EIOPA publishes supervisory statement on use of third country branches
EIOPA has published its supervisory statement on the use of governance arrangements in third countries to perform functions or activities, as well as a feedback statement (links below).
As many insurance industry participants would have expected, EIOPA has not made significant amendments to the draft text included in its consultation paper on this topic, published in July 2022.
The key provisions of the supervisory statement remain unchanged, as EIOPA states that:
- the purpose of a branch of an undertaking or intermediary should be primarily to serve the market in which it is established, so third country branches established with the sole objective of supporting insurance undertakings and intermediaries based in the EU should be avoided;
- the third country branch should not perform regulated functions or activities in a manner that leads to the insurance undertaking or intermediary being disproportionately dependent on the arrangement for its activities in the EEA; and
- the operation of third country branches should not materially impair the system of governance, increase operational risk, undermine policyholder protection, nor should regulated functions or activities be structured or conducted so as to impair supervision.
However, the supervisory statement provides that supervisory authorities are encouraged to promote relocation or secondment of staff from third country branches to the EU and/or ceding part of insurance risk to third country reinsurance undertakings, to address potential concerns regarding lack of adequate technical expertise or specialist risk coverage in the EU.
The feedback statement includes some additional useful insights on these key points, in light of comments received as part of the public consultation process.
First, EIOPA defends its decision to include intermediaries within the scope of the supervisory statement, on the basis that this will ensure a level playing field and because intermediaries may carry out activities usually attributed to insurance undertakings (such as underwriting).
Secondly, EIOPA maintains there are “valid and robust” alternatives to the use of third country branches for accessing expertise or capacity to cover specialist risks. This led to the inclusion of the additional paragraph in the supervisory statement encouraging supervisors to promote relocation/secondment of staff to the EU or reinsurance of parts of insurance risk to third countries.
Thirdly, EIOPA notes that the use of the word “primarily” (in its statement as to the purpose of a branch) introduces a certain degree of flexibility. This would suggest that third country branches may be acceptable from a supervisory perspective where they mainly serve the market in which they are established and also provide support to EEA undertakings on an ancillary basis. However, it remains to be seen how much flexibility supervisory authorities are willing to display on this issue.
Finally, in response to concerns expressed by a number of stakeholders, the supervisory statement includes an illustration as to the meaning of “disproportionately dependent“, i.e. where an entity cannot demonstrate that, in the event of sudden loss of access to the third country branch, it can continue operating fully, without undermining policyholder protection. As pointed out in the supervisory statement, there are certain parallels here with outsourcing arrangements, even though third country branches do not qualify as outsourcing.
These statements will be of keen interest for insurance undertakings and intermediaries with branches in non-EEA states, particularly the United Kingdom. Given London’s leading position in the insurance market, it is likely to be challenging for many insurance industry participants with UK branches to find alternative sources of expertise and capacity within the EEA.
However, the impact of the EIOPA statement may represent an opportunity for other EEA states (such as Ireland), with a suitably qualified and experienced labour force, to present such alternatives to industry participants looking to decrease their reliance on UK branches.
In addition, the supervisory statement may assist EEA insurers who seek regulatory approval to reinsure specialist risks to the UK (or elsewhere) in future, particularly where there is a lack of capacity to cover those risks within the EEA.