The next twelve months may see some important breakthroughs in long-term projects for the reinsurance industry, both internationally and within the London market, says Marie-Louise Rossi

Next year could well be characterised as one of opportunity for the reinsurance industry, with a number of barriers to international trade gradually crumbling. Our industry has always been inherently international, seeking to spread risks and capital as widely as possible, but all too often it has come up against artificial obstacles preventing a truly global level of competition.

There are, however, two key milestones which if progressed in the months ahead might begin to make a real difference. The first is the European Commission's reinsurance directive, a measure that will extend the single market in financial services and establish a level regulatory playing field for reinsurers in Europe. Secondly, there is also now hope that the deadlock in trade liberalisation negotiations at the World Trade Organisation (WTO) may have ended.

The reinsurance directive is an initiative for which the industry has been campaigning since the mid-1990s. The International Underwriting Association (IUA), the London company market trade association, has supported it from the start and, indeed, under the guise of its predecessor organisation LIRMA, was responsible for initiating the project. It has persuaded the rest of Europe to follow and obtained the support of the Comite Europeen des Assurances (CEA), the federation of insurance associations in Europe.

The work has largely involved promoting the principle of 'mutual recognition'.

Under a mutual recognition scheme, regulators in each individual country recognise companies approved by their counterparts from other countries.

This means that companies are free to trade and establish anywhere within the geographical area of mutual recognition, providing they can prove that they have satisfied the supervisory demands of their own state of origin. This will be demonstrated through some form of certificate or reinsurance 'passport'. The result will be to remove some of the inequalities and inadequacies of existing reinsurance legislation across Europe and the creation of a fairer competitive environment.

Traditionally, UK licensed companies have been subject to stricter controls than their rivals in continental Europe. Certainly, the advent of ten new member countries to the EU has made the need for some harmonisation of regulation more important than ever. The scope for rogue operations will be reduced to the benefit of reputable companies and the reputational value of European licensing will be enhanced to the advantage of London market businesses operating on an international scale.

Perhaps one of the most striking arguments supporting the directive, however, is the desire to try and prevent a growth of uncoordinated and ineffective reinsurance regulation. To the uninitiated, it might seem that the introduction of yet another directive would not be the most sensible way of tackling an increasing regulatory burden. But without doubt, the promise of an EU directive harmonising supervision has deterred individual states from introducing their own different regimes across the continent in a piecemeal fashion.

Fortunately, the proposal was made early enough to pre-empt the considerable pressures for stricter reinsurance regulation that have made themselves felt in recent years. Much of this pressure has come from the US which has often used perceived deficiencies in European supervision to justify the imposition of collateral requirements on foreign companies trading in the country.

In addition to boosting business within Europe, the reinsurance directive will go a long way to aiding the IUA's promotion of the mutual recognition principle beyond the borders of the EU. It will influence a number of international initiatives and, together with standards being laid down by the International Association of Insurance Supervisors (IAIS), will help enable reinsurers to trade freely on an international basis while reporting to only one home supervisor.

The directive will give power to the EU's institutions to conclude mutual recognition agreements with third countries and require member states to report countries whose supervisory regimes put up barriers to free access for European firms. Before that can take place, a draft text will be submitted to the European Parliament for consideration by its Economic and Monetary Affairs, Legal Affairs and Internal Market committees. As the directive is subject to a co-decision process, it will also be discussed in parallel by the Council of Ministers and amendments from both lines of debate will be brought together in a conciliation process.

The Dutch government has identified progress on the directive as a major priority for its current Presidency of the European Parliament. Next year, the Presidency will pass to Luxembourg and then the UK. All three nations have strong financial services industries and can be expected to appreciate the value and significance of the reinsurance directive.

It is hoped, therefore, that a final version may be approved by the European Council by the end of 2005.

Meanwhile, a breakthrough in global trade talks was made at the WTO in Geneva at the beginning of August. The deal will see wealthier countries cut their agricultural subsidies in return for an opening up of markets for manufactured goods by developing countries. This is significant for the insurance sector because it means that, with issues on other economic sectors making progress, the way is opened for further discussions on the liberalisation of financial services trade. The IUA has focussed a considerable amount of effort on trying to ensure that negotiations on services industries, including insurance and reinsurance, are not left off the WTO agenda.

WTO bargaining takes place through multilateral agreements whereby each participating country offers to make concessions according to its own political, cultural and economic circumstances. The IUA and the CEA have worked together to help ensure that insurance and reinsurance concessions have been included in the European Union's requests for the removal of barriers by other members of the WTO.

To date, negotiations on service industries have not made any great leaps forward as governments have sat back and waited to see what happens in the bargaining elsewhere before offering anything other than token concessions.

Thus the breakthrough on agriculture and manufacturing, while not immediately impacting financial services trade, is a most welcome development. It gets the entire talks process back on track - a process that began three years ago and is known as the Doha round of negotiations, after the November 2001 WTO meeting that kicked it off in Doha, Qatar.

The talks stalled at the Cancun summit in Mexico in September 2003 after delegates failed to reach agreement on questions surrounding agricultural trade. Now, following the deal in Geneva, the way is open for full negotiations to start this autumn.

The original 1 January 2005 deadline for completing the Doha round has been effectively deferred to the Sixth WTO Ministerial Conference in Hong Kong in December next year. And within this overall timeframe there will hopefully be some important forthcoming dates for progress on liberalisation of insurance and reinsurance trade.

In the coming months, the IUA will be working to help ensure EU negotiators are fully up to date with the insurance liberalisation agenda. The association has, in the past, contributed to the production of a comprehensive list of 'Common Insurance Barriers' upon which talks could be based. This will now be revised to ensure that it contains the most current information.

According to the World Bank, a successful conclusion to the Doha round could add £280bn to the world economy by 2015. There is little doubt that in the long-term, WTO trade talks could have substantial economic benefits for our industry.

Looking forward to 2005, another important development for the London market could come in the area of business process reform. The London Market Principles (LMP) programme has recently been able to demonstrate some tangible successes after much hard work and preparation, and not a little frustration. Use of the LMP slip, which contains all the information required to place a risk with increased contract clarity, is now widespread. Lloyd's has mandated its use and while the IUA, as a trade association, has no powers or desire to issue a similar order, it has strongly recommended use of the slip to its members.

The LMP slip is the building block upon which other market reform projects will rest. Among these other ongoing projects the most important priority as far as the IUA is concerned is accounting and settlement reform, including the enabling of principal to principal accounting. This is a proposal which has now reached a crucial stage after a considerable amount of preparation and consultation. Its aim is to move to full electronic processing of accounting and settlement transactions between brokers and carriers.

The first phase of the project considered a number of options for the new model and was completed at the end of May 2002. Work then concentrated on identifying the common standards and processes to be used.

The key element of the change is the adoption of ACORD electronic message standards for the communication of accounting and settlement data through the market. The same settlement currencies will also be established for both Lloyd's and IUA company bureau processes. Principal-to-principal accounting will allow funds to be paid and received at any time, by anyone, anywhere.

A cross-market practitioner group has been developing detailed designs for implementing the accounting and settlement project which will cover all processes for both direct and reinsurance business, including original premiums, endorsements, treaty scheme transactions, claims and refunds, and outwards reinsurance.

The detailed design phase is expected to be completed within the next few weeks and will be made available for publication to the market. Once this design has been agreed, building of the system should begin sometime in the fourth quarter of 2004 with full completion expected towards the end of 2005.

The major argument for accounting and settlement reform is the opportunity to make significant savings in both operating and transaction costs.

A report published last year by the LMP programme office estimated these benefits are in excess of £50m a year, recouping one-off implementation costs of between £64m and £76m within two years. The implementation expenses include money to be spent both by Xchanging Ins-sure Services and individual companies in adapting their own internal systems; some firms have already made the necessary adjustments.

In addition to the potential cost savings, the accounting and settlement project will also enable faster processing of premiums and claims with improved capturing, storage and reuse of data. Better control of the accounting and settlement process will be possible with a more transparent audit trail greatly assisting in meeting the compliance requirements of the UK regulator, the Financial Services Authority. The end result will be a much more efficient marketplace. Levels of customer service will be greatly enhanced, thereby encouraging the flow of international business to the London market.

Accounting and settlement improvements have always been the IUA's most important objective within the wider market reform programme and the coming months promise some exciting progress.

Together with other developments in opening up international reinsurance markets, 2005 is certain to be another busy year.