Pipeline convergence from EIOPA - third country reinsurance | How would your approach align?

The European Insurance and Occupational Pensions Authority (EIOPA) recently launched a consultation relating to reinsurance concluded with third country (re)insurers (TCRs). A supervisory statement has been published (on which EIOPA has invited comments). This draws on national supervisor approaches that EIOPA has identified as good practice, in recent years.

Aim and focus

EIOPA aims to ensure consistency in the approach of EEA insurance supervisors to third country reinsurance arrangements. The main focus of the supervisory statement is on insurers using reinsurance as a risk mitigation technique. However, EIOPA acknowledges that the consultation may be relevant to retrocession, depending on the circumstances.

The Irish complexion

Irish insurers will likely find that many aspects of the supervisory statement are already captured by their TCR strategy, including when taking into account the Central Bank of Ireland’s (CBI) supervisory approach. Particularly where that reinsurance is employed as a risk mitigation technique to support solvency.

Something old, something new…

To a certain extent, EIOPA’s consultation paper can be seen as reinforcement of existing requirements and expectations (and clarification of EIOPA’s views in that regard). However, there are elements of the consultation that signal pipeline enhancement and/or formalisation of expectations (and it is important to be aware of these). While the outcome of the consultation may be primarily directed at insurance supervisors, it can be expected to inform the approach taken by supervisors to TCR arrangements.

Reinforcement highlights

Key focal points from EIOPA in this regard include the following:

  • Risk approach

Risk assessment and early identification/implementation of risk mitigation is highlighted as key, when engaging with TCRs. Defining reinsurance strategy, conducting diligence and monitoring/managing developments are just some of the points addressed by EIOPA. The importance of incorporating TCR arrangement risks into an insurer’s Own Risk and Solvency Assessment (ORSA) is noted as vital. Risk triggers such as counterparty default (and the use of collateral, ring fencing and other measures as safeguards) are also a central focus.

  • Supervisory dialogue

The importance of appropriate ongoing dialogue with the relevant insurance supervisor is emphasised. In particular, EIOPA focuses on keeping supervisors informed of material changes impacting TCR arrangements. EIOPA also calls out timeliness of engagement with supervisors (to ensure that solvency impact and reinsurance strategy can be understood). These are complexions already captured (whether generally or specifically) by the Solvency II regime; EIOPA’s prior Opinion on risk mitigation techniques; and CBI requirements/practice.

Pipeline enhancements?

Certain aspects of the supervisory statement are not necessarily and/or formally captured by current requirements. Among these are expectations, recommendations and/or suggestions regarding the following:

  • Graduated diligence expectations. For example, more granular risk assessments when proposing a material exposure to a single TCR (or TCRs within the same group). Similarly, more detailed risk assessments where the nature of the reinsurance is complex. Many TCR arrangements would fall into these catchments.
  • Inclusion and use of commutation clauses in reinsurance agreements (for example, when an insurer’s exposure thresholds to TCRs are triggered); in conjunction with a general focus on dilution of concentration risk and diversification of TCR arrangements.
  • Assessment of the quality of TCR capital (in addition to the consideration of features of the third country capital regime itself). This may require additional vetting beyond that usually undertaken.
  • Other tools to de-risk TCR arrangements. This includes localisation in the insurer’s jurisdiction of assets that are the subject of collateral or other similar measures.
  • Specific assessment by supervisors of the means/process whereby insurers monitor and respond to certain developments having a knock-on impact on TCR solvency/rating (as well as assessment of process and procedures for general risk management adequacy).
  • Importance of choice of law and jurisdiction in contracts as a risk mitigant.

Equivalent and non-equivalent

Solvency II mandates that reinsurance contracts with TCRs from jurisdictions deemed ‘equivalent’ (for reinsurance purposes) are to be treated in the same manner as reinsurance concluded in the EEA. Once the consultation is completed, it remains to be seen how a distinction between equivalent and non-equivalent status would be achieved/preserved in practice.

The vast majority of the supervisory statement applies equally to arrangements with TCRs from jurisdictions that are deemed equivalent (for reinsurance purposes under Solvency II); and those that are not.

There are only a handful of distinctions captured in the consultation itself, in this respect.

For TCRs from non-equivalent jurisdictions, EIOPA emphasises the need for appropriate licensing in the home jurisdiction (and to ensure that required permissions to conduct reinsurance in relevant Member States are in place).

Notably, EIOPA highlights that insurers should consider the experience of a TCR from a non-equivalent jurisdiction with the type of risk transfer solution involved. This has the potential to create challenges for novel reinsurance structures.

What happens next?

Comments are invited until 10 October 2023 from interested parties.

These must be submitted via a survey link published by EIOPA, which can be accessed here.

For advice or for further information on this topic please contact James Grennan, Partner, Laura Mulleady, Partner, Sinéad Lynch, Partner, Emma Martin, Of Counsel, or any member of the A&L Goodbody Insurance & Reinsurance team.

Date published: 27 July 2023