Solvency of Insurance Undertakings (Mueller-Report) - Eiopa

The majority of delegations admit that the reinsurance deduction method applied up to now does nottake account of the different balancing effects of the various types of reinsurance contract. However,it did not support the method change proposed by the delegation. The main objection was that thiswould lead to certain types of reinsurance contracts being given preference, especially excess of lossreinsurance, and this was not what the majority aimed for, and doubts were expressed if this wasjustifiable. The purpose of reinsurance is not exclusively to transfer the fluctuation risk. Other formsof reinsurance also transfer important current technical and non-technical risks to the reinsurers.Therefore, all forms of reinsurance contract must be considered equally when it comes to finding thebest reinsurance form possible for the direct insurance undertaking, and the individual situation mustbe taken into account. However, the proposed changes can result for example in quota-sharereinsurance contracts being placed at an extreme disadvantage.The preference of excess of loss reinsurance would also have the negative effect that especially thattype of contract aggravating the risk situation of the reinsurer most could lead to the highestreinsurance deduction (as shown by the calculations presented). This is not suitable to enhancesecurity of the direct insurance undertakings.Another important reason stated against the proposed new calculation method is that it is morecomplicated and does not sufficiently take account of most recent developments due to the dataneeded being collected over a relatively long observation period.3.2.1.4 Treatment of Financial ReinsuranceThe working group takes the view that financial reinsurance contracts not including any risk transferto the reinsurance undertaking must not be taken into account in the calculation of the reinsurancededuction. First, however, a standardised practicable definition of these contracts should be foundwhich could then also be applied to the method of accounting for such contracts.The working group did not consider it appropriate to submit an independent proposal for adefinition. As a basis for further considerations however, it is to be assumed in its opinion thatfinancial reinsurance contracts are reinsurance contracts under which the reinsurer bears no technicalrisk or a very low technical risk only. These are in particular contracts transferring exclusively orpredominantly economic risks (e. g. credit risk, interest rate risk [timing risk]). Irrespective of theamount of technical risk accepted by the reinsurer, financial reinsurance is not deemed to exist if thereinsurer participates on account of proportional reinsurance contracts in the original risk to anamount corresponding to the written quota.With regard to the numerous variations of contracts encountered in this context, the supervisoryauthorities will only be able to clearly define reinsurance contracts by examining cases individually. It istherefore necessary that supervisory authorities are given scope for evaluation.- 23 -