The Reinsurance Advisory Board (RAB) has raised a series of concerns regarding references to reinsurance in a consultation by De Nederlandsche Bank (DNB) on insurer resolvability.
The RAB states that its response relates to Article 9.2d, which stipulates that the DNB shall assess the extent to which resolvability is taken into account when making strategic decisions so that these strategic decisions do not impede the implementation of resolution measures.
According to the RAB, by definition, this assessment will be a subjective exercise, so the Board urges that the DNB provide clarity on the criteria to be used for the assessment.
The Board observes that when referring to strategic decisions related to risk and capital management, the explanatory note from the DNB lists reinsurance transactions and outsourcing as examples of strategic choices that could impede the application of resolution measures.
The RAB writes that it “is concerned that reinsurance has been highlighted, without explaining why reinsurance is deemed to be problematic in cases of resolution, for example in a bail-in situation. The RAB is not aware of any evidence indicating that reinsurance transactions are usually a factor impeding resolvability.
“In fact, solvent run-off is the most appropriate resolution tool for insurance business. Maintaining existing reinsurance arrangements is, therefore, vital for ensuring that the undertaking can remain solvent as liabilities run off.
“While there may be individual and unusual cases that the DNB has in mind, not specifying these gives the impression that reinsurance itself is seen as a barrier to resolvability.”
The RAB is concerned that the current drafting of the paper will lead to confusion among primary insurers with regard to their reinsurance arrangements and could discourage the use of reinsurance, despite it being an essential part of good risk and capital management in the insurance sector.
The board states that discouraging the use of reinsurance would be counterproductive to the goal of avoiding the need to put insurers into recovery or resolution, as reinsurance is a vital risk management tool that allows insurers to preserve their financial position in cases of extreme events and large losses.
The RAB affirms that it is convinced that by pooling and diversifying risks across lines of business and geographies, reinsurance contributes to the overall resilience of the insurance market.
It concludes that a reinsurance strategy that meets the extensive Solvency II requirements on risk management (including reinsurance) does not need to be amended to improve resolvability, especially given the protections in place in Solvency II and the ongoing role reinsurance is likely to play in the runoff of insurance liabilities in resolution.
