Question ID: 2830
Regulation Reference: Revised Guidelines on valuation of technical provisions
Topic: Technical Provisions (TPs)
Status: Final
Date of submission: 11 Oct 2023
Question
An insurance or reinsurance undertaking (in the following “undertaking") enters a reinsurance agreement with another insurance or reinsurance undertaking (in the following “reinsurer") on a funds withheld basis, meaning that the premium for the reinsurance agreement is retained by the undertaking as collateral for payments of the reinsurer. Payments that the reinsurer is obliged to make under the agreement shall be debited from the withheld funds.
Question 1. Should the withheld funds be considered a reinsurance payable or a deposit from reinsurer?
Question 2. Should the reduction of the withheld funds balance due to settlement of claims covered by the reinsurance agreement be considered a reinsurance premium cash flow in the best estimates and net out the reinsurance benefit cash flow (recoverable) or should the funds withheld be treated outside the technical provisions on the Solvency II balance sheet?
Background of the question
A reinsurance contract reduces the reserve risk of the undertaking. Technical provisions are to include cashflows with insurance risk. In a situation where a decrease of a deposit should be included as a reinsurance premium cashflow in the technical provisions, it nets out the reinsurance recoverable of the benefit cashflow. The risk reducing effect of the reinsurance contract is then removed.
EIOPA answer
Under the assumption that the fund withheld as mentioned in the question classifies as collateral arrangement in the sense of Article 1 (26) of the Commission Delegated Regulation 2015/35 (DR), the following answers can be given.
On question 1: According to Commission Implementing Regulation (EU) 2023/894 (reporting ITS), the position “Deposits from reinsurers" in the solvency balance sheet is defined as “amounts (e.g. cash) received from the reinsurer or deducted by the reinsurer according to the reinsurance contract". In the question, the assets in the fund withheld are not amounts received from the reinsurer, but are built up from premiums for the reinsurance agreement that are agreed to be retained by the undertaking as collateral. The funds withheld do therefore not fall under the first part of the definition of deposits from reinsurers (“amounts received from the reinsurer according to the reinsurance contract"). However, payments that the reinsurer is obliged to make under the reinsurance agreement shall be debited from the withheld funds. This means that the reinsurer can deduct the withheld funds from its liabilities under the reinsurance contract.) Hence, following the second part of that definition (“deducted by the reinsurer according to the reinsurance contract"), the funds withheld should be classified as “deposits from reinsurers".
On question 2: In accordance with Article 41 (3) DR, the calculation of reinsurance recoverables should only include cash flows in relation to the compensation of insurance events and unsettled insurance claims. The deposit is a safeguard for future payments of the reinsurer to the undertaking. The deposit posted by the reinsurer does not correspond to reinsurance cash flow in relation to the compensation of insurance events and unsettled insurance claims. This means that the funds withheld should be treated as a separate liability position on the Solvency II balance sheet and should not net out reinsurance recoverables.