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Bermuda:Re+ILS Spring 2016

Bermuda will reap rewards of Solvency II equivalence Solvency II Spring 2016 16 Bermuda:Re/insurance+ILS The importance of Bermuda’s securing equivalency with Solvency II will become increasingly apparent over time as the true implications of the regulations and the way they are applied in the real world are revealed, believes Mike Van Slooten, co-head of Market Analysis at Aon Benfield. Van Slooten believes that an element of ‘Solvency II fatigue’ has beset the industry, given how long it has taken to bring the regulation into effect. But its true consequences for the industry and for individual companies will become clear in the months and years ahead now. “The consequences of Solvency II for everyone—and its importance to Bermuda—will become increasingly obvious over time. It almost feels that there was such a long build-up to its coming in that people stopped asking questions about it in the end, which is strange. It feels like a lull at the moment but I believe that will quickly change.” He adds that while Solvency II has not made headline news as much as might have been expected, it would have been a big issue for Bermuda had it failed to secure equivalence. “It would have been a major issue if they had not got it. It was an important achievement for Bermuda,” he says. Van Slooten makes the point that the way capital charges will apply, for example, and the consequences of the new capital regime more generally will become truly apparent only over time. Reinsurance recoverables, for example, held with companies outside a Solvency II-compliant regime will attract a higher capital charge than those with companies in countries covered by Solvency II, or which have equivalent status. “There has not been a huge impact at the moment and we are not seeing much of a change in the behaviour of buyers but that may change if they start to build up recoverables from companies outside Solvency II,” he says. “If there is a big cat loss, for example, the consequences of this will start to emerge. “We spend a lot of time speaking to reinsurance buyers and they are constantly weighing up the pros and cons of different domiciles. As far as Solvency II is concerned, there is no issue with reinsurers based in the EU, or in other territories deemed to have equivalent regulatory regimes, notably Bermuda, Switzerland and Japan. “However there are some big reinsurers based in domiciles that have not achieved this status, including China, South Korea, India and the US. Negotiations are currently underway between the EU and US regulators and these are perhaps more important than people realise. “The point is that, going forward, European buyers will be focusing more closely on the domicile of their reinsurers and what the implications might be in terms of future capital charges.” Van Slooten does express an element of surprise that, in spite of the long gestation period of Solvency II, the EU and the US are only now starting talks that may result in some sort of recognition of each other’s regimes. “Who knows how long those talks will take,” he says. The long-term view While it might seem surprising, given the sophistication of reinsurance buyers these days and the resources at their disposal, that few seem to have adjusted their strategy in light of the implementation of Solvency II and its potential consequences, Van Slooten stresses the relationship-driven nature of reinsurance as a business. “First, there is a lot of depth to Solvency II and certain things will become apparent only over time,” he says. “You also have to remember that reinsurance is a relationship business. People need a good reason to change the relationships they have had for a long time. While there might be some arbitrage on capital charges, a loss or delayed payment would cost them a lot more.” There are other reasons that securing Solvency II equivalence is important


Bermuda:Re+ILS Spring 2016
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