05 November 2014
Reporter: Stephen Durham

Still work to do for European insurers

Research by BNY Mellon and Insurance Risk magazine has identified growing pressure on firms as they face more intense demands on collateral, with fewer firms convinced they hold enough assets of suitable quality compared with previous years.

The survey claims European insurers still have work to do in respect of understanding the full implications of the move to central clearing before it becomes effective in the summer of 2016.

Only 29 percent of European respondents said they understood the impact of the move to central clearing and are moving towards operational readiness.

In contrast, 75 percent of US respondents consider themselves fully prepared, with the remainder saying they are still carrying out their impact assessment.

Close to a quarter (23 percent) of European respondents are yet to launch an impact assessment, with 18 percent saying they do not believe they will be impacted by the changes.

The pressures facing insurers is demonstrated by the fact that only 15 percent of all firms surveyed said they are comfortably holding enough assets of the requisite quality to meet collateral posting obligations, compared to 25 percent in 2013 and 41 percent in 2012.

While the survey indicates that the impact of central clearing in the US has been “relatively benign” thus far (with 40 percent of US respondents saying they either hold enough assets or comfortably hold enough assets to meet their posting obligations) the figure today for European insurers is 25 percent.

Critically, only 8 percent of European firms said they expect to hold enough assets or comfortably hold enough assets once the reforms come into play.

Kurt Woetzel, CEO of BNY Mellon markets group, said: "With the US regulatory environment being at an advanced stage and more clearly understood, many North American firms have already moved from contemplating collateral optimisation techniques to actually putting them into practice.”

“In addition, 20 percent of North American respondents have invested in technology to allow the use of 'cost of opportunity revenue lost' as a proxy for 'most efficient collateral', while one in five North American firms have integrated their collateral management and margining processes across instruments within and across legal entities.”

“We would expect a similar picture to emerge in Europe over time, once insurers in the region become European Markets Infrastructure Regulation compliant."

The survey encompasses responses from 111 insurers, of which 59 percent are active in the life sector, 64 percent in the non-life sector and 17 percent in reinsurance.

Forty-four percent of those taking part write business in the Americas and more than 75 percent do so in Europe, while only 40 percent write business in the Asia Pacific region.

The survey represents a broad cross-section of insurers by size, with 13 percent holding more than $500 billion in assets, 36 percent holding between $25 billion and $500 billion and the remainder of the sample holding $25 billion or less.

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