ASSESSMENT OF REINSURANCE COMPANIES
It is the responsibility of the insurance companies to identify the information they need for assessing the soundness (which includes the fact that the individual reinsurance company is able, financially and administratively, to pay legitimate claims and can be relied upon to do so promptly) of reinsurance companies.
The nature and extent of the assessment may vary, according to the nature and importance of the transaction, the nature and importance of the parties concerned.
While the responsibility for assessment remains ultimately with the ceding companies, it may be appropriate to draw on the experience of brokers or other sources of information and expertise (e.g. specialised press and rating agencies), but in a prudent way.
Reinsurance companies will, for the purpose of this Recommendation, be understood as professional reinsurance companies, associations of underwriters authorised to accept reinsurance, direct insurance companies accepting reinsurance. They have different characteristics and may be subject to different regulatory and supervisory frameworks, including accounting rules.
There are a number of possible sources of information relevant to an assessment. In addition to statutory annual reports and accounts, examples include publicly disclosed regulatory returns and other sources. These may provide an adequate basis for an assessment. Where such information is not available, or appears insufficient, then insurance companies may consider the following factors or comparable ones:
1. Legal and statutory framework
• Legal status of the reinsurance company;
• Scope of regulation and supervision of reinsurance in the home country (licensing registration, solvency provisions, rules related to technical provisions, collateralisation, winding-up, accounting), and if necessary in host country;
• Reinsurance regulation of investments, existence of rules related to liquidity, diversification, spread currency matching, maturity matching, derivatives, securitisation, and movements of capital. Reinsurance regulations on investments abroad, transfer of profits, premiums, claims;
• Tax regulation of reinsurance in the home country, and, if necessary, in host countries;
• Characteristics of the reinsurance contract law applicable to the contract when not specified in the contract.
2. Structural indicators
• Structure and composition of the main direct shareholding, whether it belongs to groups or conglomerates, for at least the last three years, taking account of listed/unlisted nature of the company;
• Relevant business relationship with other companies (including strategic alliances, significant relation/legal agreement, accepted non-related risks for captives, intragroup retrocessions).
• Reputation and integrity of board management and legal representatives (and other staff, if relevant); fit and proper criteria, when existing; absence of relevant professionally related criminal or civil sentences or convictions.
4. Performance indicators (for at least the past three years)
• Gross and net premiums;
• Incurred losses (gross and net);
• Operating expenses;
• Investment income.
5. Technical provisions and solvency
• Level and composition of technical provisions, including loss provisions (gross and net) and equalisation provisions (gross and net);
• General methods of valuation of technical provisions and results of past valuations;
• Level and composition of guarantee funds, of which shareholders ‘equity and subordinated liabilities, shareholders’ equity being specified as: subscribed capital and equivalent funds, share premium account, revaluation reserves, other reserves and minority interests;
• Use of alternative risk transfers.
• For at least the past three years: spread of assets between the following categories: real estate, mortgage loans, shares, bonds with fixed revenue, loans other than mortgage loans, other investments;
• Methods of evaluation in the balance sheet, including derivatives.