Insurer resolvability concerns raised in response to Dutch national bank consultation

Written by Michael Griffiths

19/12/2022

Concerns have been raised over references to reinsurance in the Dutch national bank’s consultation on insurer resolvability, according to Insurance Europe.

Insurance Europe provides the secretariat for the Reinsurance Advisory Board (RAB), which has published its response to a consultation by De Nederlandsche Bank (DNB) on insurer resolvability.

The RAB’s comments relate to an article that stipulates that the DNB shall assess the extent to which resolvability is taken into account when making strategic decisions, so that these strategic decisions do not impede the implementation of resolution measures. By definition, this assessment will be a subjective exercise, so the RAB would urge the DNB to provide clarity on the criteria to be used for the assessment.

Furthermore, when referring to strategic decisions related to risk and capital management, Insurance Europe said the explanatory note lists reinsurance transactions and outsourcing as examples of strategic choices that could impede the application of resolution measures.

Reinsurance is, however, an essential part of good risk and capital management in the insurance sector, and according to Insurance Europe, a “valuable tool|” to de-risk parts of insurers’ balance sheets.

“The RAB is concerned that reinsurance has been highlighted, without explaining why reinsurance is deemed to be problematic in cases of resolution, for example in a bail-in situation,” an Insurance Europe statement said.

“Maintaining existing reinsurance arrangements is, therefore, vital for ensuring that the undertaking can remain solvent as liabilities run off. While there may be individual and unusual cases that the DNB has in mind, not specifying these gives the impression that reinsurance itself is seen as a barrier to resolvability.

“The RAB is, therefore, concerned that the current drafting of the paper will lead to confusion among primary insurers with regards to their reinsurance arrangements and could discourage the use of reinsurance. To do so would be counterproductive to the goal of avoiding the need to put insurers into recovery or resolution. This is because reinsurance is a vital risk management tool that allows insurers to preserve their financial position in cases of extreme events and large losses.”

Insurance Europe added that the RAB is firmly convinced that by pooling and diversifying risks across lines of business and geographies, reinsurance contributes to the overall resilience of the insurance market.

“The RAB believes that a reinsurance strategy that meets the extensive Solvency II requirements on risk management, including reinsurance,” does not need to be amended for the purpose of improving resolvability,” it added.

“This is especially the case given the protections in place in Solvency II and the ongoing role reinsurance is likely to play in the runoff of insurance liabilities in resolution.”

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