Interview: Robert Quinn, Wells Fargo Bank


Ensuring solvency


More cedants on both sides of the Atlantic are seeking collateral from their reinsurers. Robert Quinn, vice president of collateral trust services at Wells Fargo Bank, extols the virtues of trusts as a mechanism for delivering this commitment.


C markets


hanging regulatory requirements ongoing volatility in the global financial have


and forced both insurers and


reinsurers to explore new methods of mitigating counterparty credit risk. For risk involving most (if not all) US states,


reinsurers are already required to post collateral to cover potential losses. One of the most cost- effective ways of doing this is through the use of trusts, argues Robert Quinn, vice president of collateral trust services at Wells Fargo Bank. “The use of trusts is becoming more com- mon in the reinsurance space, as well as in a lot of insurance applications,” Quinn says. “The credit markets continue to struggle both in the US and the rest of the world, meaning that credit is more difficult to obtain. And when it is


“Solvency II is simply an attempt by the EU to uniformly be able to measure the solvency of insurance companies across the EU.”


obtained, it is far more expensive.” This means, says Quinn, that the use of tra-


ditional collateral mechanisms such as letters of credit are becoming less appealing. “This opens up the opportunity to look for alternatives and the trust has become a very popular one,” he says. Trusts can also offer clients a range of finan- cial benefits. Quinn explains how they work: “You take your own corporate cash, put it in a trust account and pledge it directly to a coun- terparty. This means you are not relying on a third-party bank to guarantee your reinsurance programmes—you guarantee them yourself.” He says the fees from the trustee can be as


much as 98 percent less than LOC fees, giving users significant cost savings. Finally, the assets in the trust will stay on the reinsurer’s balance sheet, meaning it retains the benefit of that money on its financial statement. But the phenomenon is no longer confined


Robert Quinn, vice president of collateral trust services, Wells Fargo Bank


to the US. In Europe, a growing number of in- surers are demanding collateral. Quinn believes that trusts represent a more efficient and cost- effective way of operating in Europe too, espe- cially under Solvency II. “Solvency II is simply an attempt by the


EU to uniformly be able to measure the sol- vency of insurance companies across the EU. When evaluating the solvency of these carriers, the EU wants to know that everyone is being judged on the same solvency metrics,” Quinn says.


“Until now, some domiciles have account-


ing standards where collateral is beneficial and others have been silent on the concept. With Solvency II, we suspect collateral will be part of the metrics to measure the solvency of the ced-


12 | INTELLIGENT INSURER —BADEN-BADEN TODAY | Monday October 24 2011


ant (as well as possibly the reinsurer).” He gives the example of an insurer that


writes €100 million of business and cedes it all to a reinsurer. With collateral in place, the cedant should be immune to any future li- ability stemming from that business. Without collateral in place, the cedant is liable to pay claims if the reinsurer is unable to. The two scenarios will be treated very differently under Solvency II. “The concept of collateral will bolster the


solvency of ceding insurers in Europe. Given that the aim of Solvency II is to ensure that in- surers can always pay their claims, what better way is there to be able to demonstrate that abil- ity than through ensuring that ceded insurance is fully collateralised?” Quinn asks.


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24.10.11 MONDAY


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