EIOPA: ‘Shadow insurance’ needs to be examined

by Artemis on October 23, 2012

There were some more interesting comments made at the Baden Baden kick-off event held by Guy Carpenter on Sunday. The event featured a number of key industry figures discussing volatility as a concept affecting reinsurers and whether volatility should be looked on as a threat or an opportunity. One of the participants was Carlos Montalvo, Executive Director of EIOPA who raised the issue of what he termed ‘shadow insurance’.

Montalvo had been asked what his thoughts were regarding the fact that some hedge funds who operate in a reinsurer type capacity, providing capital to underwrite catastrophe reinsurance, would not have to adhere to Solvency II rules in the same way as traditional reinsurers. Essentially some hedge fund backed reinsurers will be able to offer a comparable product to a traditional reinsurer but without being bound by the capital rules tha Solvency II will bring in.

Montalvo responded by saying that he acknowledged that there was a problem with this. He said that this ‘shadow insurance’ sector of the broader re/insurance market was an area that needed to be examined.

Interesting comments and perhaps these show a desire from Europe for their to be a more level regulatory playing field across the various forms of risk capital which support the catastrophe (and other lines) reinsurance market. The hedge fund backed reinsurers are generally domiciled outside of Europe but many do business within the EU and as a result EIOPA would probably like to ensure that they are subject to similarly rigorous standards as are traditional reinsurance firms. We’re not sure what exactly Montalvo would class as belonging in the ‘shadow insurance’ category, but given the largely collateralized nature of the hedge fund backed or convergence reinsurance market (as well as catastrophe bonds) it’s difficult to see how capital adequacy could be the main issue. Perhaps EIOPA’s analysis of ‘shadow insurance’ would be more akin to the IAIS work on systemically risky re/insurers?

Our other articles from this event can be found here:

Volatility drives need for contingent sources of capital: Liès

Montalvo: 2016 more realistic for Solvency II

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Stephen October 31, 2012 at 1:16 pm

As the final paragraph implies, the solvency requirement element is catered for to some extent by the hedging activity Given the rationale underpinning hedging, it would appear to tick a lot of the regulator’s boxes such as reserving accuracy, aggregation and calibration of risks. The risk is that if this can be exploited if it’s seen as a means of playing outside the Sii rules.

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