Regulatory Reinsurance Collateralisation Requirements AIDA Reinsurance Working Party Copenhagen, Thursday 11 June 2015 Julian Burling 1

Credit for reinsurance Permitted reduction in liabilities/increase in assets on cedant’s balance sheet Capital charges Authorised reinsurer status Collateral: funds (premium) withheld; cash deposit; LOC/bank g’tee; trust fund 2

Why require collateral? (1) Concern at adequacy of reserves outside jurisdiction – credit and liquidity risk Regulators’ unfamiliarity with foreign accounting standards/ regulatory requirements Inability to enforce abroad judgments obtained in default of pre-answer security 3

Why require collateral? (2) Collateral will not be part of insolvent’s estate, so no hotchpot – Cleaver v Delta American [2001] UKPC 6 (Cayman Is) Collateral will be subject to rights in rem – Solvency 2 Directive, Art 286, so excluding Art 275 policyholder priority 4

Objections Requirements: (Usually) draw no distinction between well capitalised reinsurers and others Duplicate capital expenditure/increase reinsurance cost Prevent efficient global reinsurance market place Impede effective transnational co-operation between regulators Often mask protectionism 5

EEA Supervision of EEA reinsurers by home state – Reinsurance Directive w.e.f Member states not to require pledging of assets to cover technical provisions where reinsurer is authorised in EEA or equivalent third party state (none yet) - Solvency 2 Directive, Art 134 Some member states (eg France) still require collateral from non-equivalent third party states 6

USA (1) Individual state regulation “Credit for reinsurance” laws based on NAIC Model Act and Regulation, governing r/i credit given to US cedant Unlicensed reinsurers must provide collateral for 100% gross assumed liabilities:  multi-beneficiary trust (100%) + $20m surplus (with special arrangements for Lloyd’s)  qualifying LOC  cedant-specific trust (“reg 114”)  funds deposited with cedant as collateral 7

USA (2) Since 2011 NAIC Model Law reform, reduced collateralisation requirements by some states for “certified reinsurers” based in “qualified jurisdictions”, depending on criteria including credit rating and reputational history of reinsurer Cedant specific LOC or trust – may be as low as 20% of gross ceded liabilities NRRA 2010: cedant’s state of domicile (if NAIC accredited) determines credit for reinsurance applicable to that cedant throughout USA. FIO Modernisation report – “covered agreements” 8

Canada OSFI collateral requirements for unregistered insurance give cedant capital or vested asset requirement relief Reinsurance security agreement (RSA) Pledged assets covering 100% of reinsurer’s gross liabilities to cedant and cedant’s associated capital requirement are deposited with Collateral Agent in Canada 9

Australia APRA Prudential standard GPS 114 Whole or partial reduction in asset risk capital charge (default factor) on reinsurance recoverables where collateral, LOC or TP guarantee Collateral from non-APRA-authorised reinsurers must be either trust fund in Australia, deposit held by cedant in Australia, or other form approved by APRA (LOC or bank guarantee) Collateral must match reinsurance recoverable in cedant’s b/s, inc. IBNR, discounted for time value. 10

Others (not exhaustive) Japan requires statutory deposit and locally held reserves New Zealand, Singapore and Hong Kong require statutory deposits France requires security over an investment account 11