EIOPA’s expectations on the oversight of reinsurance with third-country reinsurers

The European Insurance and Occupational Pensions Authority (EIOPA) has issued a supervisory statement concerning the oversight of reinsurance agreements with third-country reinsurers.

The statement emphasizes reinsurance’s role as a crucial international, cross-border business that capitalizes on global risk diversification and provides significant benefits to insurance companies. EIOPA noted the need for thorough evaluation of actual risk mitigation in these reinsurance practices.

It outlined that the primary aim of the supervisory statement is to share the potential risks associated with using reinsurers that operate under regulatory frameworks not deemed equivalent to the European Union’s Solvency II standards.

It also covers, where applicable, reinsurance arrangements involving reinsurers from third countries recognized as having equivalent standards.

In its statement, EIOPA advocated for robust and consistent supervision of such reinsurance activities without curbing their use by introducing a risk-based approach to identify and manage associated risks.

The guidelines articulate supervisory expectations in multiple aspects, such as assessing the business context of reinsurance from third countries and emphasizing the necessity for early regulatory dialogue.

The supervisory considerations detailed in the statement also include how to evaluate reinsurance agreements and the related risk management systems of insurers using third-country reinsurers. Additionally, it describes essential tools aimed at mitigating any supplementary risks that may emerge.

What does this mean for reinsurers?

According to Lexology, EIOPA’s supervisory statement sets forth key expectations across three areas:

• Insurance firms are expected to manage their reinsurance strategies effectively. This involves weighing reinsurance premiums against additional risks, the impacts on Solvency Capital Requirement, and other factors stemming from the use of third-country reinsurance. Although the statement encourages ongoing supervisory dialogue regarding third-country reinsurance, it suggests this should occur before finalizing arrangements involving substantial risk transfer, without necessarily mandating an approval process.
   
• Insurers should ensure they are capable of monitoring and controlling risks linked to the domiciles of third-country reinsurers, including legal and compliance risks, collateral risks, and default risks. Companies must incorporate principles of reinsurer selection into their policies.
   
• Firms should examine aspects such as the parties’ rights to terminate, the presence of any side letter agreements that might compromise the agreement’s effectiveness, the claims hierarchy in case of a reinsurer’s default, and the availability of collateral arrangements in such events.

Addressed to National Competent Authorities, the EIOPA statement urges application in accordance with the principle of proportionality and a risk-based approach.

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