Opportunities for 'financially strongest' reinsurers to grow under Solvency II, says Fitch

In a new report (registration required), Fitch said that Solvency II equivalence would give non-EU reinsurance firms "an advantage" when competing for new business opportunities prompted by insurers wishing to strengthen their capital positions under the more capital intensive Solvency II regime. Reinsurers based outside of the EU, or in countries that have not yet been 'granted equivalence', could be required to post additional collateral or liaise with an EU-based regulator before they could complete transactions, Fitch said.

Currently, only Switzerland and Bermuda have been granted full Solvency II equivalence by EU regulators, as has Japan on a temporary basis. Australia, Brazil, Canada, Japan, Mexico and the US have been granted provisional equivalence in respect of the solvency calculation for a period of 10 years. Once a non-EU country has been granted equivalence, its insurers and reinsurers can operate in the EU without having to separately comply with all EU rules.

Fitch said that it was too early to predict the ultimate impact of the Solvency II regime on reinsurance demand. However, it said that there had already been a "marked increase" in the use of longevity reinsurance, particularly by UK-based life insurers with bulk annuity business.

"Longevity risk significantly increases the capital requirements for new annuity business while interest rates are very low because of the [Solvency II] risk margin," Fitch said in its report. "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."

Solvency II is the EU's harmonised regulatory regime for insurers, which came into force on 1 January 2016. The regime increased the amount of capital that European insurers must hold in relation to their liabilities depending on their level of risk. Annuities are treated relatively harshly under the rules, due to the risk that policyholders will live longer than expected.

As longevity risks are relatively complex, ceding firms to date have been less concerned with equivalence or the financial strength of reinsurers, according to Fitch. For these firms, the reinsurer's technical expertise and the price offered "may be more important than the advantages provided through equivalence", the ratings agency said.

Equivalence and financial strength would be of more importance for "more commoditised" product lines, such as property, Fitch said.