EIOPA consults on supervisory expectations of reinsurance from third-country reinsurers
The European Insurance and Occupational Pensions Authority (EIOPA) has launched a public consultation on its draft supervisory statement on supervision of reinsurance arrangements entered into with third-country (i.e. non-EEA) reinsurers.
The statement sets out EIOPA’s expectations for national competent authorities, such as the CBI, and industry in the event of using third-country reinsurance. EIOPA is seeking comments on the draft statement via an online survey by 10 October 2023.
Highlights from the draft statement are:
Insolvency and collateral
When assessing the third-country reinsurer, insurers should identify the legal consequences of insolvency of the reinsurer (in particular, the power of a liquidator to disavow contracts). An important part of this assessment will be the status of collateral – if the applicable law prevents the undertaking from enforcing against the collateral in the event of the reinsurers insolvency, it may not be possible for the requirements of Article 214 of the Solvency II Delegated Regulation to be fulfilled.
Insurers will need to assess whether the third-country reinsurer is duly licensed and can conduct business in the relevant Member State, as well as the reinsurer’s experience with this type of risk transfer and the existence of any regulatory action against the third-country reinsurer. Detailed assessments will be expected when there is a material exposure to a single reinsurer or the arrangement is complex.
on-going monitoring of third-country reinsurers will be expected. For example, ratings downgrades or breach of the reinsurer’s national solvency requirements may call into question whether the insurer should still recognise the reinsurance as a risk-mitigation technique (RMT) when calculating its SCR.
Insurers should assess if the agreement complies with Articles209-211 of the Solvency II Delegated Regulation and whether it is intra-group, short or long-term, and reinsurance or retrocession. This assessment should at least consider any further retrocession arrangements, any side letters, termination rights, claims hierarchy and collateral arrangements. If any of these issues indicate that the effective transfer of risk is jeopardised, insurers will need to provide further evidence to the national competent authority justifying recognition of the contract as an RMT. Insurers should also document their assessment of the reinsurance agreement in this regard (a point which was recently identified as good practice by the Central Bank of Ireland).
Risk mitigation tools
Where the insurer has concerns or identifies material risks, it could consider (or the NCA could request) a number of different options, including pre-emptive limits on reinsurance exposures, localisation of collateralised assets in the insurer’s jurisdiction or regular commutation of reinsurance liabilities.