While Europe reeled from 'non' and 'nee', in some quarters of the European Parliament it was a case of getting on with the business of the day Thus a Reinsurance Directive was born.

So regulation is no longer on the horizon but now a firm reality for Europe-based reinsurers. In a reassuring show of solidarity, almost all the Members of the European Parliament (the exception being the UKIP representatives, who are renowned for the anti-European stance on each and every issue) voted in the Reinsurance Directive on 7 June 2005, giving the green light to a uniform basis of regulation across the 25 European Member States. There are, of course, a few more stages to go through before the directive is adopted; provisionally (at time of writing) it is to be adopted by COREPER (the Permanent Representatives' Committee) in September, then ECOFIN (the Council of Economics and Finance Minister) in October. Only after these steps have been completed and the directive has been satisfactorily translated into all the member state languages can it be published in the "Official Journal". On that day, the directive then becomes European legislation, and all reinsurers located in the European Union will deem to be authorised.

Under the terms of the directive, Member States will have a further 24 months within which to "transpose" it into domestic legislation. For several countries, this will mean implementing for the first time oversight of the reinsurance sector - a business which until relatively recently was considered sufficiently removed from the consumer and characterised by a sophisticated business to business relationship that regulation was unnecessary. But it may not be until some time in 2008 that a harmonised system of reinsurance regulation is adopted across Europe.

Fast-track process

Once the decision had been made that a directive covering the regulation of reinsurance entities was required, the process, shepherded as "rapporteur" by UK MEP Peter Skinner, took an astonishingly short time complete. The first version of the directive was published in April 2004; the final version was passed in Parliament just 13 months later. With Solvency II due towards the end of this decade, heralding a sea change in attitude towards re/insurance regulation, the need to have at least an "interim" code of reinsurance regulation was obvious. At the same time, the final form of the directive is marked by some substantial changes from the original published version, including amended provisions for the treatment of life reinsurers, finite reinsurance and special purpose vehicles. Particularly noteworthy is the dismantling of collateralisation requirements between EU Member States, a provision which took not a little debate to unravel. The directive now allows countries which currently have collateral requirements for non-domestic reinsurers transacting business in their territory - including reinsurers from other EU Member States - a further year following transposition to dismantle the system. By all accounts, this was potentially one of the sticking points; in particular, three EU Member States have focussed their reinsurance regulatory models around the concept of collateralisation, and took a huge step in agreeing to, effectively, rebuild their regulatory environments with the future dismantling of collateralisation requirements.

Regulation rationale

It hardly comes as any surprise, therefore, that getting Member States to agree to the future elimination of collateralisation was not an easy task. Reports were undertaken both internally in the European Commission and from external consultants, and extensive expert advice was sought as to the pros and cons of a blanket change.

A fundamental argument against collateralisation at the discretion of the Member State regulator was the simple point that if the Reinsurance Directive was deemed a sufficient level of regulation to be approved by the member state, why would that country's regulator require a higher level of security than its peers in other member states? This argument makes sense in a highly logical way, but doesn't take account of different cultural attitudes to risk - particularly in those countries without a strong reinsurance industry, resulting in their domestic insurers relying on alien reinsurers for security. Some commentators have suggested that a much more cogent reason is that the abolition of collateralisation requirements within the European Union will help in negotiations to dismantle the current 100% requirements between the US and alien reinsurers.

According to the Directive Rapporteur, Peter Skinner, "The majority of large European reinsurers such as Munich Re and Swiss Re have been saying to us that they are being treated in a discriminatory fashion by being made to post collateral in the US, while US companies are not. For the larger reinsurers this amount can be as much as $5.5bn ... The key to bringing about change is trying to get a single opinion amongst those US states that regulate re/insurance as to how they can do away with collateral requirements. If they do that, they will release billions of pounds in assets which can be used more effectively within the EU. This has got to be good for the industry and for the economy of the EU, and will improve the efficiency of the reinsurance sector globally." Mr Skinner's position is not unique within European circles: in April, Commissioner McCreevy, responsible for internal market and services within the European Union, visited the US and was vocal in his dismay at the continuing collateralisation requirements. There have been suggestions that the European Commission could even go as far as the WTO (World Trade Organization) to resolve the issue.

But whether the internal termination of collateral will have any particular affect on the US-European situation is open to speculation. "There is a realisation that if they want to 'attack' the US market and tackle the collateralisation issue, then having a harmonised approach is going to be a more compelling negotiating position than a fragmented industry which is largely unregulated," observed James Bateson, a partner with London law firm Norton Rose. "Will it work? I think you have to look at the American psyche which is really very protectionist. You look at their legislation which extends extra-territorially, their anti-trust laws, their tax laws ... There would have to be a very compelling reason for them to give up the protection afforded by having a 100% collateral requirement for alien reinsurers in the US - and I really don't see what that is."

David Webster, chairman of the insurance team at Eversheds, another London law firm, agreed. "The often spoken-about reason (for the existence of the Reinsurance Directive) is to put Europe into a position whereby it can negotiate with the US over their requirements regarding the putting up of security by reinsurers that do business there - the collateralisation requirements. The intention is to put European reinsurers into a position where they can attempt to negotiate a situation where they can write business on a level playing field with their US competitors.

"However, there needs to be a bit of a carrot as well as a stick - and this isn't even a stick. Once the directive is implemented, what we are going to be able to say is that we have addressed their major concern (inadequate regulation). We can meet that criticism, but they might say: 'Fine, but tell us why we need to open up the market and let you in?', and that is going to be part of a much larger conversation about what else Europe can give. It is going to depend on what the political and commercial drivers are at that particular point in time because there are going to have to be concessions made by Europe to motivate the US to do this."

There is, potentially, another motivation for the US to rethink the issue. Within the directive are provisions for member state regulators to set entry levels for non-EU reinsurers - and those levels appear to be at the regulators' discretion. As Norton Rose's Mr Bateson observed: "At the moment, most US groups wanting to establish reinsurance operations in Europe do so through an EU-based subsidiary because they can benefit from the passport. For example, you could establish in Dublin and use the benefit of the passport to gain access, and that's what they will continue to do. So while there's the potential for individual member states to be protectionist against US reinsurers, it is quite unlikely."

Indeed, the comments from trade bodies across the European Union on the announcement that the directive had been passed in the plenary session focussed on the internal market issues and standards of regulation rather than looking across the Atlantic.

The Comite Europeen des Assurances (CEA), an umbrella organisation for European re/insurance trade bodies, said it had supported the initiative to introduce a directive. "The directive should help boost cross-border reinsurance operations and raise the international competitiveness of European reinsurers," it said in a statement. It further explained: "The directive will introduce a 'single passport' systems whereby a reinsurance company established and licensed in one EEA Member State will be able to operate in all other Member States. To do so, it will be subject to the prudential supervision of its 'home' country, thus reducing administrative burden."

Nick Lowe, Director of Government Affairs at the International Underwriting Association (IUA) in London, agreed that "competitive imbalances" will be eliminated by the implementation of "the same essential standards of regulation everywhere in Europe". But he saw a more important reason; "to stem the rising tide of regulation," he explained. "There can be little doubt that if this measure had not been introduced, our industry would instead have been faced with regulators from each individual EU member state developing and operating their own separate regimes. Such a situation would have represented a much more complicated, expensive, onerous and divergent regulatory environment than we now face."

This is an arguable contention, particularly since the UK has one of the most comprehensive reinsurance regulatory regimes already in place and is one of the few net 'exporters' of reinsurance within the European Union. By contrast, Ireland as another of the exporting Member States is using the directive as a means to implement a full regulatory regime from its currently less stringent base. To this end, the country's regulator, IFSRA, has signalled its intention for an early transposition of the directive into domestic law. "By adopting the provisions of the directive early, Ireland is sending out a clear message that it champions the cause of prudent regulation," commented Sarah Goddard, CEO of DIMA.

The next steps are awaited with much interest.

- Jane Murphy is a freelance contributor to Global Reinsurance.