Jason Noronha, Head of Actuarial and Analytics at Aon, who heads the firm's non-life insurance actuarial consulting team, clarifies Solvency II regulations as they relate to reinsurance from Guernsey.
It is not unusual to encounter confusion in the European market around purchasing reinsurance from a Guernsey-based company and whether you will be able to take credit for that as a European insurer.
Under Solvency II (SII) every firm has to calculate a regulatory capital number. There are two ways they can do that, build their own internal model, or they can apply a very complex standard formula.
Those with an outwards reinsurance programme, can, in many places, allow for that reinsurance in that Solvency capital allocation.
In order to be able to take credit for that reinsurance, a number of requirements need to be met.
Some headline requirements are well understood and well made.
To be entitled to take credit it is easiest to:
- buy reinsurance from EU domiciled insurer;
- to use a reinsurer in a Solvency II-equivalent domicile; or
- to buy from rated entity rating triple-B or above to take full credit.
Guernsey does not fit neatly into any of those categories. But there are options. A credit rating is easiest route. The rating needs to come from a European regulated rating agency and must be public. This can easily be allowed for.
Those not rated still have options. We have seen these structures used, and some of them been used for a long time. The easiest, most common, is the collateral structure, which is very natural for the ILS market. If they have insurance or reinsurance cover that is collateralised, and the collateral meets all the requirements of the SII directive, then you can allow for reinsurance from a non-equivalent domicile with a non-rated reinsurer.
There is also the option of quota share treaties and funds withheld which we see on occasions, where the ceding insurer holds back premium for a period of time before transferring to the reinsurer. This gives the same benefit as collateral.
Less common, and more applicable for a captive or group situation, is to get a guarantee from another part of the group, rated triple-B or above, and to guarantee cover you can look through to the rating of the guarantor and take credit.
So there are options. It is perfectly possible and reasonable for a European domicile insurance entity to buy reinsurance from Guernsey-based reinsurer, a non-SII entity, and this can be fully recognised in the Solvency II calculation.
The rules are complex, and there can be different interpretations. But get into the detail and it is perfectly possible to take credit for that reinsurance, and there is no explicit restriction on the use of reinsurance from non-equivalent domiciles.
Guernsey Finance's ILS Insight webinar takes place on Thursday 2 July. For more information or to register, visit the event website: https://www.weareguernsey.com/finance-events/2020/ils-insight/.
Written byJason Noronha Aon
For more information about Guernsey's finance industry please visit www.weareguernsey.com.
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