EIOPA lays down expectations for third-country reinsurance supervision

The European Insurance and Occupational Pensions Authority (EIOPA) has issued a supervisory statement laying down expectations for the supervision of reinsurance concluded with third-country reinsurers. 

Notwithstanding EIOPA's view that the global, diversified reinsurance market has a number of benefits, the statement pinpoints risks arising from arrangements with reinsurers which are not subject to Solvency II-equivalent regimes. Certain aspects of the statement also apply to arrangements with reinsurers from equivalent third countries.

Areas covered by the statement include:

• assessment of the rationale for using third-country reinsurance and early supervisory dialogue - the statement reinforces the expectation that firms properly consider (and supervisors properly assess) the trade-off between the benefits (e.g. reduction of capital requirements) and drawbacks (e.g. costs and emergent risks such as basis and counterparty risk) of such proposals; 
• firms’ risk management and control systems - the statement steps through supervisors' considerations when assessing the systems deployed by firms using material reinsurance arrangements with non-equivalent third-country reinsurers (it also reaffirms many expectations of firms, such as the scenarios where more detailed assessments are necessary and the sources of information to determine the status of the reinsurer); 
• assessment of the reinsurance agreement itself - the statement provides some helpful detail on the expectations of firms when assessing if a reinsurance agreement (irrespective of whether in an equivalent or non-equivalent third country) complies with articles 209 to 211 of the Solvency II Delegated Regulation; 
• tools to mitigate additional risks - the statement sets out a number of tools to potentially be considered or recommended by the local supervisor where material risks have been identified (these include pre-emptively limiting exposures on certain reinsurers).

The statement is addressed to national competent authorities, which will be expected to apply the statement considering the principle of proportionality and following a risk-based approach.