|[February 16, 2017]
A.M. Best Briefing: Shifting Tides in Global Regulation Present Challenges, Opportunities for Reinsurers
Regulatory risk is growing for reinsurance companies, which could
represent a mix of favorable and unfavorable changes for offshore
domiciles should U.S. tax reforms be adopted, according to a new A.M.
The Best's Briefing, titled, "Shifting Tides in Global Regulation
Present Challenges and Opportunities," states that should tax and
regulatory changes result in lower after tax earnings, organizations
would likely respond by finding alternative operating structures to
sustain earnings and manage capital cost efficiently. This also could
potentially lead to the decline of one domicile over another.
With the new U.S. administration in place, lowering the corporate tax
rate and taxes on imports remain on the table, as they were among
President Donald Trump's campaign promises, intended to bring business
back onshore to stimulate the U.S. economy. According to the briefing,
this would benefit U.S. reinsurers; however, Bermuda and other offshore
domiciles could be negatively impacted, and they have cited the risks of
less capacity and higher rates to U.S. consumers in their opposition.
In January 2017, the United States and the European Union announced a
bilateral agreement regarding insurers and reinsurers, which provides
for mutual recognition in the areas of reinsurance, group suprvision
and exchange of information. A key provision of the agreement is the
elimination of the requirement for an assuming reinsurer in either
jurisdiction to post collateral to a cedent in another jurisdiction,
subject to certain conditions. In a market flush with abundant capacity,
the reduction of collateral requirements in A.M. Best's view could
result in more pressure on rates or terms and conditions from increased
competition. From a ratings perspective, required capital, as measured
by Best's Capital Adequacy Ratio (BCAR), could increase, since
collateral will no longer serve as an offset to required capital for
The risk of changes in the regulatory environment is just one component
in an organization's enterprise risk management framework, and the
potential change in tax structure or treatment of internal reinsurance
is not a new concept for the reinsurance industry. Companies will
continue to seek the most efficient structure for their business, and
they are not opposed to restructuring operations or even re-domiciling
in order to do so.
A.M. Best will continue to communicate with companies as they navigate
the complexities of the regulatory landscape.
To access the full copy of this briefing, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=258713.
A.M. Best is the world's oldest and most authoritative insurance
rating and information source. For more information, visit www.ambest.com.
Copyright © 2017 by A.M. Best Rating Services, Inc. and/or its
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