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20 January 2017Insurance

Reinsurers face higher transatlantic competition

The Covered Agreement between the EU and the US makes these markets more attractive for reinsurers from the opposite side of the Atlantic, increasing competition and therefore adding pressure on pricing and conditions.

The European Union and the US on January 13 unveiled an agreement  which removes collateral and local presence requirements for reinsurance.

For EU-based reinsurers operating in the US this is expected to free around $40 billion of collateral. The agreement will enable players like Munich Re, Hannover Re or Scor to deploy this capital more effectively. Some estimates suggest that these $40 billion actually translate into opportunity costs of $400 million – if the way that money could have otherwise been deployed is considered.

“By having the same rules that apply to US reinsurers, the EU reinsurers will become more competitive than now, when the collateral requirements put them at a competitive disadvantage,” said Cristina Mihai, head of prudential regulation and international affairs at Insurance Europe.

US reinsurers operating in Europe are also set to benefit as the agreement reduces regulatory barriers, making the region more attractive for business.

“Before this agreement was reached, a reinsurer wanting to operate in Europe was required to establish multiple branches in Europe and competitors did not have to. That’s a very big deal," said Tracey Laws, senior vice president and general counsel of Reinsurance Association of America (RAA).

The removal of collateral requirements and other hindrances should increase the attractiveness of doing transatlantic reinsurance, boosting business and diversifying risk exposure, according to a January 17 Fitch Ratings statement.

But the deal is also set to make the EU market more attractive for US reinsurers, leading to greater competition and consequently putting pressure on pricing and profitability, Fitch warns.

Nevertheless, the Covered Agreement may serve as a blueprint for other countries such as non-EU member Switzerland, which is set to seek similar access conditions to the US market for its reinsurers.

This is a snapshot of a longer article you can read here.

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More on this story

30 January 2017   The credit quality of Western European insurers and reinsurers has been stable over the past 12 months, despite a difficult period of low investment yields, a competitive environment, particularly for reinsurers with an abundance of capacity, and challenges to meet shareholders’ expectations, according to AM Best.
17 March 2017   The US state insurance regulator National Association of Insurance Commissioners (NAIC) is asking for clarifications on the negotiated covered agreement between the EU and the US which removes collateral and local presence requirements for reinsurers from the opposite side of the Atlantic, and suggested that the agreement might have to be renegotiated.
30 May 2017   The European Council has agreed to the signing of an agreement with the US on insurance and reinsurance which is set to enhance regulatory certainty in transatlantic re/insurance operations.