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Trump, Brexit, & regulatory risk changes & concerns: A.M. Best

17th February 2017 - Author: Marianne Lehnis

Reinsurers on either side of the Atlantic have been watching in trepidation as the global political agenda takes an increasingly protectionist stance, A.M. Best highlighted key concerns in a recent report, outlining how these changing regulations have impacted the insurance and reinsurance industry.

The rating agency’s analysts examined some of the major factors set to disrupt the market, including changes to treatment of internal group reinsurance, repercussions of Trump’s proposed policies, and other recent bilateral EU/U.S. reinsurance agreements.

Among Trump policies that threaten to impact offshore re/insurance domiciles is his promise to lower corporate tax rates;  A.M. Best analysts have suggested this would benefit U.S. re/insurers, if it has the intended effect of bringing business back onshore and stimulating the economy.

One of the major concerns of regulatory change for the industry stems from the introduction of a bill introduced by Senator Mark Warner (D-VA) and Representative Richard Neal (D-MA) in September last year.

The bill is intended to prevent “avoidance of tax through reinsurance with non-taxed affiliates,” it would be applicable in jurisdictions that do not tax reinsurance premiums and A.M. Best explains it means “deductions for reinsurance cessions from the U.S. to affiliates in those jurisdictions would not be allowable as a tax deduction.”

Should the bill become law, many global re/insurers could have to reevaluate their current operating structures, A.M. Best warned.

The rating agency highlighted that on a global level, regulators are changing their view of insurers to look at the organisation as an entire group, with legal entities operating in various jurisdictions.

One such example is group solvency calculations now being required under Solvency II, and this trend is spreading to regulators outside the EU.

Another regulatory change significant to re/insurers is a new agreement released by the U.S. and EU last month, with a key provision that eliminates requirements for collateral holding:

“A key provision of the agreement is the elimination of the requirement for an assuming reinsurer in either jurisdiction to post collateral to a cedent in another jurisdiction, subject to certain conditions.”

“The reduction of collateral requirements will free up liquidity, and European companies writing U.S. risks will certainly stand to benefit. In the short-term, Lloyd’s will also benefit; however, unless the U.K. achieves a similar agreement, this benefit is likely to be lost post-Brexit,” explained A.M. Best.

However, while it appears a reduction of collateral requirements would be beneficial to re/insurers, it’s also likely to place greater pressure on a market already flush with capacity, and could result in further competition and pressure on rates.

This bilateral agreement also provides for mutual recognition in the areas of reinsurance, group supervision, and exchange of information.

Other changes to the regulatory environment include the expansion of qualified jurisdiction status to four EU member states, as well as Bermuda, Japan, and Switzerland and Bermuda and Switzerland are also now considered to be Solvency II equivalent.

Commenting on how companies are likely to respond to regulatory changes, A.M. Best said;  “Ultimately, should tax and regulatory changes regarding treatment of internal group reinsurance result in lower after tax earnings, organizations would likely respond by finding alternative operating structures to sustain earnings and manage capital cost efficiently. This may lead to the decline of one domicile over another, but that remains very uncertain at this point.

“Generally speaking, the ratings of global (re)insurers with multiple platforms will be unaffected because they have the ability to redirect business if necessary.”

In the current fluid and shifting regulatory environment, reinsurers have been advised to pay attention to potential change, but with most companies used to responding to market developments with appropriate business restructuring measures, A.M. Best said it believed industry players are “well-equipped” to handle pressures of change.

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