The momentum for a single European reinsurance passport is growing.
Do reinsurers need a single passport in Europe? Until recently most would have said there is enough regulation already, but conditions have changed. As the single market evolves, so grows the recognition that an apparently extra layer of European legislation could prove to be a means of simplifying and reducing regulation for an international business whose market spans the world.
Outside the EU there is a common belief that most European reinsurers are lightly regulated or not regulated at all. This is, of course, a parody of the truth, but like most popular misconceptions, it is hard to dispel. Varied degrees of reinsurance regulation prevail across Europe, with emphasis in some countries on direct supervision (as in the UK) and in others on a mix of direct and indirect supervision (as in Germany). The need to comply with all the different systems is a significant source of frustration for reinsurers.
Worse, there is a creeping tendency for more and more regulation in the EU member states and overseas as well. Moreover, regulation can take very different forms in different parts of the world. Contrast, for example, the risk-based capital model in the US to the solvency-margin model in Europe. For an essentially international trade, the overall complexity and variety of regulatory controls on the same business have become something of a straitjacket.
The work of the International Association of Insurance Supervisors to establish basic standards has been a welcome development. At the very least, it should mean that the regulators in emerging economies will tend to develop similar models, rather than creating yet more varieties of supervision in their new markets. Conversely, we are aware of growing pressure arising from international discussions between central bankers and finance ministries for international reinsurance to be brought more under control. This pressure owes much to the aforementioned misconception that major reinsurers are not regulated, but the main factor is a growing sense, at the intergovernmental level, that globalisation and e-commerce are creating an international market in financial services that will slip out of control unless governments take measures to track and oversee international flows of capital. This applies particularly to the wholesale areas of reinsurance and investment banking.
In the light of the general trend towards regulatory inflation, the IUA has made it its policy to promote a framework for a single European market in reinsurance. We wish to see limitations placed on the growth of the overall regulatory burden, an ironing out of the barriers to cross-border trade in reinsurance, and reinforcement of the European brand overseas to banish the myth that major European reinsurers are unregulated.
Two or three years ago we were far from optimistic. We have found, however, that reinsurers across Europe are sensitive to the changes in the economic and regulatory environment, and have been very susceptible to our arguments in favour of a European regime for reinsurers. The results of this change in viewpoint have been tangible. Last summer, the Comitè Europèen des Assurances (CEA), the umbrella body for insurance associations in Europe, presented a paper to the European Commission proposing a single passport for reinsurers.
The EC has abandoned its opposition to a single passport, and wishes to respond to the growing intergovernmental pressure for greater supervision of wholesale financial services.
The Commission has been sounding out member states on their views on the future of reinsurance supervision, and has now submitted proposals for a single passport regime. We hope these proposals will be well received by the supervisors. If so, a directive might be issued within two or three years, very fast by legislators' standards.
Unlike the single licence for insurers, developed to protect retail consumer policyholders, the EC has proposed a system of mutual recognition by supervisors of common essential standards. Any reinsurer wishing to engage in cross-border business would be required to obtain from its home regulator a passport indicating that it meets those standards. The passport would enable the reinsurer to engage in business or set up branches anywhere in the European Union, without barriers and without supervision beyond that imposed by the home regulator.
The system inevitably would depend on trust between the regulators. Much discussion will be required between them to achieve a directive that will be acceptable to all. We do not believe, however, that they will meet with insuperable obstacles to agreement, and see no reason why they should not be able to construct a system that will work very effectively once implemented.
Ultimately, we would like to see a fully free market in reinsurance across the globe. The European single passport could be the key. If mutual recognition can be achieved between the EU member states, why not extend the system elsewhere? We would like to see the single-passport model adopted by every state that can ensure the essential common standards are met.