EIOPA consults on mass-lapse reinsurance

Written by Adam Cadle

11/11/2024

EIOPA is consulting on mass-lapse reinsurance and reinsurance termination clauses to enhance guidance on risk mitigation techniques.

The first annex provides further guidance to supervisors on the treatment of mass-lapse reinsurance, promoting greater supervisory convergence across Europe in the context of evolving risk mitigation methods through the use of reinsurance.

It addresses the main elements of mass-lapse reinsurance treaties and mostly focuses on the cedent’s perspective. It outlines the most relevant elements of mass-lapse reinsurance to be considered when assessing the efficiency of the risk transfer and the consequent reduction of the Solvency Capital Requirement (SCR), with a focus on basis risk and on whether the capital release resulting from the reinsurance deal is commensurate to the actual risk transfer taking place.

Also from the cedent’s perspective, the annex addresses the impact of mass-lapse reinsurance on the balance sheet, such as the valuation of reinsurance recoverables and risk margin calculation.

Finally, the annex briefly discusses the reinsurer’s perspective, in particular the nature of the risk accepted when calculating the SCR.

The second annex addresses specific terms of reinsurance agreements' termination clauses that can compromise the effective transfer of risk. In particular, this concerns termination clauses in reinsurance agreements that absolve the reinsurer from its share on legitimately incurred losses within the reinsurance treaty period.

The Annex also addresses reinsurance contracts where the assets are transferred and where the accompanying clauses allow reinsurers, in case of termination, to unconditionally retain all premiums and assets previously transferred and be freed from all obligations.

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