Answers to the European Commission on the ... - Eiopa - Europa

• identify <strong>the</strong> counterparties <strong>to</strong> be used and evaluate <strong>the</strong> credit risk
associated with <strong>the</strong>se operations;
• identify <strong>the</strong> procedures for ongoing moni<strong>to</strong>ring of <strong>the</strong>
arrangements with a review <strong>to</strong> be undertaken at least on an
annual basis; and
• demonstrate that <strong>the</strong> ART arrangements are appropriate in
relation <strong>to</strong> <strong>the</strong> risks <strong>to</strong> be covered.
Financial hedging through <strong>the</strong> use of derivatives
12.30 The answers given <strong>to</strong> CfAs 5, 6 and 9 form <strong>the</strong> basis for <strong>the</strong> use of
derivatives. Insurers can use derivatives as a risk mitigation (including
in this context diversification) mechanism on ei<strong>the</strong>r <strong>the</strong> asset or <strong>the</strong>
liability side of <strong>the</strong> balance sheet. In this answer, derivatives used in
connection with liabilities, are discussed in <strong>the</strong> section on ART.
12.31 The use of <strong>the</strong>se products should contribute <strong>to</strong> <strong>the</strong> reduction of both
market and credit risk, and <strong>to</strong> o<strong>the</strong>r ALM considerations. Insurers must
have <strong>the</strong> ability <strong>to</strong> recognise, measure, and prudently manage <strong>the</strong> risks
associated with <strong>the</strong> use of derivatives
12.32 CEIOPS considers that besides <strong>the</strong> advice given on reinsurance here it
would be crucial <strong>to</strong> define <strong>the</strong> criteria governing <strong>the</strong> Reinsurance
Management Strategy in <strong>the</strong> form of supervisory guidance at a later
stage.
12.33 The CfA clearly mentions not only reinsurance but also o<strong>the</strong>r risk
mitigation techniques, on both <strong>the</strong> asset side and <strong>the</strong> liability side. On
this basis CEIOPS will divide CEIOPS’ advice in<strong>to</strong> three main parts: <strong>the</strong>
first one addressing reinsurance, <strong>the</strong> second focussing on alternative
risk transfer and <strong>the</strong> third concerning derivatives.
CEIOPS' Advice
Risk mitigation measurement
Meaning of risk mitigation (including by means of reinsurance)
12.34 The underlying impact on risk associated with risk mitigation
(reinsurance) should be treated consistently, regardless of <strong>the</strong> legal
form of <strong>the</strong> protection.
12.35 The prime consideration is <strong>the</strong> extent of risk transfer. The different risk
characteristics (including risks transferred and acquired) of various
covers will need <strong>to</strong> be taken in<strong>to</strong> account.
12.36 Terms such as 'traditional reinsurance', 'non-traditional reinsurance'
and 'Alternative Risk Transfer' are not well-defined in <strong>the</strong> sense that
<strong>the</strong>re is no universal common understanding of <strong>the</strong>ir meanings; nor do
142