Insurance Europe has expressed “serious concerns’’ about the European Insurance and Occupational Pensions Authority (EIOPA)’s draft Supervisory Statement (Statement) on the supervision of reinsurance concluded with third countries (re)insurance undertakings.
- Insurance Europe welcomes the opportunity to respond to EIOPA’s consultation on the draft Supervisory Statement on supervision of reinsurance concluded with third country insurance and reinsurance undertakings (the “Statement”).
- While Insurance Europe recognises EIOPA’s stated objective of ensuring a high-quality and convergent supervision of reinsurance from non-equivalent third country jurisdictions, it has serious concerns about the draft statement.
- Insurance Europe has summarised below the following issues that require attention and justify significant revision to the Statement. Further information on these can be found in the main body of the consultation response.
Insurance Europe notes that it is unclear what problem EIOPA is aiming to address.
The federation further argues that the choice of a Statement is disproportionate and overreaching, and using an alternative tool, such as a supervisory handbook, would be more appropriate.
The Statement, Insurance Europe adds, imposes conservative expectations and additional burdens on National Competent Authorities (NCAs) and (re)insurers, potentially discouraging the use of reinsurance capacity from third countries.
Worryingly, the draft Statement is essentially bypassing the Solvency II framework, including the European Commission’s equivalence decisions. Insurance Europe calls for the Statement to clarify its interaction with these equivalence decisions and the EU-US Covered Agreement, and not override them. This includes recognising the distinctions between equivalent and non-equivalent jurisdictions.
In its response, Insurance Europe reiterates the importance of open reinsurance markets to support competition and keep prices low. The industry also warns of the risk of reciprocity by other jurisdictions, in case of restricted market access for non-EU reinsurers to the EU, potentially making EU reinsurance less attractive overseas.
Insurance Europe calls for the Statement and impact assessment to be revised to highlight the importance of global market access, including achievements such as equivalence decisions and the EU-US Covered Agreement.
Insurance Europe calls for consistency in EIOPA’s approach to reinsurance. EIOPA itself identified reinsurance as a crucial element to addressing the insurance protection gap, yet the Statement on third country reinsurance conveys a different – and potential conflicting – message on reinsurance.
Cross-border reinsurance and access to global capital play a key role in addressing the protection gap, and this needs to be reflected in the Statement.
Insurance Europe considers that EIOPA should clarify the objectives and scope of the Supervisory Statement – what is the rationale and the problem, as well as the dimension of the problem aimed at solving.
The supervision of US-based reinsurers is governed by the specifics of the Covered Agreement. Meanwhile, reinsurers based in Bermuda and Switzerland are covered by the European Commission’s equivalence decisions under Article 172 of the Solvency II Directive which prohibit, inter alia, the pledging of assets to cover unearned premiums and outstanding claims provisions.
Reinsurers in the UK, despite the absence of decision on equivalence, are still aligned with Solvency II rules and can fall under Article 211 of the Solvency II Delegated Regulation, which states that there is no need for collateral for reinsurers that have been assigned to credit quality step 3 under Solvency II.
By treating these four jurisdictions, which represent almost the entirety of EU (re)insurers’ purchase of third country reinsurance, the same as any other jurisdiction, EIOPA is overriding the objective of Art 172 equivalence decisions, the EU-US Covered Agreement and the Solvency II framework.
Furthermore, if the use of reinsurance from non-equivalent jurisdictions is targeted, EIOPA should explain what concrete problems the Statement is trying to address, together with their materiality, considering EU purchase of reinsurance in other third countries is “non-material” as explained by EIOPA itself in the impact assessment.
In addition, supervision in those jurisdictions is, in many cases, likely to be guided by the IAIS’s ICPs. This means that the macro risks stemming from the use of third country reinsurance by EU (re)insurers is extremely limited.
Finally, Insurance Europe considers that retrocessions should be excluded from the scope of this Statement. Retrocession is important within a reinsurance group to achieve diversification of risk and for efficient capital management. External retrocessions by reinsurers are pursued by highly specialised risk professionals and retroceding risks is an important risk mitigation technique to diversify risk exposure.
It enables reinsurers to manage and transform risks from primary markets effectively and efficiently while staying withing the limits of their risk appetite: the wider the geographical scope of retrocession, the lower the risk of accumulation in a single reinsurer and in a single jurisdiction.
Through retrocessions, EU reinsurers taking on EU-authorised insurers allow global capital to absorb losses occurring in the EU, and by doing so, contribute to the resilience of the region.
by Yana Keller
