Shortcomings in outsourcing practices of non-life and life insurance companies
The Financial Supervisory Authority (FIN-FSA) identified shortcomings in the outsourcing practices of non-life and life insurance companies in a thematic assessment conducted at the end of 2017. Companies have not fully complied with regulations aimed at ensuring that the interests of the insured are protected.
“Insurance companies are responsible for the activities they outsource, including compliance with provisions and other obligations,” says Kaisa Forsström, Head of Department, Insurance Supervision. In many respects, the shortcomings identified in connection with the assessment have already resulted in practical development measures.
The aim of regulation is to ensure that the interests of the insured are protected. Outsourcing should not lead to a substantial deterioration in the quality of governance arrangements, an unreasonable increase in operational risk or a deterioration of the service provided to the insured and policyholders.
The most significant shortcomings were:
- In ensuring the adequacy of the service provider’s risk management and internal control arrangements so as to prevent, among other things, a decline in the service level provided to policyholders.
- Outsourcing agreements do not fully meet regulatory requirements; for example the FIN-FSA’s and auditors’ right to inspect and access information on outsourced activities has not been ensured.
- When activities are outsourced within a group, regulations are not always complied with.
Companies’ boards of directors must investigate further measures
The boards of directors of insurance companies must ensure that corrective measures necessary for each company are investigated, and that the FIN-FSA is informed about the implementation of corrective measures.
It is a task of a board of directors to assess the adequacy and effectiveness of its governance arrangements. Particularly in a situation where a company has outsourced a significant part of its core activities, attention must be paid to its actual ability to influence the service provider. The company must, if necessary, use its rights under outsourcing agreements, such as the right to issue general and specific operating instructions, and to ensure adequate qualitative and quantitative resources.
The FIN-FSA will outline policies to be specified later on certain issues. These include, among other things, the delegation of a public administration task related to the enforcement of the Motor Liability Insurance Act and the Act on Employment Accidents and Occupational Diseases as well as the issue of “shell companies”, i.e. companies that have outsourced nearly all of their activities.
At the end of 2017, the FIN-FSA conducted a thematic assessment aimed at clarifying how well insurance companies comply with outsourcing regulations and what kind of solutions companies have adopted in outsourcing.
For further information, please contact:
- Teija Korpiaho, Head of Division
- Requests for interviews are coordinated by FIN-FSA Communications, tel. +358 9 183 5250, weekdays 9.00–16.00