Question ID: 3213
Regulation Reference: (EU) No 2015/35 - supplementing Dir 2009/138/EC - taking up & pursuit of the business of Insurance and Reinsurance (SII), Guidelines on application of outwards reinsurance
Topic: Solvency Capital Requirement (SCR)
Article: 209
Status: Final
Date of submission: 17 Dec 2024
Question
Three independent insurance companies have entered a pooled outgoing reinsurance contract covering Nat Cat (windstorm) and Man-Made Cat (fire). Capacity covers the three companies individually (both perils at the same time). Capacity also covers the sum of their windstorm perils but not the sum of their fire perils. The contract has four layers. In the upper two layers there is only one reinstatement. In the lower two layers there are three and two reinstatements. The three companies have also signed an agreement among themselves stating how the premium and retention shall be split. The three companies each use full capacity in calculating the risk mitigation effect but they only count in their share (approximately 1/3 each) of the retention and the reinstatement premium. We have three questions:
1) There is no overlap between their fire policies in the 200-meter area and it is of course highly unlikely that they all three have a 1 in 200 years man-made fire catastrophe at the same time. That being said, are they double counting the capacity according to article 209, 1, e)?
2) Are they double counting reinstatements in the top layers? If the top layers are exhausted by one company the two other companies in the pool are left with no contractually binding access to reinstate the two top layers. Even though it might be common practice to reinstate layers if they are exhausted it seems that they need more contractually binding access to reinstatement to fulfill article 209, 1, a). You could also argue that article 210, 4, a) could come in play since getting more reinstatements is out of the three companies´ direct control.
3) Would it be feasible to regard the cat pool contract as a group contract and the three companies as the participating solo entities? From a risk perspective this would make some sense for the solo entities but probably not for a group (no consolidation). But since there is no holding company or physical group this might be less important as long as the solo calculation represent a sound risk based approach. In this case the reinsurance recovery could follow guideline 32 and 33 in Guidelines on application of outwards reinsurance arrangements to the non-life underwriting risk sub-module.
EIOPA answer
The risk-mitigating effect of the reinsurance treaty should be allocated to the undertakings covered by the pooled reinsurance arrangement using realistic criteria. Guideline 24 states that shared reinsurance covers should follow the principles in Guideline 32. Although Guideline 33 is not mentioned in Guideline 24, consistency with principles in Guideline 33 is also expected where relevant, as the economics at individual level are equivalent to this case. Therefore:
1) Undertakings should not consider the risk-mitigating effect of the common reinsurance treaty independently, as this could lead to double-counting. This is consistent with Guideline 33 for group reinsurance contracts for specific risk catastrophe events, which requires the group event to overlap with the solo event to allow for cover at solo level, i.e., one single event is being covered. It should be noted that in case the contract allows more than one event to be covered (e.g., through reinstatements), more than one undertaking might benefit from the risk-mitigating effect of the pooled reinsurance arrangement.
2) As for group reinsurance contracts, difference should be made for reinsurance contracts for aggregating catastrophe events and reinsurance contracts for risk catastrophe events. In the first case, consistently with Guideline 32, losses from all three undertakings can be aggregated and, therefore, all three undertakings might benefit from the risk-mitigating effect even if there are no reinstatements. In any case, undertakings should ensure that the sum of the aggregate losses for all undertakings considered does not exceed the capacity of the treaty. In the second case, as discussed in the first question, the number of reinstatements should be enough to ensure that all undertakings can benefit from the reinsurance cover considering all the risks covered. In the example described, this is not the case. The risk-mitigating effect of the treaty should be based on the terms of the arrangement.