EIOPA’s expectations regarding the supervision of reinsurance with third country reinsurers | Insurance business America
Regulator calls for assessment of actual risk reduction
reinsurance
By Kenneth Araullo
The European Insurance and Occupational Pensions Authority (EIOPA) has issued a supervisory declaration on the monitoring of reinsurance contracts with reinsurers from third countries.
The statement emphasizes the role of reinsurance as an important international, cross-border business that benefits from global risk diversification and offers significant benefits to insurance companies. EIOPA highlighted the need for a thorough assessment of the actual risk reduction in these reinsurance practices.
It explained that the main objective of the supervisory statement is to highlight the potential risks associated with the use of reinsurers operating under regulatory frameworks that are not considered equivalent to the European Union’s Solvency II standards.
Where appropriate, reinsurance arrangements involving third country reinsurers recognized as having equivalent standards will also be covered.
In its opinion, EIOPA advocated for robust and consistent monitoring of such reinsurance activities, without restricting their use, by adopting a risk-based approach to identify and manage associated risks.
The guidelines set out regulators’ expectations in several aspects, such as assessing the business context of third country reinsurance and emphasizing the need for early regulatory dialogue.
The regulatory considerations set out in the opinion also include the assessment of reinsurance contracts and the associated risk management systems of insurers that use third country reinsurers. In addition, key instruments are described that aim to mitigate any additional risks that may arise.
What does this mean for reinsurers?
According to Lexology, EIOPA’s supervisory statement sets out key expectations in three areas:
- Insurance companies are expected to manage their reinsurance strategies effectively. This includes weighing up reinsurance premiums against additional risks, the impact on the solvency capital requirement and other factors resulting from the use of reinsurance from third countries. Although the Declaration encourages an ongoing supervisory dialogue on reinsurance in third countries, it suggests that this should take place before the conclusion of agreements with significant risk transfer, without necessarily imposing an authorization procedure.
- Insurers should ensure that they are able to monitor and control risks associated with the location of third country reinsurers, including legal and compliance risks, collateral risks and default risks. Companies must integrate reinsurer selection principles into their policies.
- Companies should consider issues such as the parties’ right to terminate, the existence of side letter agreements that could jeopardize the effectiveness of the agreement, the hierarchy of claims in the event of a reinsurer’s default, and the availability of collateral arrangements in such cases.
The EIOPA statement addressed to the relevant national authorities urges application in accordance with the principle of proportionality and a risk-based approach.
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2024-04-19 13:20:00
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