The guidance outlines the Central Bank’s expectations of (re)insurance undertakings regarding IGTs (“Intragroup Transactions”) and exposures.
The Central Bank published the guidance with “the aim of being more transparent about its expectations” regarding IGTs and exposures of (re)insurance undertakings. The guidance intends to clarify its expectations with regards to existing legislative and domestic requirements rather than establishing any new requirements.
The guidance is split into two core parts:
- Governance & Risk Management, and
- Key Exposures which includes intragroup assets, intragroup reinsurance and cash pooling/treasury function arrangements.
In particular, the Central Bank notes the following expectations across the two core components of the guidelines:
Governance & Risk Management
Regarding governance and risk management, the Central Bank expects that (re)insurers demonstrate that due care, attention, consideration and approval of material IGTs has been undertaken.
Additionally, a (re)insurer must ensure that there is no undue influence or control from the group or overreliance on group practices, policies and procedures.
In relation to Intragroup Arrangements:
- Undertakings must extend the equivalent level of oversight to an intragroup counterparty exposure as they would to an external counterparty.
- The ensuing risks after entering into IGTs must be appropriately detailed in the risk register and risk appetite statement including detailed metrics on levels/limits on IGTs.
- The (re)insurer must be able to evidence that the board has appropriately considered ongoing compliance with pre-defined appetites for IGTs and that any KRIs listed in the RAS have been embedded in the risk management framework.
- Material IGTs should be regularly reviewed for their on-going appropriateness and compliance with the pre-defined appetites.
- The inclusion of definitions and limits of IGTs accompanied by the frequency of review must be incorporated on risk management policies.
- If policies and procedures are implemented at a group level, (re)insurers must be in a position to demonstrate how group policies and procedures appropriately reflect its risk exposures, tolerances and requirements.
- Regular audits of material IGT risk management must be considered in the internal audit function’s overall audit planning.
- Material IGTs must be appropriately and accurately reported including whether the levels of IGTs (re)insurers are required to report to the Central Bank align with those in the financial statements.
Key Exposures
Intragroup Assets:
- Undertakings must examine how their intragroup assets affect the security, quality, liquidity and profitability of the portfolio while also ensuring compliance with the Prudent Person Principle.
- Limits must be applied on the amount of funds which can be invested within the group accompanied by concentration limits to all intragroup and external investments.
- Undertakings must ensure that no single intragroup asset can threaten its solvency or financial position. Significant concentration of risks must also be avoided or mitigated.
- Undertakings must investigate and clearly demonstrate that no material conflict of interests are introduced by investment in intragroup assets. In cases where a conflict emerges, it must be appropriately managed and resolved, even if total investment withdrawal must occur.
- Intragroup assets must undergo the equivalent level of risk management and “arm’s length” scrutiny as other assets.
- Undertakings must have the ability to demonstrate how they have considered the classification of the (re)insurer’s own funds in compliance with the criteria specified under Solvency II.
- Where significant concentrations in intragroup assets are present, the (re)insurer must perform suitable stress testing of the relevant exposures.
Intragroup Reinsurance:
- For material intragroup reinsurance, a (re)insurer’s ORSA must include robust Group Counterparty Risk stress tests and reverse stress tests inclusive of a scenario of Group failure that illustrates the impact on the (re)insurers SCR and MCR.
- A (Re)insurer’s assessment of Overall Solvency Needs (OSN) must outline two separate scenarios demonstrating solvency coverage following a default and a downgrade of a material group reinsurance. A risk appetite for both of the above scenarios must also be completed.
- The counterparty risk policy must outline the requirement for the board to document and consider the appropriateness of all material reinsurance contracts at least annually.
- Intragroup reinsurance matters must be adequately factored in to the Head of Actuarial Function Opinion.
Cash Pooling/Group Treasury Arrangements:
- (Re)insurers undertaking “cash pooling” or similar arrangements must demonstrate a clear understanding of the transaction structure and how it will be reported in financial statements and Solvency II balance sheets.
- When calculating the SCR: cash pooling must be treated as exposure to a Type 1 counterparty if it is considered as “cash or cash equivalents” in the financial statement; and the credit rating of the counterparty the (re)insurer is transacting with must be used.
- All cash pooling arrangements must be clearly defined i.e. on balance sheets and in risk management policies.
- Suitable stress testing of relevant exposures must be performed on significant cash pooling arrangements.
- Undertakings must examine how their cash pooling arrangements affect the security, quality, liquidity and profitability of the portfolio while also ensuring compliance with the Prudent Person Principle.
- Undertakings must ensure that no single cash pooling arrangement can threaten its solvency or financial position. Significant concentration of risks must also be avoided or mitigated.
What Next?
While the Central Bank does not prescribe next steps in relation to this, undertakings should assess their compliance with these expectations via an internal audit or third party review and immediately remediate any areas where gaps are found.
How can we help?
Grant Thornton Ireland are well positioned to assist your firm with such a review; with an experienced Insurance Regulatory team, including ex-CBI insurance regulators, we understand the practical operational aspects and can assist firms in the interpretation of regulatory requirements, guidance and feedback.
