Irish regulator looking into insurers' use of staff service companies

Out-Law News | 22 Nov 2019 | 4:21 pm | 2 min. read

The Central Bank of Ireland (CBI) is seeking to better understand the use by insurers and reinsurers ('insurers') of service companies for their staffing arrangements.

The regulator has noted increased use of these arrangements in the context of the UK's planned departure from the EU, as well as historically. It has now published a discussion paper (17-page / 1.2MB PDF) on the topic, as it is keen to understand the extent to which these arrangements may lead to additional complexity and the need for further risk management. It is seeking responses by 31 January 2020.

Insurance law expert Niall Campbell of Pinsent Masons, the law firm behind Out-Law, said that the type of arrangement described by the CBI in its paper is "one which we are very familiar with".

Campbell Niall

Niall Campbell

Senior Associate

While the CBI doesn't appear to suggest that such arrangements will be prohibited in the future, it opines that it is an area which requires further regulatory consideration and where guidance may need to be developed.

"The paper is likely to be of particular interest to groups with Irish insurers and reinsurers which currently operate a service company model. It provides an insight into the CBI's expectations – particularly the management of conflicts of interest and business continuity," he said.

The discussion paper focusses on the type of arrangement where the staff's employment contracts are with a service company, which is usually part of the same corporate group as the insurer. While the service company is responsible for all the employment-related obligations, including legal and tax obligations, the staff are then provided under contract to the insurer by the service company. All work is performed under the direction of the insurer, and as such can be viewed as an activity of the insurer.

The CBI is of the view that arrangements which are solely of this nature arguably do not fall under the definition of "outsourcing" under the EU's Solvency II Directive. These cases could be viewed "as another way of employing people such that the relevant staff consider themselves, to all intents and purposes, as employees of the [insurer] and hold their duty of fidelity and responsibility to the [insurer] as opposed to the [service company]", it said.

The CBI notes that there are practical reasons why an insurer may seek to enter into one of these arrangements, such as leveraging group expertise, cost and tax efficiencies or managing all HR and pension-related issues for the corporate group under a single arrangement. However, it is of the view that these arrangements could introduce new and increased risks for firms.

The paper sets out 16 questions designed to help the CBI understand how the board and senior management of the insurer identify and manage these risks in order to ensure that appropriate standards of governance, control and risk management are upheld. It is particularly focused on questions of corporate substance appropriateness and adequacy of the initial and ongoing risk identification and management processes; and adequacy of policyholder and beneficiary protection.

"While the CBI doesn't appear to suggest that such arrangements will be prohibited in the future, it opines that it is an area which requires further regulatory consideration and where guidance may need to be developed," said Campbell. "To the extent that the paper is relevant to your business operations in Ireland, we would be pleased to have a conversation with you about it."