On April 4th, EIOPA published a document on the supervision of reinsurance activity with companies operating in third countries, following the provisions of Directive 2009/138/CE (Solvency II) and Annex Delegated Regulation (EU) 2015/35.
The document highlights risks arising from reinsurance activities with reinsurers operating in a regulatory framework different than that regulated by the Solvency II Directive, defining supervisory standards and providing recommendations about the methods of how to assess reinsurance agreements and risk management systems of companies properly. For this purpose, the document suggests:
- to limit beforehand exposures to certain third-country reinsurers through a careful diversification between operators;
- to mitigate the counterparty default risk of third-country reinsurers through collateral or pledge agreements, using due precautions to avoid situations where the guarantee may be insufficient;
- to ensure that companies have, in case of insolvency or failure of a reinsurer, recourse right or other credit right against it provided for in the reinsurance agreement.
The document is addressed to all competent Authorities, which are required to comply with the indications contained therein.