Assessment of Asset-Intensive Reinsurance Contracts DNB

Answer:

Section 3:267e of the Wft requires insurance undertakings to obtain DNB’s consent prior to entering into or amending asset-intensive reinsurance contracts, if these reinsurance contracts allow the reinsurance undertaking (referred to in the Wft as ‘the other insurance undertaking’) at any time to hold assets in a state outside the European Economic Area¹.  

This means that asset-intensive reinsurance contracts are contracts where there is not only risk transfer, but also asset transfer, or where the insurance undertaking or reinsurance undertaking does not pay out the reinsured losses immediately, but at a later date. Another characteristic of such a contract may be that the reinsurance undertaking generates profits not only from the reinsurance premiums received for the risk transfer, but also from investment returns on assets held. 

The consent requirement does not depend on the country of domicile of the reinsurance undertaking. The requirement also applies if a reinsurance undertaking from another Member State may hold the assets in a third country. This may be the case if the reinsurance undertaking from another Member State transfers the reinsured risk to a reinsurance undertaking outside the European Economic Area through asset-intensive retrocession. The insurance undertaking is not required to seek prior consent for asset-intensive reinsurance contracts if the reinsurance contract provides for exclusion of transfer of assets to third countries. The reinsurance contract then prevents asset-intensive retrocession of the reinsured risks, for instance, which could have resulted in assets being held in a third country. 

DNB will assess the application to determine whether the insurance undertaking can comply with the prudent person principle, as referred to in Section 3:267d(1) of the Wft and in Sections 118-122 of the Decree on Prudential Rules for Financial Undertakings (Besluit prudentiële regels Wft – Bpr), for the entire term of the reinsurance contract.  

Below, DNB indicates for different types of reinsurance whether it expects these to qualify as asset-intensive in the insurance undertaking’s analysis. 

Reinsurance of insurance policies without capital accumulation 

In principle, DNB deems reinsurance relating exclusively to insurance liabilities where policyholders do not accumulate capital (risk insurance) to be exempt from the consent requirement, since investment returns on assets held are not typically a significant source of revenue for the reinsurance undertaking. Non-life insurance policies usually classify as risk insurance, as do some life insurance policies. 

Proportionate reinsurance of insurance policies with capital accumulation 

• DNB expects that, in the case of proportional reinsurance of insurance policies where capital has been or is being accumulated, the reinsurance undertaking will hold assets in many instances. This is because asset transfers may take place at the start of the reinsurance contract, with any reinsurance recoverables usually being paid out only after a longer period (several years) after they arise. 

Non-proportional reinsurance of insurance policies with capital accumulation 

• In case of non-proportional reinsurance of insurance policies where capital has been or is being accumulated, the type of reinsurance as well as the reinsurance conditions determine whether the reinsurance undertaking may hold assets. 
• ‘Swap’ contracts (such as for longevity risk) are an example of non-proportional reinsurance that generally involve the reinsurance undertaking holding assets. This is because under such contracts, any reinsurance recoverables are paid out only after a longer period (several years) after they arise. Note that posting collateral by the reinsurance undertaking does not prevent that the insurance undertaking reports a reinsurance recoverable on its balance sheet over a longer period. 

Information to be submitted with an application for consent 

DNB will consent to the intention to enter into (or amend) an asset-intensive reinsurance, unless the application of the prudent person principle referred to in Section 3:267d(1) of the Wft is not ensured. Pursuant to Section 122a of the Bpr, the following information must be submitted with the application: 

1. The reinsurance contract including annexes, including an explanation of the valuation approach of the ceding insurance undertaking’s claim against the other insurance undertaking ; 
2. If applicable, the collateral agreements; 
3. Information on the geographical location of the ceding insurance undertaking’s claim against the other insurance undertaking and the related collateral; 
4. A substantiation of the adequacy of the risk management with respect to the reinsurance; 
5. An analysis of credit risks associated with the reinsurance; 
6. Information that enables DNB to reasonably assess whether it can exercise its competence as referred to in Section 3:137 of the Wft after reinsurance; 
7. An opinion from the insurance undertaking's risk management function on the information submitted and the insurance undertaking's ability to meet the conditions relating to the asset-intensive reinsurance as referred to in Section 3:267e of the Wft. 

In the case of an application for consent for a non-material asset-intensive reinsurance, insurance undertakings can suffice with submitting a summary of the information to substantiate the explanations under  a, d, e and g.² DNB considers asset-intensive reinsurance to be material if entering into the reinsurance contract may result in the total reinsurance recoverable on the insurance undertaking’s balance sheet being (or at any time becoming) of such significance that its omission or misstatement could impact the decision-making or the judgement of the supervisory authorities. 

The assessment of the application for consent under Section 3:267e of the Wft relates solely to the compliance with the prudent person principle during the term of the reinsurance contract

As mentioned above, when applying for consent to enter into or to amend an asset-intensive reinsurance, DNB assesses whether application of the prudent person principle is ensured. The prudent person principle is an existing standard, with which insurance undertakings already had to comply prior to the introduction of the consent requirement.   

The assessment does not relate to whether the reinsurance may be included in the  calculation of the Solvency Capital Requirement under the standard formula. If an insurance undertaking wishes to consult DNB about the risk mitigation technique in this context, the insurance undertaking completes the relevant self-assessment and sends this to DNB together with the underlying documentation. For an explanation, see the Q&A on Risk mitigation techniques for (re)insurance undertakings. Insurance undertakings can contact their supervisor with any questions. 

The implications for resolvability can also be discussed with DNB in advance. The assessment of  an application for consent under Section 3:267e of the Wft does not pertain to the consequences for the resolvability of the insurance undertaking or its group nor the extent to which the reinsurance could lead to substantive impediments thereto, as referred to in Section 3a:82 of the Wft.³ For prior consultation on this topic, the insurance undertaking or relevant group entity may turn to its regular contacts at DNB’s Resolution division. For more information on resolvability, see the Policy rule on resolvability of insurers 2023 (in Dutch).