Fitch Ratings have said Solvency II (S2) will increase demand for reinsurance products as under the new regulatory regime insurers can strengthen their capital position through risk transfer.
It expects the main beneficiaries of new business to be the financially strongest reinsurers in the EU and the jurisdictions whose regulatory regime is considered fully equivalent to S2.
It believes a complete picture of the impact on reinsurance demand will take time to emerge. But S2 has already contributed to a marked increase in longevity reinsurance, particularly among UK life insurers with bulk annuity business.
According to Fitch, longevity risk significantly increases the capital requirements for new annuity business while interest rates are very low because of the S2 risk margin.
This increased capital requirement has made insurers keen to reinsure longevity risk, as the associated capital charges for counterparty risk with large, financially strong reinsurers are much lower than those for retained longevity risk.
Fitch said reinsurers based in the EU or a country that has been granted equivalence for reinsurance supervision under S2 are likely to have an advantage over those domiciled in non-equivalent countries when competing for business from EU insurers, because transactions should be simpler to execute.
However, reinsurers outside these regions could be required to post collateral or liaise with a local European regulator, adding costs or delays. Only Bermuda, Switzerland and Japan (temporarily) have been granted this equivalence.
These benefits are likely to have the greatest influence on more commoditised reinsurance products such as property, said Fitch. Other factors could be of greater importance for more complex risks, such as longevity.
Fitch concluded by saying diversification benefits can be achieved in relation to other exposures, particularly mortality risk, and typically lower the reBermudainsurer's longevity capital charges. This reduction is often significant compared to the charges faced by the ceding life insurer, even when both companies are operating under the S2 framework.
Fitch Ratings, Solvency II, Insurance, Reinsurance, Bermuda, Europe, EU, North America