In early June, we blogged about the European Securities and Markets Authority’s opinion setting out nine principles to support supervisory convergence following UK withdrawal from the EU. The opinion appeared as if it was designed to ensure there were no incentives given by one Member State over another and to ensure a balanced playing field.
Now the European Insurance and Occupational Pensions Authority (EIOPA) has published its own “Opinion on supervisory convergence in light of the United Kingdom withdrawing from the European Union” (click here for full document), which provides guidance for EU regulators facing applications from UK-based insurance companies. The opinion assumes a hard Brexit and thus the UK becoming a non-EU third country (as to date, no bilateral arrangements have been agreed that grant UK insurers access to the single market, and vice versa).
The opinion emphasises, among other things, a number of points relating to risk retention, outsourcing and corporate substance:
- The opinion rejects the idea of pure fronting arrangements. EIOPA states that a regulator should require a minimum retention of 10% to be held by any newly established EU insurance carrier.
- The opinion does not prohibit outsourcing, but EIOPA states that outsourcing of critical or important functions requires that the insurance company remains fully responsible for the outsourced activities and that there should be a person within the undertaking responsible for outsourced key functions on an ongoing basis. The outsourcing of activities which are critical or important for an insurance undertaking should be carefully assessed by the supervisor.
- Finally, there is an expectation that any newly established EU insurance undertaking should demonstrate “an appropriate level of corporate substance, proportionate to the nature, scale and complexity of the planned business including an appropriate presence of the administrative, management or supervisory board members and key function holders in the member states … as well as a level of local staff commensurate to the nature and amount of business being run from the entity”. The opinion does not prescribe a fixed headcount but it is clear that EIOPA will be sceptical towards any attempts by newly setup EU carriers to run excessively lean operations.
A number of UK insurers and reinsurers have already publically chosen their preferred post-Brexit EU domicile. What remains clear however is that EIOPA, like the ESMA, is keen to ensure that there are no ‘brass plaque’ insurance companies set up in the EU post-Brexit.