Solvency II surprise for US reinsurers

Reinsurers based in countries without Solvency II equivalence could have a shock during the forthcoming renewals as they encounter significant but often unexpected obstacles to doing business with some European countries, Brad Kading, president of the Association of Bermuda Insurers and Reinsurers (ABIR), told Monte Carlo Today.

He said that when the regulators of many European countries changed their own regimes to give Solvency II precedence, they also—sometimes inadvertently—made things much harder for reinsurers based in non-Solvency II-compliant countries to do business there.

Many companies aware of a potential problem might have assumed any issues could be overcome by posting collateral. But that may not be enough to overcome the problems, Kading said.

Germany, Poland and the Netherlands are just three countries where specific rules are now in place that make it very difficult for reinsurers outside Solvency II to trade with insurers in those countries.

Some of the challenges may become clear only as the renewals season goes into full swing. But the situation could benefit Bermuda, as a natural way around the problem will be to use an entity that is based in a Solvency II-equivalent jurisdiction.

“Solvency II equivalence is a badge of credibility and helps with our wider reputation as a jurisdiction with a robust prudential regulatory regime. It will also have some very practical implications,” he said.

“There are now some clear impediments for reinsurers wishing to do business in some European countries, which could become a big problem. Collateral may not be a solution, but using a Bermuda-based entity could be.”

This could be a problem for US reinsurers in particular. Negotiations around a EU-US regulatory deal are underway but the final implementation process could take years and it looks unlikely that a solution will be in place by the January 1 renewals.

“That is the potential solution in the long term but the implementation process will not be quick,” he said. “The renewals will really bring things to a head.”

Kading added that Bermuda will be mindful of exactly how companies might use Bermuda operations. “We don’t want Bermuda to be used in a game of regulatory arbitrage. Instead we believe that equivalence means adding more underwriting substance to the Bermuda legal entity so that more business can be written from more clients. It can expand our market footprint,” he said.