On 24th November 2020, Insurance Ireland submitted its reply to a consultation of the European Insurance and Occupational Pensions Authority (EIOPA) on its statement on the use of risk mitigation techniques by insurance and reinsurance undertakings.
The issue of effective and efficient risk mitigation techniques and reinsurance arrangements is very important for the Irish insurance market. Ireland is the 5th biggest insurance market in the EU and the 2nd largest for reinsurance. Risk mitigation techniques and reinsurance arrangements form an essential part of an effective and efficient risk transfer and risk mitigation between economies, societies and the (re)insurance industry. The availability of sound reinsurance arrangements is key for the availability and affordability of cover – thereby the industry’s ability to provide consumers with the necessary peace of mind.
The European supervisory regime for (re-)insurance, Solvency II, recognises risk mitigation arrangements which achieve an effective risk transfer. The statement which EIOPA consulted upon suggests that certain risk mitigation techniques are used to limit the solvency capital requirement (SCR) which (re-)insurers have to fulfil in accordance with the standard formula of Solvency II, without transferring risks effectively. Insurance Ireland agrees that the effective risk transfer is can differ from the capital relieve under the Solvency II standard formula. This difference is due to the general nature of the standard formula which is a compromise between risk sensitivity and simplicity.
Therefore, Solvency II foresees that the appropriateness of the standard formula is assessed at individual undertaking level. The assessment of risk mitigation techniques should be no exemption to that. Based on the assessment, supervisory authorities have powers at hand to intervene where it considers it necessary. Due to these already existing measures, we do not fully understand the necessity for this statement.
On the contrary, we consider that the statement might put effective and efficient risk transfers at risk. Transposing the EIOPA statement, national supervisory authorities might draw diverging conclusions and inconsistently apply the statement. Under all circumstances, it has to be avoided that the examples which EIOPA chose for their statement are the starting point for a “black-list” on the use of certain risk mitigation techniques.
If understood as such a list, these risk mitigation techniques might be banned in some jurisdictions or their use might be significantly limited to the detriment of effective and efficient risk transfer and, finally, insurance customers. Rather than black-listing or banning activities, we would expect EIOPA to provide NCAs with the necessary information on how to assess the individual situation of (re-) insurance undertakings and apply the existing Solvency II provision consistently.
Finally, Insurance Ireland would like to express its concern regarding the transparency of the assessment and the provision of evidence for the statement. Usually, EIOPA bases its statements on a detailed assessment of the issue at question and the situation across the EU. We assume that this has been the case for this statement as well. However, as the consultation does not provide for any such assessment or evidence, we would be very interested to learn more about the scale and density of the undue use of risk mitigation techniques across the Union, before potentially wide-ranging action is taken.