Andrew Pincott argues against the single European passport.
A new European regime for the licensing and supervision of reinsurers has been proposed by the Comitè Europèen des Assurances (CEA), which hopes it might stand as a model for regulating reinsurance worldwide or, at least, as a basis for mutual recognition and the reduction of international barriers to trade in reinsurance. Do we really need this?
Well-ordered markets encourage trade, but most people recognise that regulation, particularly state regulation, carries a downside. There will be initial barriers to entry, timeframes different from – and often inconsistent with – business objectives, and always an on-going cost, direct and indirect. In addition, state supervision fosters people's irrational belief that they are protected from loss.
Not surprising, then, that the CEA has called for a debate. Under European Community law, these sorts of restrictions have to be objectively justifiable in the public interest, and the European Court of Justice is a firm guardian of freedom of trade within Europe. So, to what extent would regulation of reinsurers achieve, at international level, the laudable objectives of maintaining confidence in markets, reducing financial crime and protecting consumers?
Most of the occasional reinsurance ‘scandals' are treated as cautionary tales, rather than evidence that reinsurance markets work corruptly, inefficiently or for the benefit of insiders. There is no crisis of confidence in reinsurance. It is true, of course, that a system of prior licensing and ongoing supervision would make some contribution to reducing financial crime, at least so far as concerns those reinsurers which fall within the regulatory net. But it would surely be better to promote international co-operation in the pursuit and punishment of financial criminals than load law-abiding companies with regulatory burdens.
In the end, most people believe that state regulation is necessary for the protection of consumers. That is why direct insurance is heavily regulated, but reinsurance is quintessentially a business between sophisticated commercial undertakings, not consumers. However, this is only half the argument, for it is said that protection of individual policyholders does entail the need for insurance regulators to concern themselves with the quality of insurance companies' own reinsurance protections.
In practice, there is no evidence that the financial collapse of even the world's biggest reinsurer would pose any systemic threat to the insurance market, whether in Europe or in the US. It is true that the collapse of a reinsurer may spell doom for any particular insurance company – but that is a lame argument for regulating reinsurers. Insurance companies can and do go bust for lots of other reasons which are wholly unconnected with reinsurance. Regulating reinsurers will not save them.
Only if one were to set up some sort of hermetic system of insurance supervision is there any force to the argument that licensing and regulating reinsurers will provide some significant protection for policyholders. Of course the US system of insurance regulation is just such. US insurers reinsure with domestically-licensed reinsurers and, to the extent that they do not, the foreign reinsurer is required to collateralise its future payment obligations. But if – as European countries do – you permit insurers to buy reinsurance protection anywhere in the world, what is the point of regulating only those who set up an office in Europe?
Surely no-one is proposing that in Europe we replicate the US system! Well, pause for thought. One of the principal purposes of a European framework of certification, argues the CEA, is to enable the European authorities to negotiate reciprocal agreements of mutual recognition with other trading blocs or countries, citing in particular the sub-federal layer of regulation in the US. There is more than a hint here of building up Fortress Europe, so as to negotiate barriers down from a position of strength.
Perhaps this is what has excited the Reinsurance Association of America (RAA), which has been quick to pour cold water on prospects for pan-Atlantic parity of reinsurance regulation. The RAA undoubtedly will have motives of its own to resist attempts to prise open the US market at reinsurance level, a market which still accounts for about half of the world's insurance premiums ceded by way of reinsurance. But there are other, less protectionist reasons to oppose building up state regulation of reinsurance in Europe, particularly on American lines.
First, any system which imposes, directly or indirectly, a requirement for hypothecated funds from reinsurers not licensed in that country or trading bloc increases the risk of a financial catastrophe in the reinsurance industry, rather than making the international system more secure. Secondly, regulation in Europe may encourage a flight of capital to more amenable jurisdictions, such as the Channel Islands or Barbados. Thirdly, such a development would introduce in Europe – and in some cases re-introduce – restrictions not previously thought to be justifiable. This runs counter to the freedom of establishment and the freedom to provide cross-border services within the EC, as guaranteed by treaties and the whole trend of case law from the European Court of Justice, which has been alert to strike down internal barriers to trade in Europe, old or new.