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EU, U.S. reinsurance deal could boost business, but hinder profits: Fitch

20th January 2017 - Author: Luke Gallin

International financial services rating agency, Fitch Ratings, has commented on the recently announced EU/U.S. transatlantic reinsurance agreement. Fitch says that while the proposed deal could boost the attractiveness of transatlantic reinsurance business, it could also result in some additional pricing pressure in the space.

At the end of last week the EU and the U.S. jointly announced that after more than 12 months of negotiating an agreement had been reached for a new transatlantic reinsurance deal, which would see the abolishment of regulation that requires EU and U.S. reinsurers to post collateral for their transatlantic operations.

Reinsurance is the most global segment of the insurance market, with transatlantic reinsurance already a major feature. The removal of collateral requirements and other hindrances should increase the attractiveness of doing transatlantic reinsurance, boosting business and diversifying risk exposure.

“It could also lead to greater competition, which would put pressure on pricing and profitability,” said Fitch.

It’s an interesting warning from Fitch, as so far, the majority of market commentary since the announcement of the new reinsurance agreement have noted the positives, such as increased attractiveness as a result of the removal of capital requirements, greater investment freedom and an important boost to reinsurers’ liquidity as locked up collateral is released.

And while Fitch clearly outlines the potential good that could come from the deal, the resultant increased attractiveness of participating in transatlantic reinsurance business could see a wave of new market players, ultimately increasing competition, which in turn would put pressure on returns in the sector.

The agreement is, however, unlikely to drive additional pricing pressures in the current soft reinsurance market environment, as approval is still required from the U.S. congress and the European Parliament and, even when this has been received it might still take five years to implement fully, says Fitch.

Abolishing regulatory requirements for EU and US reinsurers to post collateral for their transatlantic business is the most significant element of the recent bilateral EU-US agreement on insurance supervision,” said Fitch.

 “The agreement will also lead to the elimination of local presence requirements for EU and US reinsurers, making it easier for EU and US reinsurers to access each other’s regions. Germany is the most significant market affected by this change as the country does not give US reinsurers direct access to its market unless they have a legal entity established in Germany or access the market via a subsidiary in the EU or a Solvency II equivalent jurisdiction,” said Fitch.

The rating agency continued to explain that the agreement will not directly affect companies regulatory capital ratios, or will it have any impact on credit ratings for reinsurers with strong liquidity.

Public disclosures on the geographical breakdown of reinsurance collateral are limited but we believe material proportions of capital are still tied up by the collateral requirements for EU reinsurers with business in the US and for US reinsurers in the EU. This is despite a gradual reduction of collateral requirements in recent years,” explained Fitch.

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