CBI publishes final guidance on the use of service companies for staffing purposes in the insurance sector

On 31 January 2022, the Central Bank of Ireland (CBI) published its finalised guidance on the use of service companies for staffing purposes in the insurance sector (the Guidance). The Guidance applies to all Irish (re)insurance undertakings (except as between captive (re)insurance undertakings and captive managers) that have entered or propose to enter arrangements with separate legal entities for the provision of extensive staffing to the undertaking. (Re)insurers will have until 31 January 2023 to implement the Guidance. For many (re)insurers, this will involve reviewing existing and proposed staffing arrangements in light of the Guidance, potentially making changes and being able to evidence steps taken to the CBI if requested. 

The Guidance is accompanied by a feedback statement, which provides a summary on feedback received on the draft Guidance by stakeholders, commentary and any changes made to the final Guidance (the Feedback Statement). In the Feedback Statement the CBI noted that it was necessary to prepare guidance separate to the CBI's Cross-Industry Guidance on Outsourcing because the use of staffing arrangements is more common in the insurance sector.

This note provides an overview of the Guidance incorporating the changes to the draft guidance published in August 2021 and notes the comments made by the CBI in the Feedback Statement.

Key requirements / expectations

The CBI expects that where an undertaking uses a service company staffing arrangement, this should not impair the quality of the system of governance of the undertaking or unduly increase operational risk. The arrangement must not impair the ability of the CBI to monitor compliance of the undertaking with its obligations or undermine service to policyholders. 

The CBI expects undertakings to comply with a range of measures, including to:

• Conduct appropriate and proportionate due diligence and to be able to demonstrate to the CBI that it has considered a range of matters including whether the service company holds the appropriate authorisation and its ability to meet its obligations in both normal and stressed scenarios. In the Feedback Statement the CBI confirmed that the due diligence requirements are to be implemented before entering into any new arrangements. While the CBI acknowledged that the Guidance does not expressly state that it applies to all existing arrangements, the CBI also expects firms to review and amend existing arrangements to comply with the Guidance. 
• Integrate the staffing arrangement into the risk management system (including, as appropriate, the Own Risk and Solvency Assessment (ORSA) process) and internal control framework of the undertaking.
• Ensure that its business continuity planning measures factor in the staffing arrangement and provide for a level of protection that is comparable to a scenario where the staff are employed directly by the undertaking. The Feedback Statement confirmed the CBI's expectation for firms to incorporate staffing arrangements into their overall operational resilience framework/business continuity planning and does not require a separate plan to be created within the service company.
• Ensure compliance with the Fitness and Probity requirements, where a staffing arrangement includes the provision of staff to perform Pre-Approval Controlled Functions (PCFs) or Controlled Functions (CFs).
• Ensure that the staffing arrangement does not act as a barrier or impediment to the resolvability of the undertaking, by ensuring operational continuity in a resolution or failure event. 
• Demonstrate how the undertaking's board of directors has reviewed, considered and become comfortable with the specific arrangement the undertaking proposes to enter, or has already entered, and to provide details on their deliberation and decision upon request from the CBI. It was noted in the Feedback Statement that supervisors are likely to engage with undertakings in respect of these arrangements as part of their normal supervisory engagement. 
• Ensure that the arrangement does not create impediments to the supervision of the undertaking.

The role of the Board

The board of the undertaking is ultimately responsible for the proper monitoring and oversight of all activities of the undertaking, irrespective of whether staff are directly employed or engaged through a staffing arrangement. 

Importantly, the CBI expects that "sufficient substance" is maintained in the undertaking at all times, so that the undertaking does not become an "empty shell" or "letter box entity". Furthermore, entering into a staffing arrangement with a service provider must not impede the undertaking’s ability to meet the conditions it must comply with in order to remain authorised.

Basis of the staffing arrangement

The CBI expects staffing arrangements to be governed by a legally binding written contract or agreement setting out the basis of the arrangement. The contract should note the structure of the arrangement and the respective responsibilities of both parties, with due regard for the responsibilities of those in PCF or CF roles. The contract is also expected to provide a clear outline of how conflicts of interest will be managed together with business continuity provisions to ensure the continuity of services to the undertaking in a stress scenario.

Conflicts of interest

In relation to the duty of fidelity of staff or conflicts of prioritisation or commitment, in circumstances where staff are required to work across multiple entities, the CBI expects undertakings to address these potential conflicts in its written conflicts of interest policy and in the written agreement between the services company and the undertaking. 

Under a staffing arrangement, it must be clear that staff hold a duty of fidelity to the (re)insurance undertaking they work for and that they must act in the interests of that undertaking. However where staff are shared across multiple entities, the CBI expects that this should not compromise the staff’s ability to properly carry out their responsibilities for the (re)insurance undertaking. The CBI confirmed in the Feedback Statement that in a hybrid arrangement i.e. an agreement for the provision of both staff and services, where a material element relates to outsourced services the CBI expects a direct employee of the undertaking to be responsible for monitoring the outsourcing element.

Reporting to the CBI

The CBI expects an undertaking to provide it with appropriate information on a staffing arrangement at both commencement and whenever there is a material change to the arrangement. 

If the staffing arrangement is entered in to at authorisation stage the information is expected to be included in the undertaking’s business plan. Or, if the arrangement is entered into at a later stage, relevant information is expected to be provided as part of the next narrative Regular Supervisory Report following commencement of the arrangement.

Change to the draft guidance 

The Guidance substantively reflects the draft guidance issued by the CBI in August 2021. However in the Feedback Statement, the CBI notes that additional context has been added to the section relating to resolvability.

The CBI clarified that the reference to ring-fencing working capital in this section was not intended to be a requirement, but rather an illustration of how an undertaking could resolve an issue. The draft guidance stated as follows:

"consideration should be given to adequate pre-funding (e.g. equivalent to six months’ worth of working capital being ring-fenced within the service company) and contractual obligations that ensure continued service for a reasonable period of time”

This has been amended in the Guidance to read as follows:

"an undertaking could consider taking measures to ensure adequate pre-funding (e.g. equivalent to six months’ worth of working capital being ring-fenced within the service company) and/or include contractual obligations that ensure continued service for a reasonable period of time”.

Next steps

(Re)insurance undertakings should take steps to review their existing arrangements and any new arrangements in light of the guidance, make any necessary amendments to existing staffing arrangements, and put procedures in place to ensure compliance with the Guidance for any new arrangements. The CBI expects undertakings to be able to show how its board "has reviewed, considered and become comfortable with the specific arrangement the undertaking proposes to enter, or has already entered, (where it has considered, inter alia, the nature, suitability, etc. of the proposed arrangement) and to provide details on their deliberation and decision in this regard, upon request". Our view is that this will not necessarily be a straightforward exercise, in particular for (re)insurers party to arrangements that involve staff being shared across multiple entities.

The CBI expects the Guidance to be implemented in full by (re)insurers by 31 January 2023. 

For further information, please contact James Grennan, Laura Mulleady, Sinéad Lynch or your regular A&L Goodbody Insurance and Reinsurance team contact.

Date published: 15 March 2022