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EIOPA Supervisory Statement on the use of governance arrangements in third countries to perform functions or activities

On the 3rd February 2023, the European Insurance and Occupational Pensions Authority (EIOPA) issued a Supervisory Statement on the use of governance arrangements in third countries to perform functions or activities (“Supervisory Statement”).  The EIOPA Supervisory Statement follows a public consultation which was launched by the European Authority on the 29th July 2022 relating to the use of governance arrangements in third countries (“Consultation Paper”).

What is the aim of the Supervisory Statement?

The principal aim behind EIOPA’s Supervisory Statement, and indeed the whole consultation process, is to again highlight the importance to Member States and its supervisory authorities, that insurance undertakings and intermediaries alike are expected to maintain a strong governance structure which is underpinned by an appropriate level of corporate substance which reflects the nature, scale and complexity of the entity’s business operation in the European Economic Area (EEA).

To which insurance operators is the Supervisory Statement aimed?

In its Supervisory Statement, EIOPA addresses its attention explicitly to third country branches set up by EU/EEA insurance undertakings and intermediaries. Specifically, EIOPA opines that “branches established in third countries with the sole objective of supporting undertakings and intermediaries based in the EU should be avoided” since not to do so would likely result in the European head office to be “disproportionately dependent” on such branches to carry out its daily operations and to serve policyholders within the EU/EEA.

What are the key takeaways of the Supervisory Statement following the Consultation Paper?

  • The Consultation Paper was aimed at “third country branches or similar governance arrangements”. The loose reference to “similar governance arrangements” may have resulted in a lack of supervisory convergence by European supervisory authorities in the application of the Supervisory Statement and thus being exposed to the risk that the expectations arising from the Supervisory Statement are erroneously applied to other “governance arrangements”, such as outsourcing, despite the clear statement made in paragraph 2.14 of the Consultation Paper (which has been reiterated in paragraph 2.14 of the Supervisory Statement) that “….these governance arrangements [third country branches] do not qualify as outsourcing”.

    • Consequently, the scope of the Supervisory Statement is not aimed at restricting the use of third country service providers which qualify as outsourcing.  This most likely because there is already a detailed and onerous legal and regulatory framework addressing such outsourcing arrangements.  On the other hand, the scope of the Supervisory Statement is now more focused in nature to exclusively address new or emerging areas such as those governance arrangements in third countries taking the form of branches with the aim of undertaking regulated functions or activities.

  • The Consultation Paper had failed to recognise the reality that is being faced by insurance undertakings or intermediaries operating in small financial markets in the smaller peripheral member states, with limited resources, and which may need to resort to the services provided by the arrangement in a third country. The smaller EU member states should not be discriminated against by limiting the possible leverage off the knowledge and expertise of skilled individuals, including intra-group, from larger financial markets.

    • Following the consultation process, the Supervisory Statement shows clear signs of acknowledging the general lack of resources currently being experienced across Europe.  Specifically, in the new paragraph 3.3 of the Supervisory Statement, EIOPA is encouraging supervisory authorities to address any potential concerns regarding lack of adequate technical expertise or specialist risk coverage in the EU by promoting “…. relocation or secondment of staff from the third country branch to the EU undertaking or intermediary and/or cede part of the insurance risk by way of reinsurance to a reinsurance undertaking headquartered and authorised in a third country.”

  • EIOPA opines that the “sole objective” of a third country branch should not be of supporting EU-based insurance undertakings and intermediaries but “should be primarily to serve the market in which it was established”. In its feedback statement, EIOPA clarifies that the world “primarily” is intentional with the purpose of allowing a window of opportunity for viable alternatives to the use of third country branches to conduct activities or functions such as secondment or relocation of staff.  One may therefore argue that it is permissible for third country branches to also assist their respective EU head offices provided that such third country branches also serve clients of the undertaking or intermediary in the third country where the branch is established.

  • The Consultation Paper had identified three possible routes which EIOPA could take in relation to this topic:

  • Policy option 1: No action (maintain status quo)

  • Policy option 2: Issue a detailed supervisory statement

  • Policy option 3: Issue a principles-based supervisory statement

    • EIOPA appears to have opted for Policy option 3 when issuing the Supervisory Statement by describing supervisory expectations for insurance undertakings and intermediaries and recognising the role of the national supervisory authorities to implement the applicable regulatory framework based on Union or national law and, where adequate, apply a case-by-case approach.

    Click here for the EIOPA Supervisory Statement.

    Author: Romina Bonnici

    February 15, 2023

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