Fitch: ‘Significant Element’ Of EU-US Agreement
“Abolishing regulatory requirements for EU and US reinsurers to post collateral for their transatlantic business is the most significant element of the recent bilateral EU-US agreement on insurance supervision, says Fitch Ratings.
“The agreement, jointly announced by EU and US negotiators 13 January, will release a large amount of capital currently locked up as collateral, providing an important boost to reinsurers’ liquidity and investment freedom,” the ratings agency said.
“This will not directly affect reinsurers’ regulatory capital ratios or their scores in Fitch’s Prism capital models. We do not expect any impact on credit ratings for reinsurers with strong liquidity.
“Public disclosures on the geographical breakdown of reinsurance collateral are limited but we believe material proportions of capital are still tied up by the collateral requirements for EU reinsurers with business in the US and for US reinsurers in the EU. This is despite a gradual reduction of collateral requirements in recent years.
“The agreement will also lead to the elimination of local presence requirements for EU and US reinsurers, making it easier for EU and US reinsurers to access each other’s regions. Germany is the most significant market affected by this change as the country does not give US reinsurers direct access to its market unless they have a legal entity established in Germany or access the market via a subsidiary in the EU or a Solvency II equivalent jurisdiction.
“Reinsurance is the most global segment of the insurance market, with transatlantic reinsurance already a major feature. The removal of collateral requirements and other hindrances should increase the attractiveness of doing transatlantic reinsurance, boosting business and diversifying risk exposure.
“It could also lead to greater competition, which would put pressure on pricing and profitability.
“The agreement will not affect regulatory capital requirements. EU subsidiaries of US reinsurers will still be subject to Solvency II capital requirements. US subsidiaries of EU parents will still be subject to US capital requirements, which are deemed equivalent to Solvency II, despite typically being lower.
“The agreement is subject to approval by the US congress and the European Parliament and, even if approved, might then take five years to implement in full.”
