Yannis Samothrakis and Christian Pierotti chart some of the issues currently challenging the European reinsurance industry.

The reinsurance industry plays a crucial part in the global spread of risk and thus allows economic development. It supports and expands the capacity of direct insurers to assume risk, promotes financial stability and acts as a buffer for national economies against the shock of economic losses resulting from catastrophic events. Its importance in the global economic architecture is evidenced by the many debates involving governments and supervisory authorities.Two key dossiers are currently being actively dealt with by the Comité Européen des Assurances (CEA), the representative body of the European insurance and reinsurance industry:

  • the EU plans to propose a directive on reinsurance supervision; and
  • the reduction of the collateral requirements imposed on non-US reinsurers.
  • Turning to the first of these, the CEA supports the objective of a single market for reinsurance. A project to harmonise the supervision of reinsurance business in the EU was initiated in 2001. The purpose was to remedy a great disparity in supervisory regimes - and in some member states the absence of supervision for reinsurance business - thus allowing for a harmonised single market for reinsurance. The project is also seen as strategic in negotiating access to third country markets for EU reinsurers, notably the US. Member states decided to opt for a single licence system. It is therefore on that basis that the work on a 'fast track' directive started. The Commission Services issued a first draft proposal for a directive on reinsurance on 2 October 2002 (Markt/2531/02). There were three subsequent versions of the drafts (Markt/2531/02 Rev 1, Rev 2 and Rev 3), each followed by extensive industry consultation. The CEA has been keen to be actively involved in the consultation process and provided comments on all drafts through its Reinsurance Working Group1. Though considerable progress has been made since the beginning of the project, notably thanks to a thorough consultation of stakeholders by the Commission Services, there are still some important issues which require further consideration.

    Current proposalsIt is essential that the future framework on the one hand be consistent with existing dispositions for direct insurance, and on the other hand take into account the specificities of reinsurance business. Although no final proposal has yet been issued, several essential principles defended by the CEA have been accepted by the Commission Services and incorporated into the draft. The principle of a single licence is arguably the core of the future system. Indeed, by harmonising supervision of reinsurance business, the licence granted by one member state - the 'home member state' - to a reinsurance company will be valid in all other 'host member states'. Reinsurers will therefore be subject to supervision in their home state and will not need to apply for a separate licence in each of the member states where they decide to do business. A 'grandfathering' clause ensures that companies currently authorised or entitled to conduct reinsurance business in accordance with the provisions of their home state will be deemed to be authorised.The system will preclude the indirect supervision of reinsurance business. Indirect supervision occurs when the supervisor of a direct insurer assesses the quality of the supervised company's reinsurance. Because business ceded to an inadequately supervised reinsurer could represent a risk for the direct insurer, this can lead its supervisor to disallow reinsurance from counting as an admissible asset. Such a practice would become unjustified under the single licence regime. The same reasoning is behind the suppression, in the draft proposal, of the possibility for member states to require the pledging of assets by reinsurers. In addition, the principle of the reduction factor, which determines the proportion of the ceded risk which can count as an admissible asset for the cedant, has also been incorporated in the draft.Another key feature of the provisions of the current draft proposal is the creation of a level playing field between so-called 'mixed' and 'pure' reinsurers, the former providing both direct insurance and reinsurance as opposed to the latter, which only deals with reinsurance.Finally, the principle of the reduction factor, whereby a cedant will allow a proportion of the ceded risk to count as an asset, has also been incorporated in the draft. The CEA considers that, as a proof of confidence in the soundness of the future supervisory system, the reduction factor should be raised to 75% instead of the proposed 50%.

    Remaining key issuesThere are still some important outstanding issues. The solvency margin which would apply to reinsurance business is of paramount importance to the reinsurance industry. The CEA has long argued that, awaiting the outcome of Solvency II and in the context of a fast-track directive, the only workable solution is the one-to-one transposition of the direct non-life solvency margin - with some adaptations for life, health and investment-linked business. This is especially true as there are currently no EU solvency requirements at EU level. Therefore, a transposition of 100% of direct insurance solvency rules is the most appropriate transition. However, in May 20032, the Commission Services suggested that a solvency margin equivalent to 150% of that of direct insurance was considered as an option, the main justification being the difficulty of supervising reinsurance business. Another alternative considered by the Commission was to include 100% transposition of direct insurance solvency requirements in the directive and use the so-called 'comitology' procedure to apply enhancements ranging from 0% to 50% for certain classes of business. This would be decided on the basis of recommendations by the Conference of European Insurance and Occupational Pensions Supervisors CEIOPS. It is this latter option that the Commission has included in the latest draft of the proposal for a directive.The industry has shown consistent support for a reinsurance directive which, as the present draft stands, integrates some essential features requested, such as a single licence precluding indirect supervision, pledging of reinsurers' assets and allowing a more flexible reduction factor. However, the CEA considers that any system which would arbitrarily impose a solvency margin for reinsurance business above that of direct insurance is both unjustifiable and unacceptable. The industry agrees that supervision of reinsurance business is needed, but there have been no arguments put forward that can justify increased solvency requirements compared to direct insurance as an intermediate step before Solvency II. Considering that there are currently no harmonised solvency requirements across the EU, the only sensible approach is, as a first step and awaiting the outcome of Solvency II, to transpose the solvency requirements of non-life direct insurance to reinsurance with some adaptations for life, health and investment-linked business. To impose an increased solvency margin would undermine the competitiveness of EU reinsurers and increase the cost of reinsurance for direct insurers - which will eventually increase the cost of insurance for consumers.

    Harmonisation concernsThe CEA is also concerned about the low level of harmonisation, allowing the supervisory authorities of any member state to apply harder rules on a certain number of issues such as the treatment of equalisation reserves. The CEA will continue to contribute actively to the EU reinsurance project.The Commission issued the last draft proposal for a directive on 22 September along with a document entitled 'Stakeholder Consultation' 3, asking for comments to be sent by 7 November 2003. The Commission is expected to issue its final proposal for a directive on reinsurance in spring 2004, and the CEA will continue to contribute proactively to the process aiming at creating a single market for reinsurance in the EU.

    Alien reinsurersNon-domiciled 'alien' (non-US) reinsurers which write US reinsurance business on a cross-border basis currently are required to collateralise 100% of their liabilities in the US and cannot take credit for any retrocession purchased. These requirements do not apply to US reinsurers. Thus, they are discriminatory and do not allow for a level playing field. They put a significant, disproportionate financial burden on non-domiciled reinsurers.The CEA and one of its members, the International Underwriting Association (IUA), have jointly been lobbying since 2000 for a reduction of these collateral requirements. They have proposed to US regulators and legislators that a list of approved reinsurers satisfying certain legal and commercial criteria should be created, and that reinsurers on this list should benefit from a reduction of collateral requirements by up to 50%. Reinsurers who did not want to be on the approved list or could not meet its criteria would be free to reinsure US companies and collateralise 100% of their liabilities. The concept of an approved list of reinsurers is based on an identical approach that has worked very successfully in the US for the surplus lines industry. For nearly 40 years, the US National Association of Insurance Commissioners (NAIC) has maintained a list of eligible surplus lines insurers. Currently, this list contains 44 insurers from ten countries.The National Conference of Insurance Legislators (NCOIL) and the NAIC have been considering the CEA/IUA proposal, and the NCOIL Executive Committee adopted a formal 'Resolution Regarding Reinsurance Collateral Requirements' at its national conference in November 2003. This issue also formed one of the EU's requests to the US in the context of the WTO trade talks.The EU project on the supervision of reinsurance and the issue of collateral requirements in the US are closely linked. Indeed, the disparity in supervision of reinsurance business in the EU is the main argument of the defenders of US collaterals. A harmonised single market for reinsurance, in addition to the benefit for EU markets, could have a positive impact on the international business.

    References1 All CEA position papers are available at www.cea.assur.org2 European Commission 2003, tentative staff recommendations for quantitative parameters and related issues (Markt/2523/03).3 (Markt/2522/03) available on the Commission's websiteBy Yannis Samothrakis and Christian PierottiYannis Samothrakis (top) is Assistant Manager, Economics and Finance at the Comité Européen des Assurances, and Christian Pierotti (bottom) is Manager International Affairs at the Comité Européen des Assurances.