Reinsurers in Europe and the US will benefit from abolition of regulatory requirements, says Fitch

Abolishing regulatory requirements that mean EU and US reinsurers must post collateral for their transatlantic business will provide an important boost to reinsurers' liquidity and investment freedom, according to Fitch Ratings.

The rating agency said the abolition of such requirements represents the most significant element of the recent bilateral EU-US agreement on insurance supervision and will release a large amount of capital currently locked up as collateral.

This will provide “an important boost to reinsurers' liquidity and investment freedom. This will not directly affect reinsurers' regulatory capital ratios or their scores in Fitch's Prism capital models. We do not expect any impact on credit ratings for reinsurers with strong liquidity,” Fitch said.

It noted that while public disclosures on the geographical breakdown of reinsurance collateral are limited it believes material proportions of capital are still tied up by the collateral requirements for EU reinsurers with business in the US and for US reinsurers in the EU. “This is despite a gradual reduction of collateral requirements in recent years,” it said.

“The agreement will also lead to the elimination of local presence requirements for EU and US reinsurers, making it easier for EU and US reinsurers to access each other's regions. Germany is the most significant market affected by this change as the country does not give US reinsurers direct access to its market unless they have a legal entity established in Germany or access the market via a subsidiary in the EU or a Solvency II equivalent jurisdiction.”

Fitch added that reinsurance is the most global segment of the insurance market, with transatlantic reinsurance already a major feature. “The removal of collateral requirements and other hindrances should increase the attractiveness of doing transatlantic reinsurance, boosting business and diversifying risk exposure.

“It could also lead to greater competition, which would put pressure on pricing and profitability.

“The agreement will not affect regulatory capital requirements. EU subsidiaries of US reinsurers will still be subject to Solvency II capital requirements. US subsidiaries of EU parents will still be subject to US capital requirements, which are deemed equivalent to Solvency II, despite typically being lower.”

It did add, however, that the agreement is subject to approval by the US congress and the European Parliament and, even if approved, might then take five years to implement in full.

Did you enjoy reading this story?  Sign up to our free daily newsletters and get stories like this sent straight to your inbox.