EIOPA supervisory statement on the use of governance arrangements in third countries
In February 2023, EIOPA issued a new Supervisory Statement on the use of governance arrangements in third countries to perform functions or activities whose ultimate policyholders are based in the EU.
Concerns addressed by the statement
EIOPA’s main concern is to prevent EU insurers and intermediaries from excessively relying on third countries’ operations – which fall outside the scope of EU supervisory authority – for their business in the EEA. This concerns was initially identified in the context of Brexit but it’s equally relevant for any other third country.
EIOPA focused on the need for insurance undertakings to not display the characteristics of an empty shell company. This could happen when the undertakings use third country branches, or similar governance arrangements, to perform disproportionally functions or activities. Instead they should demonstrate an appropriate level of corporate substance, including the presence of key decision-makers, function holders and staff to an extent proportionate to the nature, scale and complexity of the entity’s business in the EEA.
Scope of application of the statement
EIOPA also included intermediaries in the scope of the Supervisory Statement. Some relevant activities in the product lifecycle (eg underwriting activities) may be carried out by insurance intermediaries.
The aim of the Supervisory Statement is to promote ongoing and easier supervision of situations where an EU-registered intermediary becomes disproportionately dependent on the services provided by a branch in a third country to carry out distribution activities in the EEA. According to EIOPA, intermediaries should always have competent staff with appropriate knowledge and ability to perform their duties. But the “disproportionate dependence” should be assessed on a case-by-case basis.
EIOPA raised concerns regarding governance arrangements where the EU-registered insurance company or intermediary doesn’t have an adequate corporate structure. This could lead to financial, operational, reputational risks, and potentially result in harm to policyholders. As a result, supervisory activities may be compromised if essential functions occur in third countries. It’s imperative to ensure robust governance structures are in place to mitigate risks and protect policyholders.
EIOPA encourages National Supervisory Authorities to promote relocation or secondment of staff from the third country branch to the EU undertaking or intermediary. And they should cede part of the insurance risk by way of reinsurance to a reinsurance undertaking headquartered and authorized in a third country.