Reinsurers writing out of Dublin are now subject to the gentle hand of the Irish regulator.

The end of last year saw the Insurance Act 2000 pass into law. As far as reinsurance companies are concerned the Act continues, albeit on a more formal basis, the ‘authorisation but not supervision' regime previously operated by the current Irish insurance regulator, the Department of Enterprise, Trade & Employment (DETE). However, it also contains significant enabling provisions which will allow Ireland to increase the level of regulation of reinsurance companies should the need arise.

This could be a wise move on the part of the Irish authorities. On an international level there are a number of initiatives under way to create a pan-European market for reinsurance companies. Although it may be 2005 before these initiatives are moulded into a draft Directive, the Act will allow Ireland to respond quickly and competitively to such changes. In the shorter term, the Act introduces important changes to the regulation of reinsurance companies – both Irish and non-Irish – with a place of business in Ireland, against the backdrop of international developments.

However, it is first worth noting that the Act has wider ramifications for the Irish insurance industry generally. Firstly, it replaces the current system of self-regulation of insurance intermediaries by transferring responsibility for their authorisation and supervision to the Central Bank of Ireland within the framework of the Investment Intermediaries Act, 1995 (as amended), starting 1 April 2001. In addition, it obliges the sellers of life assurance products (both life companies and intermediaries) to disclose key information about the policy, such as commissions and other payments to brokers, to the buyer before the buyer commits. This part of the Act is already in force, initially on a voluntary basis.

The Act also increases the general investigative powers of the DETE, as well as updating applicable fines and penalties.

Before a new reinsurance operation may start business it must now give the Minister for Enterprise, Trade & Employment not less than 30 days' notice of its intention so to do by completing prescribed forms. Additionally, reinsurance operations which were carrying on business before 1 January 2001 were obliged to file the prescribed forms with the DETE by 1 March 2001. These forms require information on any shareholder holding more than 10% of the share capital of a proposed reinsurance operation, and the proposed level of share capital.

Paid-up capital
While it is not a specific requirement of the Act, the DETE has made it clear that it expects all reinsurance companies to have paid-up share capital of at least the equivalent of IR£500,000, the same level required under the Insurance Acts for direct writers (roughly E635,000). In exceptional circumstances, particularly for certain types of existing reinsurance operations, the DETE may consider a deviation from this requirement – the directors and senior management of the proposed reinsurance operation. In particular the DETE will require that the general manager is an Irish resident. Alternatively, the DETE will accept the appointment of an Irish-based insurance management company as general manager. Each director and the general manager will also have to complete separate questionnaires setting out relevant personal and professional information; the proposed reinsurance operation's solicitors, tax advisors, actuaries, auditors and accountants and any other professional advisers; and the risks proposed to be covered and the acceptance policy including details of cedant insurance undertakings. Details will also be sought in respect of the proposed retrocession policy including details of retrocessionaires.

Draft guidelines on the new procedures issued by the DETE indicate the department is aiming to ensure that only reinsurance operations of substance which have reputable shareholders, fit and proper directors and management, adequate capitalisation and a credible reinsurance policy will be allowed to establish in, or carry on business from, Ireland.

Changes to the information provided to the DETE in the notification must be advised to the DETE not later than before the end of the year in which the changes took place. In practice, it would be sensible for a reinsurance operation, where possible, to notify the changes as soon as possible after they occur.

One of the most significant new powers the Act confers on the Minister is the power to order a reinsurance operation to stop writing business. It is unlikely this power will be used except in extreme cases. Moreover, the Act imposes due process requirements on the Minister before he can issue such a direction. However, these powers represent a very necessary safeguard for the regulator, because once established there will be virtually no ongoing supervision of reinsurance operations by the DETE. Circumstances in which such a direction can be issued are:

  • if a reinsurance operation contravenes its obligations to give the requisite notification to the Minister within the stipulated time period, 30 days before starting a new operation and by 1 March 2001 in the case of reinsurance operation carrying on business at 1 January 2001, or information which is, to the knowledge of the reinsurance operation, false or misleading is included in any notification filed;
  • if the Minister considers that, having regard to the risks to be covered by the reinsurance operation, it is undercapitalised; if the Minister considers that one or more of the directors or the senior management of the reinsurance operation are not suitably qualified or that the reinsurance operation does not have a sufficient number of suitably qualified employees in Ireland to effectively carry on its business (hence the importance of the general manager being based in Ireland); or
  • if the Minister is in possession of information which shows that the reinsurance operation has engaged in unlawful activities (either within or outside Ireland).

    The Act also confers authority on the Minister to make further regulations (where he considers it necessary to do so in the public interest, in the interest of policyholders and in the interest of the orderly and proper regulation of the insurance industry) to apply any part of the Insurance Acts applying to insurance companies to reinsurance operations. So far, the DETE has taken the position that it does not wish to regulate the reinsurance industry in any formal way, at least at this stage. But the enabling provisions have been formulated to allow the Minister to move quickly should the need arise.

    The Irish reinsurance industry has generally welcomed the new regime for reinsurers, following the extensive prior consultation that took place between the industry and the DETE. The Act is regarded as striking the right balance between full authorisation and supervision, which the industry had already indicated is not currently the preferred option, and the somewhat semi-formal system that previously existed.

    International developments
    Clearly, the Act was drafted with one eye on international developments. The Organisation for Economic Co-operation and Development (OECD), the International Association of Insurance Supervisors (IAIS), the Comité Européen des Assurances (CEA) and the European Commission have each established working groups to develop and recommend standards for the authorisation and supervision of ‘pure reinsurers'. While the focus of each working group might be different, together they represent the most influential stakeholders in the European insurance industry: regulators represented by the IAIS; insurance companies represented by the CEA; and the European Commission, champion of the single market. As a result, it is virtually inconceivable that we will not see a draft Directive in this area once the consultation process has concluded.

    The Commission's discussion paper (which was prepared for the Reinsurance Sub-Group of the Insurance Committee)1 is particularly interesting in that it gives an overview of matters that could influence any EU initiative to strengthen a single market for reinsurance in the EU and to further safeguard the interests of policyholders. The paper examines the background to the regulation of reinsurance at EU level and the different working groups at international level mentioned above. It also examines different approaches to reinsurance supervision and asks a number of questions on the merits and demerits of each approach. European organisations are currently being asked to send their comments to the EC on its paper.

    No-one could accuse the Commission of acting prematurely on this topic. The only European Directive dealing directly with pure reinsurers is Council Directive of 25 February 1964 on the abolition of restrictions of establishment and freedom to provide services in respect of reinsurance and retrocession (64/225/EEC). Although this Directive was designed to facilitate the establishment by EU reinsurers of branches, it left the question of supervision of such branches to the host state. As a result, there are different philosophical approaches adopted by regulators in the differing member states, ranging from regulation almost on a par with direct writers such as is seen in the UK, Denmark and Finland, to indirect supervision through direct writers within an almost a complete absence of regulation (eg Italy and Belgium).

    Although each of the organisations has its own preference as to how the current situation – described as “a mosaic of supervisory systems” by the CEA – can be improved, most likely is a system analogous to the current system for direct writers to emerge. Thus, we may see a formal authorisation system for reinsurers, with an on-going obligation to file returns with the local regulator and to meet certain solvency and reserving requirements (though how these will be set is likely to be a vexed question!). Allied with a system of authorisation and supervision is likely to be a passport system in which a reinsurer authorised in one member state may ‘passport' into other member states without further authorisation by either establishing a branch or through freedom of services.

    A European Directive on the authorisation and supervision of reinsurers would undoubtedly be consistent with the European ideal of creating a single integrated financial services market. However, that is by no means the end game – the prize is much bigger. As far as the EC and the CEA are concerned, a harmonised system for European reinsurers would give them a quality stamp or badge of approval which would also be recognised in non-EU countries with the ultimate aim of creating standards of regulation which will allow EU reinsurers to have access to other trading blocks – most ambitiously the US – on a reciprocal basis. The ambition is to eliminate discriminatory treatment and barriers to trade, such as additional licensing procedures, deposits and similar requirements, in the context of global trade negotiations.

    While the possibility of access to global markets on this basis would be a holy grail for many European reinsurers, and particularly those based in Ireland whose primary focus is already on international markets, all concerned should be prepared for a long wait if reciprocal access to the US is a benchmark. US reinsurance regulation is extremely complicated as it is substantially the same as that for direct writers and is carried out on a state-by-state basis. While the National Association of Insurance Commissioners (NAIC) has made efforts to introduce some level of harmonised regulation between states, this will not happen overnight. For as long as that is the case, reciprocal arrangements between the US and Europe will not happen.

    The following quote, which probably represents the views of many in the US insurance industry, illustrates this point:

    “The US reinsurance industry cannot support any proposal that will permit non-US reinsurers to assume reinsurance risks through US cedants on the basis of a single licence through mutual recognition while US reinsurers continue to be constrained by a 50 state regulatory system. Mutual recognition is not feasible until US reinsurers are permitted to do business in the US in a manner that will maintain a level playing field with non-US reinsurers. A single licence to do business in the US through mutual recognition must be preceded by single licence and regulatory authority within the US for any individual US reinsurer.”2

    The attitude of US reinsurers is likely to be typical of many other developed jurisdictions which will, understandably, not encourage free international competition where to do so would put them at a competitive disadvantage locally. Therefore, while it might be cynical to describe the EC's global ambitions for European reinsurers as aspirational, they should certainly not form the basis of a medium term business plan.

    Notwithstanding this, the EC, in the knowledge that it has the general support of the IAIS and CEA, will want to press forward with plans to harmonise European regulation of reinsurers. It regards increased harmonisation of reinsurance supervision as possibly providing the needed framework for eliminating single market frictions in the area of reinsurance supervision as well as further liberalising the reinsurance market to increase comprehensiveness and efficiency.

    Turning back to the Act, as far as Irish reinsurers are concerned, it represents a gentle introduction to a new regime of increased regulation; the next phase will be driven at European and international level. As to what advice the Irish reinsurance industry should follow in the meantime, perhaps the most apt would be to heed the Irish scouting motto – “Bí Ullamh” – be ready.

    1. Discussion Paper to the 1 C Reinsurance Subgroup-Approaches to European Supervision (MARKT/2132/00-EN Rev. 1 Orig.)

    2. Franklin W Walter and Deborah J Hall of the Reinsurance Association of America in an Article titled “Reinsurance Regulation: Looking to the Future” which appears in the November 2000 edition of Global Reinsurance.