EIOPA finalises Statement on third-country reinsurance: What has changed?

The European Insurance and Occupational Pensions Authority (EIOPA) issued its long-awaited Supervisory Statement (the Statement) on arrangements with third-country reinsurers (TCRs) in April.

The Statement sets out EIOPA’s expectations for reinsurance entered into with TCRs. This follows its June 2023 consultation (and draft Statement) which was widely reported on and the source of much interest and commentary from the industry. The Statement aims to ensure consistency across the EEA in regulators’ approach to TCR arrangements.

The consultation prompted approximately 300 comments from 22 industry stakeholders. Interestingly, around 100 comments have been classified as confidential and not published. 209 comments are publicly available here. The information published captures comments submitted by only 13 of the 22 stakeholders that made submissions.

See our article teasing out key elements of the original consultation ranging from the enhancement of existing EIOPA expectations to the pipeline formalisation of expectations not captured by current requirements.

A core issue highlighted in our article was the question of the dividing line between TCRs based in equivalent jurisdictions (EJs) and those based in non-equivalent jurisdictions (NEJs) and how they should be treated.

This article focuses on the changes now applied by EIOPA in its finalised Statement.

What’s new?

Most of the substance of the original proposals have been retained.  However, some important adjustments have been made. Central to those adjustments is welcomed clarification on the distinction in treatment between EJ and NEJ TCRs.

While many individual adjustments have been, there are some key focal points and themes. Important examples are summarised below.

Equivalent and non-equivalent TCRs are distinguished…

EIOPA’s original consultation captured only a handful of distinctions regarding the proposed difference in treatment of EJ and NEJ TCRs.  The Statement now deepens the distinction, reflecting more differentiation.

Key changes in this vein include the following:

• Updated objectives: EIOPA’s overall goal is to ensure quality and convergent supervision of TCR arrangements generally, but the adjustments make clear that EIOPA’s primary focus is to limit the effect of NEJ TCR risk. Previous, broader wording that included reference to EJ TCRs has been largely amended and confined to NEJ TCRs. This general approach is reflected throughout the Statement, which is now more closely aligned with the principle under Solvency II whereby reinsurance contracts with TCRs from jurisdictions deemed ‘equivalent’ (for reinsurance purposes) are to be treated in the same manner as reinsurance concluded in the EEA.
• Graduated recognition: The Statement now calls out that, consistent with Solvency II, NEJ TCRs may be recognised (in the Basic Solvency Capital Requirement) for their own merits if their financial strength is equal or above Credit Quality Step 3.
• Ratings and risk management: EIOPA’s original consultation did not specifically highlight credit quality rating as a factor when vetting potential reinsurers. Now, the Statement explicitly notes that the credit rating of a TCR must be assessed prior to approving the TCR as a potential counterparty (e.g. inclusion on a panel), but particularly in the case of NEJ TCRs.
• Qualitative assessment: Regulators are expected to evaluate how insurers assess qualitative elements of a NEJ TCR arrangement. Factors such as geographical risk diversification, proven willingness to pay, fair behaviour and adequate governance are highlighted by EIOPA as important benchmarks in this regard.
• Diligence expectation: A general theme that is apparent throughout the Statement is an expectation for deeper diligence for NEJ TCR arrangements. One example is EIOPA’s comment regarding cedents taking into account the experience of the TCR with regard to the specific reinsurance solution.

…and aligned.

Not all changes to the Statement move to distinguish the treatment of EJ and NEJ TCRs. Many of the expectations in the Statement apply to arrangements with both.

Key examples include those bulleted below (some of which are new additions).

• Ensuring that material risks associated with TCRs are captured in risk management frameworks and ORSAs.
• Considering external credit assessments in risk management of TCRs.
• Prior to engaging a TCR, ‘proper’ consideration and assessment (essentially, a risk/benefit analysis) to weigh up the advantages of the arrangement against the additional exposures, cost of premiums and other factors.
• Where material risk is being transferred through a TCR (whether EJ or NEJ), encouragement of early dialogue between regulators and (re)insurers and maintaining this dialogue over time.

The question of materiality

A materiality threshold of sorts has been incorporated. Many of the comments and expectations in the Statement have now been confined to ‘material’ exposures to TCRs (and mainly to NEJ TCRs). While ‘material’ in this context has not been described in further granularity, this is a welcome change which means that approach may be tailored.

Additional interesting themes

Some other noteworthy complexions evident from the Statement include:

• de-emphasis on (but not fully ruling out relevance of the Statement’s principles to) retrocession
• indications that collateral is a focus for EIOPA only in the case of NEJ TCRs (together with stating that collateral should not be a default practice)
• a softening of certain expectations, including framing them as actions that regulators and cedents may (rather than must) take as well as describing certain regulator tools as risk mitigation actions that could be considered or recommended (rather than requested)
• further clarification of how EIOPA views choice of law as supporting risk mitigation
• recognition that practical feasibility is a factor in certain respects (e.g. assessment of soundness of retrocessions sitting behind arrangements with TCRs)

Innovative reinsurance – watch this space!

A new inclusion to the Statement highlights EIOPA’s plans to issue guidance on the use of reinsurance including innovative reinsurance techniques (e.g. matching adjustment reinsurance) by the end of 2024.

This was not referenced in the original consultation. However, we have been seeing other signposts that innovative reinsurance is becoming a focal point for EIOPA. Its 2024 Annual Work Plan (published in December 2023) indicated that providing guidance on innovative reinsurance would be a key objective.

EIOPA began discussions with its members on the use of innovative reinsurance structures in 2023. Based on materials published by EIOPA, it plans to consider:

• mass-lapse reinsurance (cover for loss due to discontinuances such as policy surrenders)
• sliding scale commissions (a ceding commission which varies depending on the actual loss ratio)
• funded or asset-intensive reinsurance (where asset and liability risk transfers to the reinsurer)
• any other novel arrangement proposed by its members

It will be interesting to see the output from EIOPA on this project, which should hopefully facilitate and support the use and consideration of innovative reinsurance arrangements in the sector.

What next?

No timing is specified as to when the enhanced expectations are to take effect.

We can expect to see innovative reinsurance guidance from EIOPA soon, perhaps before the end of 2024.

The Statement has been finalised with closer alignment to Solvency II. Nonetheless, taking into account the Statement and further guidance anticipated, it seems clear that cedents will need to consider the impacts and opportunities for arrangements with TCRs. 

As well as reinsurance contracts themselves, the expectations may have a knock-on impact on matters such as:

• reinsurance strategy and business model
• policies and procedures (e.g. selection, vetting and monitoring)
• extent and nature of diligence/interrogation
• connected risk assessment, risk management/mitigation and governance

Final thoughts

The Statement is silent on the treatment of existing (as opposed to new) TCR arrangements. 

Its focus is on TCR arrangements constituting risk mitigation techniques under Solvency II.

Directed to EU regulators, the Statement can be expected to influence approaches to TCR arrangements. EIOPA mentions that the Statement is based on concrete cases shared by those regulators.

It remains to be seen how individual regulators across the EEA will integrate the expectations into their supervisory activities against the backdrop of a maximum harmonisation regime such as Solvency II.  EIOPA is clear that regulators should apply the Statement factoring in the principle of proportionality and following a risk-based approach. 

At a practical level, time would be needed to assess and assimilate any impacts on a case-by-case basis. It is hoped that any changes in regulatory practice will include appropriate flexibility, proportionality and lead-in time to cater for actions ultimately needed. 

For advice or for further information on this topic please contact Sinéad Lynch, Partner, Catherine Moloney, Solicitor, or any member of the A&L Goodbody Insurance & Reinsurance team: including James Grennan, Partner, Laura Mulleady, Partner, Emma Martin, Of Counsel.