Our Insurance and Regulatory team highlights recent areas of regulatory focus in relation to reinsurance activities, and what are the considerations which firms should be aware of.
Recent communications from the Central Bank of Ireland and EIOPA highlight the increased scrutiny on insurers reinsurance arrangements. These include:
- January 2023: the Central Bank of Ireland (the “Central Bank”) published their guidance for (Re)insurance Undertakings on Intra-Group Transactions (PDF, 481 KB);
- July 2023: The European Insurance and Occupational Pensions Authority (“EIOPA”) launched a public consultation on its draft supervisory statement on the supervision of reinsurance arrangements entered into with third-country (i.e. non-EEA) reinsurers; and
- July 2023: The Central Bank share observations from their supervision of reinsurance activities in the June 2023 quarterly insurance newsletter (PDF, 1,168 KB).
Guidance on intragroup transactions and exposures
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.
EIOPA consultation on its supervisory statement
EIOPA has launched a public consultation on its draft supervisory statement on supervision of reinsurance arrangements entered into with third-country (i.e. non-EEA) reinsurers.
The statement sets out EIOPA’s expectations for National Competent Authorities (“NCA”), including the Central Bank, and industry in the event of using third-country reinsurance. EIOPA is seeking comments on the draft statement via an online survey by 10 October 2023.
The “Supervisory Statement on supervision of reinsurance concluded with third country insurance and reinsurance undertakings”, sets out supervisory expectations regarding:
- Assessment of the business rationale for using third country reinsurance;
- Establishment of an early on-going supervisory dialogue;
- Assessment of insurance undertakings’ risk management system on the use of third country reinsurance;
- Assessment of reinsurance contracts compliance with Articles 209-211 of the Solvency II Delegated Regulation; and
- Tools in place to mitigate additional risks.
The Supervisory statement is based on the good practices in supervision implemented by some NCAs that are worth to be considered by the whole supervisory community. It aims to ensure high-quality and convergent supervision regarding insurance undertakings using reinsurance arrangements with third country insurance and reinsurance undertakings both from equivalent and non-equivalent countries.
The Central Bank observations
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.
Going Forward
These recent developments, and feedback, provide valuable information regarding the increasing importance of robust risk management frameworks for reinsurance arrangements. (Re)insurance undertakings should review their governance, risk management and reinsurance assets valuation in the context of the Central Bank Guidelines, their observations of best practice and EIOPA direction of travel.
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Jean Rea
Partner
KPMG in Ireland
John O'Donnell
Director
KPMG in Ireland
Aoife O'Brien
Director
KPMG in Ireland