We have a question about EIOPA Guidelines on the Application of Outwards Reinsurance, particularly in relation to catastrophe risk, for exposures from non-EEA countries. 

These guidelines provide a framework for the use of risk mitigation techniques that best reflects the mechanism of outward reinsurance contracts and the specificity of the gross scenarios considered. Chapter III, sections 8-14, present possible methods for allocating gross scenarios to determine the losses for which (re)insurers' shares are determined. 

The next section provides guidance on determining these shares in outward reinsurance losses. For non-EEA regions, the risk measure for gross scenarios is the gross earned premium in the following 12 months.

The Asian regions designated in the Delegated Regulation are geographically extensive areas where adverse natural events are largely local in nature. Referring to Guideline No. 15a, we received a questions from our market, whether it is possible to interpret this provision in such a way that it provides the possibility to divide the gross scenario for this region into the countries within it. Outward reinsurance, i.e., an arranged portfolio protection program, will be applied to losses in individual countries (or group of the countries) due to the huge geographical extent of the region for which probability of a catastrophic event occurring in the entire designated region is very close to zero. Aggregation of net scenarios to the region-wide level will be performed using the assumption of independence of national losses.

We acknowledge that Asia is a huge continent and that natural catastrophes are essentially local in character, which in principle could justify some level of diversification by splitting the regions in, e.g., countries, if the risks are independent. 

However, the current Standard Formula for computing the capital requirement for natural catastrophes makes a distinction between countries (regions) and zones within Europe only. The split for non-EEA risks is over large regions as provided in Commission Delegated Regulation (EU) 2015/35 Annex III. In particular, Asia is split into two regions: Eastern Asia and Central & Western Asia. EIOPA’s Guideline for Outwards Reinsurance clarifies how possible choices within partitioning compliant with legislation should be made by an undertaking. Moreover, the resulting choice should be at least appropriate for the risk profile. Accordingly, the role of the prudential supervisor includes to check that the partitioning approach considered by the undertaking does not underestimate the risk. Any disaggregation to country level may facilitate the application of reinsurance, but it does not permit additional diversification when the net losses are reaggregated for calculating the capital requirement. Note that when a number of 1-in 200 year catastrophe events can be defined the undertaking should select the event which results in the highest catastrophe charge after the application of the risk mitigation techniques.

EIOPA’s Guideline serves only as an aid for the practical application of legislation. It does not introduce new possibilities for divisions into regions and zones, as this would overrule legislation. 

It may happen that the risk profile of an undertaking does not match with the capital requirement based on the Standard Formula. In such a case, an undertaking may apply for an Internal Model (IM).