Supervision of Reinsurance Activities

Many (re)insurers established in Ireland are part of large international (re)insurance groups. The Central Bank recognises the benefits of being part of a group but also that as intragroup arrangements may be more commonly perceived as being ‘less risky’ than external arrangements, there may be a heightened risk of inadequate governance and/or recording of intragroup arrangements by a (re)insurer.

Following the consultation period in 2022, the Central Bank published the final Guidance for (Re)Insurance Undertakings on Intragroup Transactions (“IGT”) and Exposures in January 2023. The aim of this guidance is to provide clarity on the Central Bank’s expectations regarding IGTs and exposures of (re)insurance undertaking supervised by the Central Bank and in doing so, to promote a level playing field in this regard. The Guidance focuses on three key exposures namely: 

(i)   intragroup assets;

(ii)  intragroup reinsurance; and

(iii)  cash pooling/treasury function arrangements.

A summary of the expectations from the Central Bank include:

• (Re)insurers will be expected to demonstrate that due care, attention, consideration and approval of material IGTs has been given by the (re)insurer and that there is no undue influence or control from the group or overreliance on group practices, policies and procedures.
• The Central Bank expects that a (re)insurer applies the same level of oversight to an intragroup counterparty exposure as it would an external counterparty.
•  (Re)insurers are expected to be able to demonstrate how investments in IGTs comply with the relevant Solvency II requirements that apply e.g. Prudent Person Principle and Arm’s Length Criteria.
• The Central Bank expects that (re)insurers, in their ORSA, include robust scenarios looking at default or downgrade of the group reinsurer when monitoring and measuring all material risks in relation to intragroup reinsurance.
• A (re)insurer’s appetite regarding the use of intragroup reinsurance arrangements is expected to be included in the overall reinsurance policy and risk appetite statement and appropriately documented on the (re)insurer’s risk register.
•  (Re)insurers should have a clear understanding of how their “cash-pooling” arrangement should be treated in the SCR calculation, including the correct credit rating for the counterparty.

The Central Bank, in their June 2023 Quarterly Insurance newsletter, set out their observations based on supervision of reinsurance activities. Their remarks covered the following areas:

• Engage in open communication: The Central Bank encourages (re)insurers to engage with them before the conclusion of reinsurance agreements, with better practice including the early sharing of information in respect of non-traditional treaties.
• Evaluate and manage risks: (Re)insurers are expected to thoroughly assess and manage risks associated with their reinsurance treaties (e.g., counterparty, operational, legal risks), especially with non-traditional reinsurance arrangements where these risks may be heightened.
• Demonstrate compliance: Central Bank have observed best practice in companies who provide justifications and documentation supporting their compliance with the Articles 208-215 of the Commission Delegated Regulations concerning the use of risk mitigation techniques in their calculation of the Standard Formula SCR. This can include engagement with legal experts, or other experts as relevant, in this assessment.
• Consider EIOPAs Opinion on RMTs: The main subject of the EIOPA Opinion on Risk Mitigation Techniques (“RMT”) involves consideration as to whether capital relief is commensurate to the risk transferred. Where the Central Bank believes that the consideration of “commensurateness” is not sufficiently thorough, undertakings may be asked to revisit it.
• Guidelines on Recovery Plans: Companies should consider the impact of a lack of availability or price increase of risk mitigation techniques in adverse events and assess the effectiveness of reinsurance treaties in mitigating underlying risk exposure.
• Year End SCR: The January 2023 renewals season was challenging for many (re)insurers, and the Central Bank saw a number of undertakings not having reinsurance treaties signed by year-end due to last minute negotiations. This created an element of doubt as to whether those treaties are fully incontrovertible and if they could be included in the calculation of the Standard Formula SCR. They plan to discuss this situation with (re)insurers on a bilateral basis.