit, it was unusual for an Irish headquartered insurer to carry on insurance business or establish a presence in a third country. Most examples of Irish insurers establishing a presence in other jurisdictions involved them setting up branches in the UK, which at that time was a member of the EEA. Rules on freedom of establishment that apply to EEA member states simplified the process.

With Brexit, the UK is no longer in the EEA, but despite this there remain solid reasons why an Irish headquartered insurer would want to carry out business in the UK or operate a branch in London or another UK financial centre. EU and Irish insurance rules allow Irish-headquartered insurers to establish a presence or carry-on insurance business in a third country like the UK. However, before doing so an insurer should give thought to a range of legal and regulatory requirements.

The legal and regulatory issues to consider

Under Article 15 of the Solvency II Directive, an Irish headquartered insurer's authorisation from the CBI is valid for the entire EEA. It permits the insurer to pursue insurance business in the classes for which it is authorised in other EEA member states on a freedom of establishment (branch) basis and a freedom to provide services basis. Some Irish headquartered insurers also carry-on reinsurance business pursuant to their CBI authorisation. While the Solvency II Directive contemplates an EEA headquartered insurer establishing a presence in and/or pursuing insurance business in a third country, automatic recognition of the Solvency II authorisations by third country regulators is not guaranteed.

If an Irish headquartered insurer is contemplating establishing a presence or pursing insurance or reinsurance business in a third country, it should obtain local legal and regulatory advice in that country to understand more about the insurance regulatory regime and what is required. Pertinent issues to consider will include:

  • Would the insurer's EU insurance authorisation under the Solvency II Directive be recognised there?
  • If the insurer's EU Solvency II Directive authorisation would be recognised, would it nonetheless be required to obtain an authorisation, licence, registration or other permission from a local regulatory authority?
  • If a local regulatory authority authorisation, licence, registration or other permission is required, what are the main requirements attaching to that with respect to, for example, the need to have a localised governance structure in the country; would a local fitness and probity type regime apply; would there be a need to hold insurance assets locally?
  • Would the insurer be subject to any local governmental or regulatory levy in connection with its business in that country?
  • If the insurer plans to cover directly from its Irish head office risks situated in that third country, either by way of insurance or reinsurance, would it be entitled to do so without requiring any local regulatory authorisation, licence registration or other permission?
  • Would the insurer's access to the country's insurance market be contingent upon it entering into a fronting type of arrangement with a local insurance company in that country – i.e., a situation whereby a local insurance company would issue the insurance cover to the policyholders and cede the insured risk by way of reinsurance back to the Irish headquartered insurer?

It would also be necessary for the insurer to take local law and regulatory advice in other important areas, such as local tax rules, local employment law and company law. It may be the case that, for example, rights of employees and obligations on employers under local employment law could be materially different from what an insurer is familiar with in Ireland.

Prior engagement with the CBI

Independent of, albeit related to, regulatory considerations in the third country that an Irish headquartered insurer would need to consider, generally speaking, formal prior engagement with the CBI will also be required.

There is no expressly provided for obligation under the EU Solvency II regime on an Irish insurer seeking to establish a third country presence to notify the CBI of its plans, unlike what is the case under that regime in respect of establishing a branch or other permanent presence in another EEA member state.

However, in reality there is likely to be a need to formally engage with the CBI in connection with establishing a third country presence. It is a condition of each Irish headquartered insurer's authorisation that they “notify the [CBI], in advance of material change in the [insurer's] business (including, but not limited to, the introduction of a new product, transacting business in new territory and changes to reinsurance and/or retrocession arrangements)”.

The CBI has issued guidance (14-page / 887KB PDF) to help insurers meet their regulatory obligations when establishing an EEA branch under the Solvency II framework. It is a useful document for insurers seeking to establish a third country presence too, because it includes the type of information the CBI is likely to be interested in in respect of those plans – including the nature of the insurance risks which are proposed to be covered by the insurer in the third country and the proposed structural organisation of the insurer's presence in the third country.

CBI fitness and probity regime considerations

All Irish headquartered insurers are subject to the CBI's statutory-based fitness and probity regime, under Part 3 of the Central Bank Reform Act 2010 (2010 Act). To comply with the regime, an insurer needs to, among other things, identify persons carrying out controlled functions (CFs) and pre-approval-controlled functions (PCFs) on its behalf.

The CBI does not disapply the fitness and probity regime with respect to third country branches of Irish headquartered insurers. In the CBI's FAQs (48-page / 1.09MB PDF) on the fitness and probity regime, it notes that Part 3 of the 2010 Act, including the fitness and probity standards, apply in full to all CFs in a third country branch of an Irish headquartered insurer. In accordance with Section 21 of the 2010 Act, the insurer would need to be satisfied on reasonable grounds that CFs in its third country are compliant with the fitness and probity standards. To the extent that the branch was to have any PCF role, the requirement under Section 23 of the 2010 Act to obtain CBI prior approval in respect of that role would also apply.

Consultation by EIOPA concerning third county branches

In a recently published consultation paper (18-page / 792KB PDF) the European Insurance and Occupational Pensions Authority (EIOPA) decided to look more closely at the use by EEA head officed insurance insurers of governance arrangements located in third countries to perform functions or activities. While the consultation paper does not purport to make a distinction between the UK and other third countries, from an Irish insurance industry perspective, it is likely to be of most relevance to Irish headquartered insurers having, or that are contemplating having, a permanent presence in the UK.

Prior to Brexit, a number of Irish headquartered insurers would have relied on the Solvency II regime's freedom of establishment passporting entitlement to establish a UK branch, often with the purpose of using that branch, either wholly or mainly, as a platform to access the rest of the EEA. Often the reasons for having a UK branch would include the existence of specialist underwriting expertise there and having direct and daily access to the well-established international insurance market in London. Brexit does not substantively alter those good reasons for Irish headquartered insurers wanting to have a presence in the UK.

The consultation paper includes a proposed supervisory statement which has the stated aim of ensuring appropriate supervision and monitoring of the compliance of EEA head officed insurers and intermediaries with the requirements of relevant EU insurance legislation in relation to their governance arrangements in third countries.

EIOPA cautions that an EEA head officed insurer should not display the characteristics of an empty shell that could arise from a situation where the insurer uses its branch in a third country, such as the UK, to perform disproportionally functions or activities. There would appear to be a perceived risk at EU level that an insurance group may establish an 'empty shell' insurer in an EEA member state and then look for that insurer to utilise, in as much as possible, its human resource that is based in a third country.

Under the Solvency II Directive, EEA member states must require that head offices of Solvency II insurers are situated in the same EEA member state as their registered office. Arguably, if a Solvency II insurer has an 'empty shell' existence in the EEA while, at same time, relying wholly or mainly on its third country branch to effectively carry on and oversee its insurance business, circumstances could arise where the insurer is identified by a regulator as having its de facto head office outside of the EEA.

In terms of an EEA head officed insurer's reliance on its third county branch to ultimately service its policyholders in the EEA, EIOPA opines that this governance arrangement may impair risk management and effective decision making, and have the potential to pose financial, operational, and reputational risk and ultimately impair policyholder protection. EIOPA also believes that this arrangement may impair the ability of EEA insurance supervisory authorities, like the CBI, to conduct proper supervision of insurers under their prudential supervision. EIOPA has asked stakeholders whether they agree with its view.

Based on my review of the consultation paper, I do not believe that EIOPA is looking for third country branches of EEA head officed insurers to be prohibited, and nothing which I have identified in the EU legislative proposal for EU Solvency II reform would lead me to a different conclusion. However, EIOPA has said in its consultation paper that the purpose of a third country branch should be primarily to serve the local market in which it was established and that governance arrangements established by EEA head officed insurers in third countries with the sole objective of supporting entities based in the EEA should be avoided. It has also said that an EEA head officed insurer should not become disproportionately dependent on its third country branch or similar arrangement for its EEA insurance activities. EIOPA has asked stakeholders whether they agree with its view.

While the consultation period remains open until 31 October 2022, EIOPA has already expressed a preference for issuing a principles-based, rather than a prescriptive, supervisory statement. If the finalised statement reflects EIOPA's preference, it would not list which activities or functions of an EEA head officed insurer should be conducted in the EEA. It would, however, specify supervisory expectations and give EEA insurance supervisory authorities enough flexibility to determine, on a case-by-case basis, what level of activity may be conducted outside the EEA .

It would be advisable for Irish headquartered insurers having, or that are contemplating having, a branch or similar governance arrangement in the UK or another third country to review the consultation paper having regard for the regulatory risks and other considerations identified by EIOPA. 

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