Reinsurance credit

September 22, 2017: the European Union and the United States sign their bilateral covered agreement, which removes, under conditions, the collateral required of EU reinsurers for their US cedants to take reinsurance credit. Reinsurance credit is a cedant's right to carry as an asset, and deduct from its capital requirement, the share of liabilities transferred to its reinsurers. It is never automatic: prudential regimes condition it on the reality of risk transfer, on the reinsurer's authorization or rating, and sometimes on posting collateral where the reinsurer is not established in the jurisdiction. The problem it solves is apparent strength: a cedant booking as transferred a risk whose carrier is insolvent would show a balance sheet corresponding to nothing, which is exactly what the chain of retrocession failures of the 1990s demonstrated. Reinsurance credit therefore turns panel quality into an accounting quantity, and that is what makes it economically rational for a cedant to pay more for a better rated signature. The recent direction of travel in these regimes is to replace full collateral requirements with mutual recognition agreements between supervisors.