“Empty shells or letter boxes are not acceptable.” Those were the words of Gabriel Bernardino, European Insurance and Occupational Pensions Authority (EIOPA) chair, when the watchdog released a guidance document on Tuesday.
EIOPA’s published opinion on supervisory convergence sets out principles to ensure a consistent authorisation process as it relates to the relocation of insurers from the UK. It recognises the fact that UK-based insurance undertakings will lose their right to conduct business across the European Union Member States upon Britain’s withdrawal from the single market.
Addressed to the national supervisory authorities of the 27 Member States (EU27) that remain in the European Union, the document provides guidance in the areas of authorisation and approvals, governance and risk management, outsourcing of critical and important activities, as well as on-going supervision including monitoring.
“Considering the importance of the UK as the most important financial centre in the EU contributing by 24% of EU28 to the total financial and insurance activities in 2015, this unique situation requires a common effort at EU level to ensure a consistent supervisory approach to the relocation of undertakings. Communication between the UK and EU supervisors is encouraged in this context,” said EIOPA.
The watchdog wants the authorisation process to be sound, with adequate resources in place to address the surge in authorisation requests. It said there shouldn’t be automatic recognition of existing authorisations, and that supervisors should apply a prospective and risk-based assessment.
Undertakings are also expected to show “an appropriate level of corporate substance” – meaning they should not display “empty shell” characteristics. EIOPA is urging supervisors to carefully scrutinise any transfer of risks and to require a minimum retention of risks from the authorised undertaking.
It said outsourcing of undertakings’ important functions is subject to the full responsibility of the administrative, management, or supervisory body for the outsourced activity. “Outsourcing shall not materially impair the quality of governance, increase operational risk, impair the ability of supervisors to monitor compliance, or undermine continuous and satisfactory service to policyholders,” added EIOPA.
For Bernardino, sound supervision demands appropriate location of management and key functions. He also said EIOPA will conduct its analysis and make use of its powers and oversight tools to support supervisory convergence through bilateral engagements with the supervisory authorities.
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