The role of reinsurance in promoting healthy markets

Ladies and gentlemen,

It's a pleasure to be here and to introduce the next segment of the conference programme, the role of reinsurance in promoting healthy markets.

It is indisputable that reinsurance plays an important role in the insurance industry and broader economy by providing risk management solutions that promote healthy markets and support infrastructure development, sustainability, financing, and cyber protection. We will hear more about this during the panel discussion in a few moments.

To set the tone for that discussion I would like to share with you what, in EIOPA's view, are the risks and opportunities when it comes to reinsurance.

Reinsurance inherently possesses a global dimension, which is vital for the stability and growth of international markets. And with their global reach, reinsurers provide substantial capital and expertise, making it possible for insurers to underwrite larger and more varied policies. This, in turn, fosters market innovation and stability.

And indeed, we are seeing a consistent growth in reinsurance, globally: both in absolute terms and in its share of the global insurance market. In 2023, reinsurance accounted for 18.8% of the total gross written premiums within the insurance and reinsurance sectors across the EEA, amounting to 229.5 billion euro.

This indicates a broader trend toward increased risk cession. And it is particularly evident in the EEA, where 62% of reinsurance transactions take place within the EU itself, while the remaining 38% are conducted with third countries (20.7% with countries with equivalent regulatory regimes and 17.3% with non-equivalent). The US and the UK remain significant partners here, accounting for 14.6% of the total.

These figures show how the EU integrates with global markets to manage risk and ensure financial stability across borders. They also highlight the importance of international cooperation. And in this spirit, I am pleased that we are having this discussion today-with international partners.

Bermuda is a significant player in the global reinsurance market, and the Bermuda Monetary Authority (BMA) is highly valued for its regulatory work. We appreciate the BMA's efforts and follow with interest the implementation of its activities, recognizing their importance in shaping the global reinsurance landscape.

Looking ahead

As we look ahead, there are several developments that will continue to be significant for reinsurance-first and foremost, the goal of addressing the protection gap related to natural catastrophes.

By diversifying risk across borders, reinsurers mitigate the impact of localized disasters. This in turn supports the resilience of primary insurers. A coordinated financial response to global catastrophes, such as those resulting from climate change, relies in part on reinsurance.

But it doesn't end with natural catastrophes. Reinsurance can also be a useful risk-mitigation and capital management tool when it comes to narrowing pension gaps and assessing longevity risks.

The increasing life expectancy of the EU population is putting growing pressure on governments, pension funds, life insurance companies, and individuals to manage longevity risk.

Capital markets can offer tools to hedge this risk, transferring it from those unable or unwilling to manage it to those who are. This includes investors seeking risk-adjusted returns but also reinsurers who can offset it against other risks, such as mortality.

Some solutions to this are longevity swaps and bonds, but as our population continues to age, there is a clear need for further innovation to bridge longevity pension gaps, and I believe that reinsurers can play an important role in achieving this goal.

Broader implications

These are all great benefits. But what broader implications does a growing reinsurance market have?

Well, for one, the new Commission has indicated it will be looking more at competitiveness: We are seeing an increasing reliance on third-country reinsurance in Europe, which is raising concerns about our dependency on non-EU markets.

The European Commission is particularly interested in understanding the extent of this dependency, as it could have significant implications for future competitiveness in the reinsurance sector. We expect this issue to receive increased attention moving forward.

I would like to stress that competitiveness does not need to come at the expense of the green agenda, which remains apriority for us. This means that the industry needs to make headway with transition plans. And it means that we have to progress on the implementation of Solvency II.

From a supervisory perspective, Solvency II provides a well-established framework, with experienced supervisors focusing increasingly on conduct and emerging issues within the sector. We need to see more on conduct.

Finally, equivalence is very important. As a supervisor, EIOPA is always on the lookout for risks. I alluded to the challenges associated with reinsurance, and from EIOPA's standpoint, particularly those from non-EU countries without equivalent regimes.

Trends and risks

We are seeing a growing prevalence of complex reinsurance structures, such as profit sharing, asset intensive reinsurance, and mass-lapse reinsurance. And these are increasingly drawing the attention of EU supervisors.

Mass-lapse is another growing trend. According to EIOPA's informal survey from the last quarter of 2023, most National Supervisors (9 out of 11) reported identifying at least one mass-lapse treaty in their jurisdiction, with the majority of these treaties being signed since 2020. We are currently working on guidance to national supervisors on the use of reinsurance for the mass-lapse reinsurance, that we will publicly consultation at the end of this year.

What we are observing is that suchrecent reinsurance arrangements have resulted in significant capital release, when the actual risk transfer in some cases is not so relevant. This of course is a risk. Capital release needs to be commensurate to the genuine risk transfer.

Asset-intensive, or funded reinsurance, is another trend we are seeing more and more. It extends beyond traditional underwriting risk to also cover market risk. These contracts frequently involve outsourcing the management of the underlying assets to a reinsurer, which introduces substantial counterparty risk that is usually mitigated through collateralisation. This risk is only greater if the reinsurer follows a different investment strategy from the insurer, such as investing in more illiquid assets. This is particularly relevant when considering recapture risk, i.e., the termination of the reinsurance agreement with the underlying assets or collaterals returning to the direct insurer.

In addition, these transactions might lead to a material transfer of market and underwriting risk, which might be subject to lower capital requirements in some foreign jurisdictions. One-third of European national supervisors have reported encountering asset-intensive reinsurance in their markets, a development that EIOPA is closely monitoring.

Now, having outlined some potential risks, let me be clear: EIOPA values reinsurance creativity. It enables the development of tailored solutions that address complex risks, optimize capital, and manage emerging challenges in the insurance industry.

If done well, they can be beneficial for insurance, and if done poorly, they can pose problems. But we must be cautious here: The benefits of reinsurance cannot be achieved at the expense of introducing risks-even if they stem from a small pool of insurers operating in less advanced supervisory regimes.

Supervisory Statement

And this is why it is important to promote high-quality and consistent approaches to supervision when it comes to third country reinsurance.

Earlier this year EIOPA published a Supervisory Statement on the supervision of third country reinsurance. It gives national supervisors in the EU greater clarity on the risks associated with cross-border reinsurance with third countries that do not have a reliable risk-based regime, as well as giving them tools they can use to effectively address such risks.

I can only stress the importance of collaboration between supervisors and reinsurers. This has indeed proven to be efficient in the past. For example, reinsurers have been open to provide detailed explanations about specific arrangements or have suggested topics that may require further analysis, thus drawing EIOPA's attention to topics that led to specific developments. In our work at EIOPA we encourage this close collaboration.

Reinsurance is, and should remain, an international, cross-border business that is based on the global diversification of risks. As such, it should allow reinsurers to accept risks at a lower cost than that which a local insurer would have, and which it may not be able to afford. In this way, reinsurance can contribute to narrowing the protection gap, bringing meaningful economic and social benefits.

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