NETHERLANDS - Dozens of Dutch company pension funds who reinsured their assets and liabilities are now being challenged by market conditions and confronted with increased credit risks at their reinsurers, according to financial regulator DNB.

Highlights of the DNB’s quarterly bulletin state fully reinsured pension funds which have covered their technical insurance risk and investment risk still run a credit risk in respect of the reinsurer.

Earlier believing to have shed all risks, these funds are now facing rising capital requirements because of two key factors: credit ratings and widening credit spreads.

“As soon as the credit rating of the insurer falls below the threshold set by financial regulator DNB, which is a S&P rating of AA- or higher, they need to maintain a buffer”, explained Eugenio Koenders, consultant at Mercer.

“If the rating of the reinsurer is lower, the required reserves for credit risk depend on the credit spread of bonds issued by the insurer concerned “, he continued.

The funds in question, mostly company pension funds, which have reinsured their liabilities at insurers such as Interpolis - a subsidiary of the European insurance group Eureko - or Fortis-owned ASR, now need additional capital in the region of 13-16% of their assets.

John Smolenaers, consultant at Watson Wyatt, claimed “we are talking about a considerable amount of money”, and said wondered whether the huge buffer was so indispensable.

“We should ask ourselves: what is the actual risk involved and how should we value it?” said Smolenaers, who pointed at the substantial buffers that have to be set aside for contracts with, for instance, Fortis ASR even though “the probability that this company fails can be assumed as nil, as Fortis is government-owned”.

Market leaders Aegon and Nationale Nederlanden have thus far succeeded in keeping their credit rating above the minimum level. But company funds who have reinsurance contracts at these insurers are said to be getting nervous as well.

“As these pension funds have transferred all their assets to the insurer, they have no means of creating reserves for this kind of counterparty risk”, explained Koenders at Mercer.

All company pension funds that will soon discuss the extension of their reinsurance contract, which usually lasts five years, should to take into account the creditworthiness of the insurer, he concluded.

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