Brexit – The drive for supervisory convergence - Sylvia Cronin, Director of Insurance Supervision

Good morning ladies and gentlemen. Thank you to IDA Ireland for the invitation to speak at today’s event.

In my remarks this morning, I will discuss Brexit, in the context of insurance authorisation, and consider the question of Supervisory Convergence.

Impact of Brexit

Brexit represents a significant change in the external environment, given Ireland’s close links and high level of trade with the UK. More widely, it has been well documented that Brexit will impact the continued ability of financial services firms to sell their products from the UK directly into other EU member states, and vice versa, in the absence of a negotiated alternative.

Here in the UK, financial firms who sell services to the EU market will need to ensure that they have considered the implications for their business models of a loss of passporting rights on the UK’s exit from the European Union.

In considering those implications there are a number of options open to firms. One of those options is to maintain the firm’s ability to continue to write cross border business by establishing a subsidiary in an EU member state country, and applying there for authorisation to write business.

In this context, in Ireland we have seen a material increase in the number of applications for insurance authorisation submitted to the Central Bank, due to the possible loss of passporting rights of UK- authorised entities. We have authorised a number of firms already in 2017, and have several further applications under review.

The Central Bank is strongly committed to assessing authorisations in an effective and efficient manner.  This includes deciding on applications for authorisation as well as the ongoing task of conducting assertive, risk-based supervision of authorised firms.

The Insurance Directorate of the Central Bank is ready to deal with such an increase in applications for authorisation. I have scaled up our authorisations unit, with experienced supervisors, to deal with the increase in volumes we have seen. I would say that we stand ready to do our job; we are open for engagement.

However, it is important to note that we are less than 18 months away from the end of the Article 50 period. The possibility of a Hard Brexit remains a real risk. Potential applicants should be aware that the application process takes a number of months, notwithstanding the increased size of our authorisations unit.

I would advise remaining firms who are considering Ireland as a jurisdiction for an Insurance application to engage with us early in that process. Early engagement with our authorisations unit can be useful in terms of talking through some of the key issues facing potential applicants. This may assist firms with producing a more complete application, and smooth the application process, which would be beneficial for all involved.

Supervisory Convergence

I would now like to take the opportunity to discuss the drive towards supervisory convergence and highlight some key issues of interest with respect to Authorisations. Solvency II is now embedded and becoming business as usual. It is this regime that applies to the assessment of applications for authorisation.

Supervisory convergence

A key element of any single market is that the rules that govern the market apply equally to all the players, irrespective of where they are based. Consumers know that what they are buying is of the same standard irrespective of where it is produced. In the case of insurance, it means that policyholders can expect their insurer to be regulated in accordance with Solvency II, which is applied consistently in the EU.

There needs to be a common understanding and interpretation of the Solvency II regulations to ensure that insurance supervision is consistent across the single market. There should also be a common view of what is considered good and effective supervision.  This is important from your perspective, as you need to be confident that the rules will be applied consistently, as you decide how to best future-proof your companies and business.

Our approach to insurance supervision is to ensure we are aligned with European best practice.

With respect to authorisations we are committed to providing transparent, consistent and predictable regulatory decisions. In turn, firms’ decisions in the context of Brexit should not be driven by regulatory differences, but by important matters such as business model, employee and work force concerns, cultural fit, communications, and so on.

EIOPA Peer Reviews

The Central Bank is a member of the EIOPA Board of Supervisors, EIOPA working groups and committees. We play an active and important part in shaping and influencing European standards.

Supervisory convergence is one of EIOPA’s key strategic goals. They have noted that “supervisory convergence becomes key in a period where effective implementation of Solvency II is both a challenge and an opportunity” and a “true single market demands a level playing field and quality regulation and supervision”.

EIOPA has several initiatives in place that are used to drive consistency between Member States. These include working groups, college of supervisors meetings, a common supervisory handbook, EIOPA guidelines and Peer Reviews.  The Central Bank plays its part in being an active member in all of these arenas. 

EIOPA periodically conducts peer reviews of Supervisory Authorities on particular topics: to highlight best practices; to strengthen consistency; and to drive convergence. Peer Reviews generally focus on topics that have garnered interest at EIOPA level. I will explain what is involved in a Peer Review to give you an insight into how EIOPA performs its role to ensure supervisory convergence.

Typically, a Peer Review would commence with an information-gathering phase, issued to all Supervisory Authorities. Based on this, a number of authorities are selected for an on-site visit from the EIOPA Peer Review Panel. The Panel comprises of representatives from different National Supervisory Authorities who have the necessary independence, seniority and expertise in supervisory practices. A final report is published which highlights any areas for improvement in national supervisory frameworks and best practice, which may feed into future EIOPA guidance.

I will further share the key points of the Authorisation Peer Review, which the Central Bank participated in earlier this year.

Authorisations

There has been a lot said and written about the potential for supervisory arbitrage, with member states competing to attract companies in the wake of Brexit. Whilst the new Solvency II regime applies to all member states of the EU, there is a perception that there is scope for different interpretations for some of the rules. EIOPA has a key role in ensuring rules are interpreted consistently and that there is a convergence of supervisory practices under Solvency II. The Central Bank supports this.

The Central Bank was one of the six regulators who received an onsite visit from the Peer Review Panel as part of the peer review of the authorisation process. The Central Bank’s review took place in April this year. EIOPA acknowledged a comprehensive, transparent authorisation process in place. A key aspect of this is the publication of processes, checklists and guidance on our website. The Central Bank was considered to be a benchmark with respect to on-going monitoring. It was viewed to be particularly important that changes in the business model and governance structures of firms are reviewed with regard to their appropriateness, as part of the authorisation process.

The output of this review helped develop the opinion paper titled “EIOPA Opinion on supervisory convergence in light of United Kingdom withdrawing from the EU”. This paper is published on EIOPA’s website. The stated main aim of the opinion paper “is to foster convergence and consistency of authorisation processes across Member States”.

It is critically important to have a robust authorisation process. As a regulator, it is imperative that we have a strong authorisation system in place to ensure we have adequate governance, oversight and understanding of potential risks facing firms.

Why are we concerned with the substance within a firm?

In order to effectively supervise undertakings it is essential that the key decisions are being made by the local entity in which we regulate. We expect strong local governance supported by a sound risk management framework.

Should governance of outsourcing arrangements be a key concern?

It is vital that critical functions such as underwriting, claims or distribution channels that are outsourced to a third party or to group, are monitored and reviewed on a frequent basis, to ensure that there is adequate control.

Why are we concerned with the level of reinsurance? 

Although reinsurance is an effective risk transfer tool, a high level of quota share reinsurance may indicate a lack of substance in the local entity, or possibly exposure to concentration risk and counterparty risk.

All these elements form the basis of the EIOPA guidance. The Central Bank’s authorisation process and its approach to substance, reinsurance and outsourcing are aligned to the EIOPA’s guidance.

Closing Remarks

Let me conclude there.

We recognise that the vast majority of financial firms did not choose Brexit, and firms face significant logistical and practical challenges in doing a number of things, in what may be a relatively short timeframe.  My key messages are that when it comes to applications for insurance licenses in Ireland, the Central Bank stands ready to meet the challenges that may arise. We are open and ready to engage with firms, but in line with our duty to protect consumers, and in keeping with the Solvency II framework and our published processes. The standards we apply are consistent with European norms and EIOPA guidance.