Regulatory requirements for insurers to be tightened: NBU addresses outsourcing risks
28 May 05:56
The National Bank of Ukraine plans to tighten requirements for insurance companies regarding third-party risk management. The regulator has launched a public consultation on changes related to the outsourcing of certain functions and processes by insurers. This was reported by "Komersant Ukrainian", citing the NBU.
These new rules are intended to reduce insurance companies’ dependence on third-party service providers, enhance their financial stability, and make the market more transparent and controllable.
What the NBU Proposes to Change
The National Bank has prepared draft amendments to a number of regulatory documents governing the operations of insurance companies. The changes concern the insurer’s management system, business continuity plans, and the operating conditions of financial institutions.
The main focus is on outsourcing, i.e., the transfer of certain functions or business processes to external contractors.
The NBU wants to establish clearer rules for cases where an insurance company transfers important functions to third parties. This may apply to IT services, administration, data processing, customer service, specific operational processes, or other areas on which the insurer’s stable operation depends.
Why are requirements being tightened for insurers?
The National Bank believes that insurance companies’ dependence on third-party providers can create additional risks. If a contractor fails to fulfill its obligations, experiences technical issues, does not ensure an adequate level of data protection, or suddenly stops providing services, this can impact the insurer’s own operations.
That is why the regulator wants companies to better assess risks before outsourcing critical functions.
The new rules are intended to help insurers:
- better monitor contractors;
- reduce operational risks;
- avoid critical dependence on a single supplier;
- ensure business continuity;
- protect the interests of clients;
- increase the stability of the insurance market.
Insurers will be required to conduct more thorough vetting of outsourcers
One of the key changes is the introduction of requirements to vet potential contractors before entrusting them with critical processes.
Insurance companies will be required to assess whether an outsourcer is capable of properly performing the functions entrusted to it, and whether it possesses the necessary resources, experience, technical capabilities, and risk management system.
The insurer must also consider how delegating a specific process to an external contractor could affect its own operations and financial stability.
The NBU will define the criteria for critical functions
The draft amendments provide for the introduction of clear criteria for determining an insurer’s critical functions and processes.
This is necessary so that companies can understand which specific areas of activity are critical and require enhanced oversight when outsourced.
Critical functions may include those whose failure could negatively impact an insurer’s ability to meet obligations to clients, comply with legal requirements, or maintain continuous operations.
Contracts with contractors will become stricter
The NBU also proposes to tighten requirements for contracts between insurance companies and external service providers.
Such contracts must clearly define the scope of outsourced functions, the parties’ responsibilities, control procedures, conditions for accessing information, security requirements, procedures for terminating cooperation, and actions to be taken in the event of failures.
This should reduce the risk of situations where an insurance company has outsourced an important function to an external contractor but lacks sufficient tools for oversight or rapid response in the event of problems.
Business continuity plans will be expanded
A separate set of changes concerns insurers’ business continuity plans. The NBU proposes expanding their scope so that companies can anticipate potential scenarios involving outsourcing issues in advance.
In particular, insurers will be required to have contingency plans for terminating outsourcing contracts for critical functions.
This means that a company must know in advance what to do if a contractor ceases operations, fails to fulfill the terms of the contract, or can no longer provide the required level of service.
New rules are based on European standards
The National Bank notes that the proposed changes are based on European approaches to insurance market regulation.
In particular, the NBU is guided by the requirements of the Solvency II Directive and the EU regulation on the outsourcing of critical functions by insurers.
This means that the Ukrainian insurance market is gradually aligning with European standards for risk management, corporate governance, and financial stability.
How this could affect the insurance market
The new requirements may increase the burden on insurance companies, especially those that actively use the services of external contractors.
Companies will have to review contracts, evaluate existing outsourcers, update internal policies, develop contingency plans, and strengthen oversight of outsourced functions.
At the same time, these changes could positively impact the quality of the insurance market. If companies manage risks more effectively, customers will receive more stable service, and the market itself will become less vulnerable to operational issues.
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