EIOPA sets out guidance for supervising mass-lapse reinsurance and reinsurance termination clauses

The European Insurance and Occupational Pensions Authority (EIOPA) published today two annexes to its Opinion on the use of risk-mitigation techniques by insurance undertakings from 2021 following the close of a public consultation on this topic earlier this year. The two annexes address mass-lapse reinsurance and reinsurance agreements' termination clauses, respectively, and aim to promote convergent supervisory approaches across Europe.

Mass-lapse reinsurance

The first annex provides detailed guidance to supervisors on the prudential treatment of mass-lapse reinsurance to achieve a common understanding on the key elements supervisors would need to consider when assessing whether the capital release resulting from a mass-lapse reinsurance treaty is commensurate with the actual risk transfer taking place.

The main objective of the annex is to ensure a common European approach in the supervision of mass-lapse reinsurance - especially in view of high lapse risk in several markets over the past years - while also acknowledging that complex ad-hoc treaties like mass-lapse reinsurance require case-by-case analysis to ensure a fair treatment.

The annex mostly provides guidance on how supervisors should assess the impact of certain key elements of mass-lapse reinsurance treaties - such as the definition of the measurement period, exclusions or termination clauses - on the effectiveness of the risk transfer and, consequently, on the Solvency Capital Requirement (SCR) of the undertakings involved. In particular, the annex clarifies that a (rolling) 12-month measurement period is expected to be the default approach, in line with the SCR time horizon. In exceptional cases where longer mass-lapse events are especially likely for a specific undertaking, due to the nature of its business, longer measurement periods may be necessary to ensure an efficient risk transfer. In order to ensure a consistent and harmonised application of the new guidance and fair competition among players, EIOPA will monitor the concrete use of this exceptional clause by undertakings and NCAs in the upcoming peer review on the supervision of use of reinsurance.

The Annex also includes guidance on the impact of mass-lapse reinsurance treaties on the calculation of reinsurance recoverables and the risk margin, some supervisory expectations regarding the reporting of mass-lapse reinsurance as well as some considerations from the perspective of reinsurers.

View the Annex

Reinsurance agreements' termination clauses

The second annex focuses on certain features of reinsurance agreements' termination clauses that may undermine the effective transfer of risk. Specifically, it highlights provisions that release the reinsurer from any responsibility for their portion of legitimately incurred losses during the period covered by the reinsurance treaty.

Additionally, the annex examines cases where reinsurance contracts involve asset transfers and include terms that, upon termination, permit the reinsurer to unconditionally retain all transferred premiums and assets, while simultaneously being freed from any remaining obligations.

View the Annex