The Solvency II (S2) directive will increase demand for reinsurance products, according to Fitch Ratings. Under the new regulatory regime, insurers can fortify their capital position through risk transfer.
Fitch noted that the main beneficiaries of this development will be the financially strongest reinsurers in the EU and the jurisdictions whose regulatory regimes are considered fully equivalent to S2. It has also contributed to a marked increase in longevity reinsurance, particularly among life insurance providers in the UK.
Longevity risk greatly increases the capital requirements for new annuity business while interest rates are quite low due to the S2 risk margin. This increased capital requirement has made insurers more likely 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.
Reinsurers in the EU, or other S2-equivalent territories, are more likely to have an advantage over firms domiciled in non-equivalent nations because transactions will be easier to complete. Reinsurers in non-equivalent territories may be required to post collateral or liaise with a local European regulator, adding costs or delays. Switzerland, Bermuda and Japan (temporarily) are the only territories that have been granted equivalence.
The benefits of equivalence are most likely to affect the more commoditised reinsurance products, such as property. Other factors could have greater effect on more complex risks such as longevity.
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