Is the EU Reinsurance Directive a potential solution to US collateral requirements? asks Peter Skinner.
The reinsurance market needs global standards to bring about efficiency and protection against company failures. This should include the findings of the International Association of Insurance Supervisors and the OECD working groups, which emphasises prudential management surveillance – not the protectionist measures that have shifted our markets for so long.
Unfortunately, a few countries still impose protectionist measures on alien reinsurers desiring to do business in their country. This is the case in the US, where non-US reinsurers are required to provide collateral equal to 100% of their gross liabilities. US collaterals amount to $40bn per annum and are currently tied up in US banks, for example in the form of letters of credit. In addition, the annual administrative cost of meeting this burden is an extra $500m per year for non-US companies. This is a very blunt instrument which, in the case of in the EU, should be a thing of the past.
By the end of 2005, the EU Reinsurance Directive will become law and will create, two years later, a single European reinsurance market without any barriers to trade, as well as a strong supervisory framework harmonised across all 25 member states. In addition, the directive will provide a tool to encourage bilateral negotiations between the EU and third countries, notably the US.
This year there has been a will to promote economic cooperation between the EU and the US. In the US, at the federal level, several debates with senators, congressmen and US Treasury have shown their willingness to reach an acceptable settlement to end US collateral requirements. Furthermore, the fact that supervision is not harmonised at the federal level, has also been debated at state level.
It is in all of our interests to find an acceptable consensus, but other options – if necessary – can be used to remove this anti-competitive practice. For example, access to the EU market granted to US companies could be reconsidered to compensate for an obvious imbalance. Eventually, an action before the WTO could be a last resort, albeit an unattractive one.