Group warns Irish regulator against 'prescriptive' requirements for internal reinsurance
Pardon the Interruption
This article is just an example of the content available to mallowstreet members.
On average over 150 pieces of new content are published from across the industry per month on mallowstreet. Members get access to the latest developments, industry views and a range of in-depth research.
All the content on mallowstreet is accredited for CPD by the PMI and is available to trustees for free.
There is no reason to introduce additional requirements to improve a firm’s internal reinsurance process as Solvency II provides a “rich and comprehensive” framework to regulate insurers and reinsurers, according to a lobby group.
The comment from Insurance Europe’s Reinsurance Advisory Board came in response to a consultation by the Central Bank of Ireland on its expectations on intragroup reinsurance transactions – where reinsurance arrangements are made within the same group. The consultation closed on 22 September.
The regulator said intragroup arrangements may appear “less risky” than external deals but there may be a “heightened risk of inadequate” governance when reinsurance is dealt with internally.
The CBI expects re/insurers to have sufficient local substance and governance procedures in place to continue to operate during severe stress to the group or even failure. It added that firms should extend the same level of oversight to an intragroup counterparty exposure as they would to an external counterparty.
But the RAB called the CBI’s belief that a subsidiary should be able to withstand a failure of its group "highly concerning”, saying that “it undermines the framework for group supervision under Solvency II, and needs to be addressed.”
Intragroup assets
When it comes to how assets are held, the regulator specifically looked at loans from an Irish re/insurer to other entities within its group and said these may significantly affect the level and quality of the capital resources of the group and of its subsidiaries.
The CBI wants firms to formally document all intragroup loans and ensure that a board-approved process is in place, recommending that such loans be reviewed annually by the board.
It also expects “no single intragroup asset to be significant enough to threaten the re/insurer’s solvency or financial position”.
But RAB described the requirement as “too prescriptive”, arguing that it goes further than the requirements of the Prudent Person Principle and Solvency II.
“There are extensive requirements in Solvency II regarding investment, concentration and counterparty risks, which preclude the need for prescriptive requirements on investment assets as proposed by the CBI,” said the RAB.
“As well as running counter to the risk-based principles of Solvency II with respect to the investment of assets, prescriptive criteria on asset holdings cannot in general be tailored to the specific nature of the asset held and, in the case of intragroup transactions, to the circumstances (including financial strength) of the undertaking and the group.”
The CBI plans to publish a final paper and a feedback statement within three months of the close of the consultation, in line with its policy on consultations.
To view the RAB’s response in full, click here.
Why is this topic important for Irish re/insurers?
The CBI recognised the benefits of intragroup arrangements such as cost efficiencies, improvements to risk management and more effective control and use of capital and funding.
But it noted many re/insurers in Ireland are part of larger groups, and a dependence on a parent may expose a re/insurer to “high levels of concentration”. In contrast, the RAB argued intragroup transactions are an essential tool for facilitating the diversification of group-wide risks.
Soon after the consultation was published, the International Monetary Fund urged the Irish regulator to look into the issue, as many cross-border entities have “considerable exposure” to their parent.
According to a report in July, the IMF said 166 out of 179 insurers have a majority shareholder based abroad.
The IMF said: “The large majority of Irish insurers are subsidiaries of international groups and often have significant interlinkages with related entities within the same group. Extensive intragroup financial links could expose local entities to concentration and other risks.”
Does intragroup reinsurance pose concentration or risk diversification?
