Report on the Thematic Review on Reinsurance and Other Forms of Risk Transfer (2021)

Summary

This is a thematic review report published by the Guernsey Financial Services Commission summarising the findings of its 2021 review of how licensed insurers use reinsurance and other forms of risk transfer. It assesses industry practice against the Commission's 2018 Guidance Note for Licensed Insurers on Reinsurance and Other Forms of Risk Transfer and restates existing regulatory expectations rather than creating new rules.

• Scope of review: A sample of 23 licensed insurers (retail insurers, captives and reinsurers) with outstanding reinsurance liabilities was assessed via questionnaire, documentation review and an external contract review.
• Good practices found: Some firms had well-developed reinsurance strategies, regular self-assessment against the Guidance Note, robust policies and controls, and high-quality contracts.
• Poor practices found: Many firms had not reassessed their frameworks against the Guidance Note since 2018, used unrated reinsurers without adequate risk assessment, accepted broker-proposed reinsurers without independent creditworthiness checks, had contracts missing key clauses or left unsigned for long periods, and gave little consideration to liquidity risk.
• Contract review findings: An external specialist found examples of poor drafting, inconsistent risk terminology, missing clauses, outdated entity names, and use of unrated/unregulated reinsurers where rated alternatives existed.
• Commission's response: The Commission will engage directly with firms exhibiting poor practice, and a firm's adherence to the Guidance Note will be considered if the firm later becomes distressed.

The report reiterates that all licensed insurers, whether or not they currently use reinsurance, are expected to incorporate the Guidance Note into their risk management frameworks, and that reinsurance frameworks are also considered as part of new licence applications.

Key obligations

• Licensed insurers must establish and maintain a risk management framework appropriate to the nature, scale and complexity of their business, incorporating reinsurance and other risk transfer as mitigants.
• Insurers using reinsurance must maintain a reinsurance programme appropriate to their business as part of their wider underwriting, risk and capital management strategy, consistent with the Guidance Note.
• Insurers must establish effective internal controls over the implementation of their reinsurance programme.
• Insurers must consider the impact of their reinsurance programme on liquidity management.
• Insurers' boards should periodically review reinsurance strategy, policies and procedures against the Guidance Note, particularly when the strategy or business plan changes or when using unrated reinsurers or a reinsurer's rating status changes.
• Reinsurance contracts should be reviewed thoroughly at inception and renewal to ensure they are complete, accurate, fully signed and reflect the intentions of all parties.
• Firms using unrated or unregulated reinsurers must understand the associated risks and put in place appropriate controls and mitigants, particularly where retail customers are involved.

Applies to

licensed insurers, reinsurers, captive insurers, insurance managers