Guidance Note for Licensed Insurers on Reinsurance and Other Forms of Risk Transfer

Summary

This is a Guernsey Financial Services Commission guidance note explaining supervisory expectations for how licensed insurers should manage reinsurance and other forms of risk transfer as part of their overall risk management framework. It applies proportionately, based on the nature, scale and complexity of the insurer's business, and covers both long-term and general insurance business, insurers and reinsurers.

• Reinsurance strategy and programme: Ceding insurers should have a reinsurance strategy and programme appropriate to their business, covering objectives, risk concentration, ceding limits, and control mechanisms, approved by the Board and developed by Senior Management.
• Internal controls: Insurers should establish effective internal controls over implementation of the reinsurance programme, integrated with overall risk management and internal control systems.
• Reinsurer credit risk: Ceding insurers should assess and mitigate reinsurer credit risk through criteria for eligible reinsurers, exposure limits, collateral, downgrade clauses and diversification, and reflect this in capital assessments including the Own Risk and Solvency Assessment.
• Approved security criteria and aggregate exposure limits: Insurers should have procedures for identifying acceptable reinsurer security and set prudent aggregate exposure limits per reinsurer or group of related reinsurers, with monitoring procedures.
• Facultative cover and contract documentation: Insurers should have criteria for purchasing facultative reinsurance and processes to document, finalise and manage reinsurance contracts promptly to reduce dispute risk.
• Liquidity management: Insurers must consider the impact of their reinsurance programme on liquidity, taking appropriate measures to manage liquidity risk including funding requirements in adverse circumstances.

The guidance does not impose new legal rules itself but elaborates on expectations under the Finance Sector Code of Corporate Governance and the Insurance Business (Solvency) Rules 2021, which require insurers to maintain risk management frameworks and conduct an Own Risk and Solvency Assessment.

Key obligations

• Licensed insurers must establish and maintain a risk management framework appropriate to the nature, scale and complexity of their business, including effective management of reinsurance and other risk transfer.
• Ceding insurers should develop a reinsurance strategy and programme approved by the Board and implemented under Senior Management oversight, with regular performance review.
• Ceding insurers should establish effective internal controls over the implementation of their reinsurance programme.
• Ceding insurers should reflect the characteristics of their reinsurance programme, including reinsurer credit risk, in their capital assessment and Own Risk and Solvency Assessment.
• Ceding insurers should have procedures for identifying acceptable reinsurer security and for assessing reinsurers outside any pre-approved list, kept under periodic review.
• Ceding insurers should set and monitor prudent aggregate exposure limits to any one reinsurer or group of related reinsurers, with procedures to address breaches.
• Ceding insurers should have criteria and specific approval, monitoring and confirmation processes for purchasing facultative reinsurance coverage.
• Ceding insurers and reinsurers should document and finalise reinsurance contract terms promptly, ideally before the inception date, and ensure timely and complete reporting and settlement.
• Insurers are required to take appropriate measures to manage liquidity risk arising from their reinsurance programme, including funding requirements in reasonably adverse circumstances.

Applies to

licensed insurers, reinsurers