New developments in the concept of “corporate substance” in the insurance sector

On 3 February, the European Insurance and Occupational Pensions Authority (EIOPA) issued a prudential statement for insurance undertakings and insurance intermediaries governed by the law of an EU Member State. The statement addresses the issue of the dependence of such financial institutions on branches they establish in third countries to carry out regulated activities (in this case, insurance distribution). This issue has arisen in the context of Brexit, but the prudential statement has a broader scope in that it also applies to third countries other than the UK.

According to this statement, the relationship between the EU insurance undertaking or insurance intermediary, on the one hand, and the branch established in a third country, on the other, must meet the following requirements:

• the level of "corporate substance" that the insurance undertaking or intermediary must have at its EU headquarters depends on the nature, scale and complexity of its activities within the EU.
• the core target market of such branches must be in the (third) country in which they are established. In other words, supervisors will not look favourably on branches established in a third country whose sole purpose is to assist insurance undertakings or intermediaries in carrying out regulated activities within the EU (which, since Brexit, has become a business model for insurers and intermediaries that have had to set up a subsidiary within the Union).
• the relocation or secondment to the EU of the branch’s staff and/or the cession of part of the insurance risk to a reinsurance undertaking with its head office in the third country are also criteria which should support the conclusion that the insurance undertaking or intermediary has sufficient "corporate substance".
• any excessive dependence on the part of the insurance undertaking or insurance intermediary on the branch (established in the third country) for the exercise of regulated activities within the EEA must be avoided.
  
  By way of illustration, it is likely to be considered that there is excessive dependence where the EU insurance undertaking or insurance intermediary is not able to demonstrate to the national supervisory authority that, in the event of an incident preventing access to the branch, the insurance undertaking or intermediary would be able to continue its normal course of business (without affecting the level of protection for policyholders). The level of dependence will be analysed on a case-by-case basis.
   
• the branch (in the third country) must not: (i) interfere with the system of governance of the insurance undertaking or intermediary, (ii) create greater operational risk for the insurance undertaking or intermediary, or (iii) adversely affect the protection of policyholders.
• the insurance undertaking or intermediary governed by the law of an EU Member State must maintain a sufficient level of control over the activities of the branch (in the third country).
• the structure must enable the national supervisory authority of the insurance undertaking or intermediary to supervise compliance with the relevant EU regulations. In addition, the insurance undertaking or intermediary must be able to demonstrate that such supervision can be properly carried out.