Captive Review, April, 2019

Mary McMorrow, head of Governance Services Europe at SRS Europe, provides some useful tips on governance considerations for captive insurers outsourcing services under Solvency II conditions.

The growing reliance of many regulated firms on outsourced service providers (“OSPS”) has led to European Regulators placing an increased focus on this area. While the majority of captive (re)insurers might be classified as lower risk, they must nevertheless ensure that supervisory demands regarding outsourcing are being fulfilled.

Several recent publications have outlined regulators’ expectations and recommended good practices regarding outsourcing, with a particular focus on governance, risk management and business continuity management. Captive (re)insurers should therefore ensure that they are meeting their obligations with respect to outsourcing and that they will be able to demonstrate this in the event of an onsite inspection or wider thematic review.

Evidently regulators will expect that (re)insurance undertakings make improvements in the way that they manage their outsourced activities. Captive (re)insurers would therefore do well to perform a health check as to the degree of management activities currently performed to establish whether they befit the scale and complexity of the key activities that they outsource.

Governance is an extremely important function, in that the board must be aware of the size and nature of the company’s outsourced activities (including intragroup) as well as the associated risks. The ultimate responsibility for the management and control of outsourcing risks rests with the board and senior management. Key areas for consideration include:

• Outsourcing Strategy & Policy, which should reflect the scale and nature of current and prospective outsourcing arrangements (including the outsourcing of any PCF/CF function).
• Those tasked with monitoring OSPs/managing associated risks possess the requisite skills and knowledge – who currently performs this role and how/to whom are reports provided?
• Contractual arrangements contain all necessary clauses and are supported by robust SLAs (including key performance indicators and appropriate penalties in the case of failure to meet expected service levels).

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