Monday, February 26, 2024

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EIOPA publishes opinion on cash pooling, outsourcing and governance

The European Insurance and Occupational Pensions Authority (EIOPA) has published a draft opinion concerning the supervision of captive (re)insurance undertakings, with a focus on intra-group transactions, the prudent person principle and governance.

EIOPA said the published opinion is seeking to facilitate “a risk-based and proportionate supervision of captive (re)insurance undertakings and further support the convergence of supervisory expectations in the context of creating a level playing field within the EU”.

Stakeholders are invited to provide comments by responding to questions in an online survey by 5 January, 2024.

The consultation arises in the context of planned alterations to Solvency II which should benefit a select number of captives, while new domiciles within the European Union, such as France, with a desire to regulate captive business. Similar efforts are also underway in Italy and Spain.

Concerning the use of cash pooling by captive-owning corporates, EIOPOA said regulators should “ensure that (re)insurance captive undertakings recognise and classify in the

Solvency II Balance Sheet the asset and liability descriptions according to the economic substance of the cash pooling arrangement and also apply the proper calculation of the Solvency Capital Requirement (SCR)”.

In its opinion, EIOPA sets out the different treatment of a cash pooling arrangement depending on whether it is classed as a loan or cash at the bank.

“In addition to the SCR calculation, NCAs should ensure that the captive (re)insurance undertakings assess all risks and benefits brought by intra-group transactions, for example assessing the impact on liquidity and concentration risks linked to a material reliance on these types of transactions,” it explained.

“In cases of material reliance on these types of transactions such assessment should be reflected in the Own Risk and Solvency Assessment. Furthermore, the risk exposure relating to the availability of the funds in a cash pooling needs to be evaluated in a stress scenario and depends on the role of the cash pool leader managing the cash pooling.

“Regarding cash pooling agreements, limits should be set by the group in particular concerning assets held to cover liabilities towards policyholders.”

The opinion also turns the spotlight on governance in the context of Administrative, Management, Supervisory Board (AMSB) composition and outsourcing of key functions.

EIOPA said regulators should ensure that the governance and management structure “possesses the necessary seniority, competency, skills and professional experience” and reinforced that there is no exception for captives.

“Key function tasks can be outsourced, however the captive undertaking should designate a person within the undertaking with the overall responsibility for the outsourced key function who is fit and proper and possesses sufficient knowledge and experience regarding the outsourced key function to be able to challenge the performance and results of the service provider,” it stated.

EIOPA believes regulators should ensure the person designated as responsible for outsourced key functions should have an employment contract with the captive, be a person under supervision of the regulator regardless of their employee status with the captive, or employed by the captive owner in a role that is “properly documented within the outsourcing arrangements and fitness and propriety process”.

“NCAs (national competent authorities) should ensure that, in case of multiple services provided by the same service provider or captive manager from captive undertakings, the segregation of duties is clearly agreed and documented,” EIOPA added.

“Given the high degree of outsourcing operated by captive (re)insurance undertakings, NCAs should ensure that the initial and ongoing due-diligence on the service provider operated by the captive on the service provider is embedded in strong processes and procedures which shoud be made available to the NCA upon request.”