Although Ireland has regulated life assurance activities for over 100 years, with many provisions of its historic regulatory regime still relevant today, the key driver of insurance regulation and the basis for the development of its cross-border industry, for the last 30 years, has been its membership of the European Union ("EU") and the harmonised insurance regime which has evolved at EU level since the introduction of the First Life Directive in 1979.
The Irish legal framework governing insurance business is set out in pre-existing domestic legislation as amended and supplemented by national laws which implement EU legislative provisions. This framework is further supported by guidance notes and policy papers issued by the Central Bank of Ireland (the "CBoI").
Some of the main pieces of European and domestic legislation include:
A. European Legislation
Solvency II Directive (2009/138/EC) – will repeal
other Directives once implemented
Third AML Directive (2005/60/EC)
Consolidated Life Directive (2002/83/EC) – will be repealed on the implementation of Solvency II
Financial Conglomerates Directive (2002/87/EC)
Distance Marketing Directive (2002/65/EC)
Insurance Winding Up Directive (2001/17/EC) – will be repealed on the implementation of Solvency II
Insurance Groups Directive (98/78/EC) – will be repealed on the implementation of Solvency II
B. Irish Legislation
Life Assurance (Provision of Information) Regulations 2001
European Communities (Life Assurance) Framework Regulations 1994 (as amended)
Insurance Act, 1989
Insurance (No. 2) Act, 1983
Insurance Act, 1936
Assurance Companies Act, 1909
The CBoI has issued a set of Guidance Notes which explain and clarify various aspects of the European Communities (Life Assurance) Framework Regulations 1994 (as amended) (the "1994 Regulations").
Care needs to be taken in considering the extent to which any reliance may be placed on the Guidance Notes, in particular as to whether they represent current CBoI's policy or position on a particular matter.
The purpose of this Guide is to outline the main regulatory requirements applicable to a life assurance undertaking in Ireland.
Related Dillon Eustace publications include:
- A Guide to Solvency II
- A Guide to Cross Border Life Assurance From Ireland
- Transferring an EEA Insurance Undertaking to Ireland
- Cross-Border Insurance Portfolio Transfers
- Corporate Governance Code for Insurance Undertakings
The Irish regulatory regime for life assurance is an extensive one covering the entire life of an undertaking from initial establishment through to winding-up. In a brochure of this nature, we can only cover the main areas to which the regulatory regime applies but note that most actions taken by a life company during its life are subject to regulation, one of the reasons why a compliance matrix is an important document to be prepared at launch and followed / updated continuously.
The competent authority responsible for the regulation and supervision of life assurance undertakings in Ireland is the CBoI.
The CBoI maintains registers of all life assurance undertakings authorised to write business in Ireland whether through the establishment of a head office, a branch or by way of freedom of services. The registers are available on the CBoI's website www.centralbank.ie. Additionally, the CBoI publishes annually an Insurance Statistical Review, also available on its website.
Powers of the CboI
The CBoI is the competent authority for both the authorisation and ongoing supervision of insurers. Under the Insurance Act, 1989, the CBoI has extensive powers to request a wide range of information from insurers, to carry out investigations of the business of an insurer and of connected persons, as well as powers of intervention where it considers an insurer is or may be unable to meet its liabilities or unable to provide the required solvency margin. In such cases it can direct the insurer to take such measures as it deems appropriate. Similar powers of intervention arise in other circumstances such as failure to comply with insurance legislation, inadequacy of reinsurance arrangements etc.
The CBoI can also revoke an authorisation where no business is being carried on for two consecutive years or suspend an authorisation where business has ceased temporarily.
The CBoI also has significant powers under the Insurance (No. 2) Act, 1983 to seek the appointment of an administrator to an insurer who can, upon court appointment, take over the management of the business of the insurer with a view to placing it on a sound commercial footing. Such an administrator is also granted power to dispose of all or any part of the business, undertaking or assets of the insurer concerned.
In addition, the CBoI may petition for the winding up of a life company on the grounds of it being unable to pay its debts under the Insurance Act, 1936.
The Central Bank and Financial Services Authority of Ireland Act, 2004 also provides power to the CBoI to impose sanctions for prescribed contraventions of legislation or regulatory rules under its sanctions regime.
If the CBoI has reasonable cause to suspect that a regulated life assurance undertaking and/or person concerned in the management of the undertaking has committed or is committing a 'prescribed contravention'. There is a particular framework commencing with an investigation or examination, potentially leading to an enquiry and sanctions being applied.
The legislation provides that, at any time up to the conclusion of an inquiry, the CBoI may enter into a binding settlement agreement with the undertaking and/or a person concerned in its management to resolve the matter.
An undertaking must hold an authorisation granted either by the CBoI under the 1994 Regulations or by the competent insurance authority in its home EU Member State to carry on life assurance business.
Authorisations are granted in one or more classes of life business (the full list of classes is set out in Appendix A) and, as provided for in Regulation 6(2) of the 1994 Regulations, an authorisation is valid throughout the EU Member States and allows an undertaking to carry on insurance business in other EU Member States by way of freedom of services or by way of establishment.
The CBoI has issued the following list of regulatory requirements and guidance applicable to life assurance undertakings, full details of which can be found at www.centralbank.ie:
- Guidelines for insurance companies on the risk management of derivatives
- Guidelines for insurance companies on Asset Management
- Guidelines for insurance companies on the Appointment of a Compliance Officer
- Guidelines for insurance companies on the Directors Compliance Certificate
- General Good Requirements for Insurance undertakings
- Guidelines on the Reinsurance Cover of Primary Insurers and the Security of their Reinsurers
- Guidelines for the establishment of an EEA Branch
- Guidelines on Actuarial Financial Condition Reports
- Guidance on Valuation Assumptions under Contracts covering more than one life
All of the above documents should be reviewed prior to establishing a life assurance undertaking and procedures put in place to ensure compliance and adherence to these when conducting life assurance business.
The principal conditions applicable to an applicant for Irish head office authorisation are as follows:
- it must be a company established under the Irish Companies Act, 1963 to 2009 and have its head office and registered office in Ireland;
- it must submit to the CBoI a scheme of operations to include particulars or proof concerning:
- the nature of the commitments which it proposes to cover;
- its guiding principals as to reassurance;
- the items constituting its minimum guarantee fund;
- estimates of the cost of setting up the administrative services
and the organisation of securing business and financial resources
intended to meet those costs;
- in addition, for its first three financial years, it must submit to the CBoI a plan setting out detailed estimates of income and expenditure in respect of direct business, reassurance acceptances and reassurance cessions;
- it must submit a forecast balance sheet; and estimates relating to the financial resources intended to cover its underwriting liabilities and solvency margin;
- it possess a minimum guarantee fund (equal to one third of the solvency margin, subject to a minimum of Euro 3.5 million. This minimum requirement is due increase to Euro 3.7 million with effect from December 31, 2012);
- it must have a paid-up share capital of at least Euro 635,000; and
- it must demonstrate that it shall be effectively run by persons of good repute with appropriate professional qualifications or experience.
Note that the figures given above are minimum figures only. The actual financial resources requirement for a life company will be determined in association with the Appointed Actuary and the CBoI in line with its business plan.
Limit on Activities
An Irish head office life undertaking may only carry on the business of life assurance (cannot carry on non-life insurance business) and must limit its operations to the types of business provided for in the 1994 Regulations and to operations directly arising there from to the exclusion of all other commercial business.
Application for Authorisation
A pre-application meeting with the CBoI should be held at which the applicant should outline its plans to the CBoI in broad terms including:
- nature of the business;
- broad projections;
- outsourcing; and
- target markets.
Once it is clear that the CBoI is satisfied with the outcome of the initial discussions, a detailed application for authorisation must be submitted to the CBoI. The information which should be submitted as part of the application is set out in Appendix B, but in summary includes:
- details of the applicant;
- overview of parent/group;
- regulatory supervision;
- ownership structure;
- legal structure;
- objectives and proposed operations;
- organisation of the applicant and governance arrangements;
- risk oversight;
- capital, solvency and financial projections (5 years projections required);
- proposed appointed actuary;
- policy and claims administration;
- policy documents;
- sales and distribution; and
- IT/ Business Continuity Plan.
Although draft policy documents etc. should be submitted as part of the application, there is no requirement for prior approval or systematic notification of general and special policy conditions, scales of premiums, technical reserves, forms and other printed documents which the insurance undertaking intends to use in its dealings with policyholders.
As a general guide, one should expect the authorisation process to take about 6 months.
Grant of Authorisation
Prior to formal authorisation, a successful applicant will normally be provided with confirmation of "authorisation in principle" when the application has been fully examined, reviewed and approved by the CBoI. The applicant must then address final outstanding matters (often the introduction of capital, formal appointment of directors, finalising the company's name and objects and demonstrating its ability to comply with its conditions of authorisation), before formal authorisation is granted (in the form of a physical certificate of authorisation).
"Authorisation in principle" does not entitle an applicant to write any business before receiving a certificate of authorisation.
ORGANISATION AND SUPERVISION
In order to be considered to be established in Ireland, and therefore be eligible for authorisation as an Irish head office life undertaking, the 1994 Regulations provide that a life undertaking must:
- have an office in Ireland to open during business hours for the transaction of life assurance business; and
- must employ at such office persons duly qualified to carry on the business transacted and empowered to issue cover for the authorised classes of life business and to settle claims.
The life company is also required to demonstrate that is run by persons of good repute with appropriate professional qualifications or experience and is required to have administrative and accounting procedures and internal control mechanisms which the CBoI deem sound and adequate.
To meet the above requirements, life assurers are required to have:
- a Board of Directors whose members have individually met the CBoI's fitness and probity tests, with a majority of independent non-executive members;
- Committees governing Audit, Risk, Compliance and Investment, each with set terms of reference;
- a Managing Director / General Manager dedicated on a full time basis with clear delegated powers and reporting obligations;
- an Appointed Actuary;
- a Compliance Officer;
- an internal audit function;
- a financial control function; and
- to the extent required, an investment management function.
The board must be compiled of a majority of independent non-executive directors (this majority may include the Chairman). However in the case of institutions that are subsidiaries of groups, the majority of the board may be group non-executive directors, provided that in all cases the subsidiary institution shall have at least 2 independent non-executive directors (3 in the case of a Major Institution) or such greater number as is required by the CBoI. Group directors are required to act critically and independently so as to exercise objective and independent judgement.
CBoI's Fitness and Probity Regime
In September 2011 the CBoI published its Fitness and Probity Standards (Code issued under Section 50 of the Central Bank Reform Act 2010) (the "Standards").
The new regime commenced on December 1, 2011 for all existing staff and new staff holding senior positions, (i.e. those who hold a Pre-Approval Controlled Function ("PCF")) in regulated entities other than Credit Unions. Where a person is proposed to be appointed to a PCF position, the regulated entity is required to submit an electronic Individual Questionnaire to the CBoI in respect of that person and the appointment will be subject to the CBoI's approval.
In respect of new appointments to less senior positions (i.e. those who hold a Controlled Function ("CF")), the new regime commenced on 1 March 2012. With effect from December 1, 2012 the Standards will apply to all staff in CF roles (i.e. including staff hired prior to and following the coming into force of the new Standards).
It is important to note that Board composition and responsibilities of boards and individual directors has recently been amended through the introduction of the CBoI's Corporate Governance Code for Credit Institutions and Insurance Undertakings. Furthermore, Solvency II will introduce new requirements for governance, internal control and assessment of risk for insurers.
Financial Resources / Solvency
An Irish head office life insurer is required to establish and maintain:
- technical reserves, including mathematical reserves in respect of all underwriting liabilities assumed by it; and
- an adequate solvency margin and guarantee fund in respect of its entire business. Detailed rules regarding the calculation/determination of the solvency margin and guarantee fund are set out in an Annex to the 1994 Regulations.
A register showing the assets representing the technical reserves and mathematical reserves in respect of each class of insurance business must be kept by the insurance undertaking and it must furnish the CBoI with a certificate of the value of those assets annually.
The Annual Accounts of the insurance company must be forwarded to the CBoI annually together with a set of completed regulatory returns and compliance certificates. A Directors Compliance Certificate signed by all the Directors must accompany the Annual Returns of the Company. The Certificate covers issues such as general compliance with the regulatory regime, internal controls and use of derivatives etc.
In addition, the Appointed Actuary must carry out an investigation into the financial condition of the insurance company's business on an annual basis which must be submitted to the CBoI.
Particular rules (in addition to normal company law requirements) apply to the process for approving dividend/distributions by life companies including prior actuary approval.
The term "outsourcing" refers to the entry by a life assurer into contractual relationships with a third party service provider whereby it is agreed that the life assurer may delegate to that service provider the performance of specific functions and/or services.
A life assurer may outsource certain activities to, for example, a third party administrator or asset manager or may appoint an external person as Appointed Actuary or to provide internal audit (often intra-group) or other services. Where outsourcing occurs, control over outsourced activities needs to be maintained and the outsourcing relationship must be governed by a service level agreement meeting certain minimum conditions imposed by the CBoI.
Related Party Transactions
Details of all proposed transactions of a material nature with a related company must be pre-notified to the CBoI in accordance with Regulation 10(4) of the 1994 Regulations.
Impact of Solvency II
Once implemented, Solvency II will place additional reporting obligations on insurance undertakings, including:
- insurance undertakings will be required to submit their written policies and procedures of insurance and reinsurance undertakings for risk management, internal control and (where relevant) outsourcing to the CBoI for prior approval;
- insurance undertakings will be required to submit their ORSA and SCR assessments to the CBoI; and
- every insurance undertaking will be required to report any Internal Audit findings to the CBoI who shall determine what actions are to be taken and ensure those actions are carried out.
Ownership and Qualifying Holdings
In addition to the requirement to disclose full details of shareholders and other persons who have qualifying holdings, direct or indirect in the applicant and the amounts of such holdings as part of the application for authorisation.
Prior CBoI approval is required thereafter for certain acquisitions and disposals, both direct and indirect, in the ownership / voting rights of life companies.
(i) Qualifying Holdings
A "qualifying holding" in an insurance undertaking means a direct or indirect holding:
- that represents 10% or more of the capital of, or voting rights in, the undertaking, or
- that makes it possible to exercise a significant influence over the management of the undertaking.
For the purpose of determining whether a holding:
- is a qualifying holding, or
- has reached or exceeded or will reach or exceed a prescribed percentage of the capital of or voting rights in the undertaking,
the rules regarding the calculation of voting rights in Regulations 9 and 10, paragraphs (4) and (5) of Regulation 12 and Regulations 14(5), 15 to 17 and 21(6) of the Transparency (Directive 2004/109/EC) Regulations 2007 and the conditions regarding aggregation of voting rights in Regulation 18 of those Regulations need to be taken into account.
(ii) Prior approval for Acquisitions
Under Regulation 40A(1) of the 1994 Regulations, a proposed acquirer shall not, directly or indirectly, acquire a qualifying holding in a life assurer without having previously notified the CBoI of the size of the intended holding, together with sufficient information to enable the CBoI to consider the proposed acquisition in accordance with pre-set criteria (influence on the life assurer, suitability of the proposed acquirer, financial soundness of the proposed acquisition etc.). A specific Acquiring Transaction Notification Form is required to be completed. Depending on the proposal, a revised business plan, projections and reorganizational framework may be required.
A similar process applies where an entity who already holds a qualifying holding seeks to increase the size of its holding so that its holding would either reach or exceed a prescribed percentage or so that the life undertaking would become its subsidiary.
The prescribed percentages are 20%, 33% or 50%.
There are specific timeframes within which notifications must be assessed, criteria against which they must be assessed when dealing with such notifications and a formal decision must issue by the end of the assessment period, failing which the acquisition is deemed to have been approved.
Completion of an acquisition may only be made where the required notification has been made and acknowledged and either the CBoI has notified that it does not oppose the proposed acquisition or has not notified that it does oppose by the end of the assessment period.
(iii) Prior notifications of Disposals
Under Regulation 40A(5) of the European Communities (Life Assurance) Framework Regulations 1994 a person shall not, directly or indirectly, dispose of a qualifying holding in an insurance undertaking without having previously notified the CBoI in writing of the intended size of the holding to be disposed of.
In addition, under Regulation 40(A)(6) a person shall not, directly or indirectly, dispose of part of a qualifying holding in an insurance undertaking without having previously notified the CBoI in writing of the intended size of the holding, if, as a result of the disposal that :
- the percentage of the capital of, or the voting rights in, the undertaking that the person holds would fall to or below a prescribed percentage; or
- in the case of a person who is a company or other body corporate, the undertaking would cease to be the person's subsidiary.
(iv) Notification by Target
The life company itself is also required to make a notification in accordance with Regulation 40B(1) and (2) of the above types of proposed changes.
A life insurer must also appoint an actuary of appropriate knowledge and experience as its Appointed Actuary.
The Appointed Actuary's responsibilities - valuing liabilities to policyholders, certifying premium rates etc. are part of the process in certifying the solvency of a life undertaking and the CBoI relies on the professional expertise of the Appointed Actuary, one of the reasons why the CBoI has not laid down detailed requirements in relation to premium rates, policy conditions, and reserving standards. In this way, companies enjoy considerable freedom to innovate but in a manner that does not place solvency at risk.
The Appointed Actuary also has an important role in relation to customer protection - for both cross-border business and domestic business. In that regard, the Professional Guidance Notes from the Society of Actuaries in Ireland require Appointed Actuaries, inter alia, to "take all reasonable steps to ensure that the company's incoming policyholders should not be misled as to their expectations." The 1994 Regulations require the Appointed Actuary to certify compliance with that requirement.
This requirement covers the worldwide business of long-term insurers supervised from Ireland. Its scope means that the Appointed Actuary of a life assurance company supervised from Ireland must try to ensure that purchasers of the company's products in other countries are not misled as to their expectations. This responsibility transcends the normal division of responsibilities between "home country" and "host country" regulators under EU rules.
The Appointed Actuary is required to conduct an annual investigation into the company's financial condition the results of which must be reported to the Board of Directors and to the CBoI. The form of the report to the CBoI is specified in the 1994 Regulations but the actual content in terms of assumptions for future mortality, expenses, etc. are at the actuary's discretion. The actuary's annual report and certificate to the CBoI must also include reference to provisions made in the valuation for mis-matching between assets and liabilities and to the adequacy of premium rates for new business.
Each life insurance undertaking is required to have a Compliance Officer whose functions generally encompass the following duties:
- obtain the approval of the Board and Managing Director/General Manager for a policy statement on compliance with the Insurance Acts and Regulations, the guidelines issued by the insurance supervisory authority and with other applicable legislation;
- monitor the implementation of compliance and to report periodically to the Managing Director/General Manager and to the Board thereon;
- review products, procedures and systems on a planned basis from the viewpoint of effective compliance and to advise as to steps necessary to ensure compliance;
- review staff training processes so as to ensure appropriate compliance competencies.
The appointment of a Compliance Officer is designed to supplement, not supplant, the responsibility of the Board and of senior management to ensure compliance with legislation and applicable guidelines.
The Directors Compliance Certificate should be signed by all the Directors and accompany the Annual Returns of the Company. The Certificate covers issues such as general compliance with the regulatory regime, internal controls and use of derivatives etc.
Life companies are required to put in place an asset management policy to ensure that they adequately manage the investment-related risks to solvency. The asset management policy should include consideration of regulatory restraints, investment-related risks, technical provisions and solvency which insurers need to monitor, measure, report and control. Main risks would normally be market risk (adverse movements in, for example, stocks, bonds and exchange rates), interest rate risk, credit risk (counterparty failure), liquidity risk (inability to unwind a position at or near market price), operational risk (system/internal control failure), and legal risk.
The Board of Directors should regularly review the adequacy of the insurer's overall investment policy in the light of its activities, product range, its overall risk tolerance, long-term risk-return requirements and solvency position, the results of which should be communicated to senior management in a written investment mandate(s) setting out the operational policies and procedures for implementing the overall investment policy.
Adequate systems of internal control need to be put in place to ensure that investment activities are properly supervised and that transactions have been entered into only in accordance with the insurer's approved policies and procedures. Internal control procedures should be documented and include regular and timely reporting of investment activity.
The life company's investment committee should focus on these matters, regularly (both on policyholder and shareholders funds as well) and report to the Board.
Clearly, the product range and, therefore, the investment related risks, will differ from company to company and procedures and policies need to be tailored appropriately.
General Good and Other Irish Legal Requirements
In addition to insurance regulation, an Irish head office life undertaking is required to comply with the following general good requirements:
- the provisions of the Consumer Information Act, 1978 (applicable to insurance contracts in the marketing and selling of insurance products);
- the provisions of the Sale of Goods and Supply of Services Act, 1980 (applicable to insurance contracts in the marketing and selling of insurance products);
- provision relating to the supervision and regulation of insurance intermediaries under the Investment Intermediaries Act, 1995 (as amended); and
- the Consumer Credit Act and the Unfair Contract Terms legislation.
Such companies are subject to general Irish and EU legislative provisions applicable to Irish companies including but not limited to the Companies Acts, data protection and anti-money laundering legislation, insurance mediation legislation, employment law, auditing and taxation legislation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.