Outsourcing agreements in the insurance sector – What you cannot forget

The insurance sector is highly regulated and also outsourcing agreements in this sector are victim of such regulatory framework with stringent obligations in terms of contents of agreement, internal procedures and formalities to be followed.I have already discussed about the legal issues relating to outsourcing agreements also with reference to obligations in the financial services sector and it is now time to discuss about the insurance sector where such agreements are becoming more and more popular.

In this respect, the Italian Insurance Regulator (IVASS) recently issued new regulations on obligations applicable to insurance companies in case of outsourcing of services to third parties that set a very stringent regime.  Indeed, apart from the internal controls that shall be put in place, ISVAP requested, among others, that:

1. The outsourced services do not deprive the recipient of the services of all its main activities and therefore the company cannot become an empty shell but for instance the activity of assumption of risks cannot be outsourced and the outsourced services do not exempt the company’s management from its responsibilities;
2. The modalities of outsourcing shall not (i) impact on the quality of governance system of the company, (ii) affect the financial results of the company and its stability, (iii) the ability of the company to provide a continuous service to its clients and the damaged persons and (iv) do not lead to an unjustified increase of operational risks;
3. The board of the company shall set the criteria of selection and assessment of outsourcees including the exit plans; and
4. The outsourcing agreement shall prescribe (i) a clear scope of outsourced activities, (ii) the supplier’s obligation to comply with applicable laws and promptly notify events that might affect the quality of services (iii) the company and regulator’s audit right to the activity, documentation and premises of the supplier and (iv) the company’s exit right without major restrictions and when required by IVASS.

The outsourcing of essential or important activities requires furthermore the prior notification to IVASS and it is always a challenge to identify the activities falling within this scope.  Likewise the broad principles set forth above leave a certain level of discretion but also of uncertainty.

In any case outsourcing agreements in the insurance sector are interesting projects that require the synergy of experts from different legal fields.  And as usual of you want to discuss about the matter, feel free to contact me Giulio Coraggio (giulio.coraggio@gmail.com). Also follow me on my Facebook page, Twitter, Google+ and become one of my friends on LinkedIn.