The European Insurance and Occupational Pensions Authority (EIOPA) has issued a supervisory statement outlining expectations for the oversight of reinsurance agreements involving third-country reinsurers. This statement underscores the pivotal role of reinsurance in international business, highlighting its capacity for global risk diversification and its substantial contributions to insurance companies.
EIOPA underscores the importance of rigorously assessing the actual risk mitigation provided by these reinsurance practices. Central to the statement is the recognition of potential risks associated with reinsurers operating under regulatory frameworks not considered equivalent to the European Union’s Solvency II standards. Additionally, the statement encompasses reinsurance arrangements with reinsurers from third countries recognized as having equivalent standards.
In advocating for robust and consistent supervision, EIOPA emphasizes the need to identify and manage associated risks through a risk-based approach, without inhibiting the use of reinsurance by insurers.
The supervisory statement articulates guidelines across various dimensions, including evaluating the business context of reinsurance from third countries and facilitating early regulatory dialogue. Furthermore, it delineates supervisory considerations for assessing reinsurance agreements and the risk management systems of insurers employing third-country reinsurers. Crucially, it provides insights into essential tools aimed at mitigating potential supplementary risks.
For reinsurers, EIOPA’s supervisory statement sets expectations across three main areas, as elucidated by Lexology:
1. Effective Management of Reinsurance Strategies: Insurers are expected to proficiently manage their reinsurance strategies, considering factors such as reinsurance premiums, impacts on Solvency Capital Requirement, and other risk-related considerations stemming from the utilization of third-country reinsurance. While ongoing supervisory dialogue regarding third-country reinsurance is encouraged, the statement suggests that such dialogue should precede finalizing arrangements involving substantial risk transfer, without mandating a specific approval process.
2. Monitoring and Control of Risks Linked to Third-Country Reinsurers: Insurers must ensure their capability to monitor and control risks associated with the domiciles of third-country reinsurers, encompassing legal and compliance risks, collateral risks, and default risks. Principles of reinsurer selection should be integrated into insurers’ policies.
3. Examination of Reinsurance Agreement Aspects: Firms are advised to scrutinize various aspects of reinsurance agreements, including parties’ termination rights, the existence of side letter agreements potentially compromising effectiveness, claims hierarchy in case of reinsurer default, and availability of collateral arrangements in such events.
The supervisory statement, addressed to National Competent Authorities, emphasizes application in line with the principle of proportionality and a risk-based approach.
