As detailed in our previous post (available here), the European Insurance and Occupations Pensions Authority (EIOPA) has now concluded its public consultation and published its supervisory statement on the supervision of reinsurance concluded with third-country reinsurers.

As expected, whilst EIOPA has taken on board some comments from stakeholders, the substance of the supervisory statement, as well as EIOPA’s supervisory expectations, remain largely unchanged.

While the supervisory statement is largely addressed to national competent authorities, such as the Central Bank of Ireland, as the feedback statement makes clear, it also sets expectations for (re)insurance undertakings.

It should also be borne in mind that, while the aim of the statement is to set supervisory expectations for reinsurance arrangements entered into with reinsurers who are established in third countries whose insurance regimes are not deemed equivalent to Solvency II, certain parts of the supervisory statement are seen by EIOPA as relevant to arrangements with reinsurers established in jurisdictions that are deemed equivalent to Solvency II. These areas are expressly called out in the supervisory statement and relate to:

• the undertaking being able to demonstrate in the ORSA that material risks associated with third country reinsurance arrangements are appropriately captured by the risk management framework;
• the undertaking’s assessment of risks should include identification of any legal/compliance risk arising from the law of the third countries concerned, including for example counterparty risk. The EIOPA statement indicates that, in case of concern or material exposure, such assessment can be performed for equivalent third countries e.g. to assess whether the cedant has a direct claim against the counterparty on an event of default or insolvency event;
• the undertaking’s consideration of the reinsurer’s credit rating and what the undertaking is expected to consider in its assessment of the appropriateness of such external credit rating as part of the risk management process; and
• the undertaking’s monitoring of whether reinsurers in equivalent jurisdictions have breached their national solvency requirements and whether they have procedures in place which are to be followed in those circumstances.

Overall the statement seeks to recognise the international nature of reinsurance business and the positive diversification effects that is inherent in this. The EIOPA statement will bring some welcome clarity and assist European insurers and reinsurers with managing their reinsurance arrangements with global partners.