Majority of Europe’s Insurers Unprepared for Central Clearing, Finds BNY Survey

Research sponsored by BNY Mellon has identified 71% of European insurers do not understand the impact of central clearing, as firms face intense demands on collateral and growing cost pressures.

Only 29% of respondents to the survey said they are moving towards operational readiness to central clearing, which rolls out in Europe in the summer of 2016 under the European Market Infrastructure Regulation (EMIR).

In contrast, 75% of U.S. respondents said they felt fully prepared, while the remainder saying they are still carrying out their impact assessment. However in Europe, just under a quarter of firms are yet to launch an impact assessment, with 18% saying they do not believe they will be impacted by the changes.

“This year’s survey more starkly points to regional differences, driven by asset allocation choices, the extent of usage of derivatives and EMIR’s and Dodd Frank’s differing timelines,” says Paul Traynor, head of insurance, international, BNY Mellon.

“The Europeans, who were originally less troubled by the proposals, given their historically more limited use of derivatives and their large holdings of sovereign bonds, conversely have grown more nervous as they have progressed through their impact assessments.”

Some insurers are also convinced they do not hold enough assets of suitable quality to be used as collateral for central clearing. According to the survey, 15% of all firms said they feel they have enough quality assets to meet their collateral obligations, as opposed to 25% last year and 41% in 2012.

The survey demonstrates the advantage U.S. firms have when it comes to understanding central clearing, in which most have now moved to implementing collateral optimization techniques by either investing in technology or integrating their collateral management and margining processes.

Nevertheless, according to Kurt Woetzel, CEO of BNY Mellon Markets Group: “We would expect a similar picture to emerge in Europe over time, once insurers in the region become EMIR compliant.”

The research encompassed responses from 111 insurers, of which 59% are active in the life sector, 64% in the non-life sector and 17% in reinsurance.