Trevor Petch says reinsurance was deregulated first in the European Union, but reinsurers now have less ability to offer services freely than life insurers.

Regulation of reinsurance companies in the European Union presents a number of paradoxes. The most glaring question to which Denis Kessler, the president of the French insurance companies' association (FFSA), drew attention in mid-May is that they are not beneficiaries of a single passport (home country control) supervisory regime as primary insurers are.

The EC Reinsurance Directive, which established the principle of freedom of services in reinsurance, dates back to February 1964. Since reinsurance is solely concerned with the relationships between commercial entities, it was seen as relatively unproblematic, and was, therefore, the first part of the insurance market Brussel dealt with. For much the same kind of reasons, a single market was created for large commercial risks in primary insurance before personal property and life, where issues of policyholder protection created more political concern and more complex harmonisation.

The third generation directives which created the single market in insurance from mid-1994 specifically exclude reinsurance. It came as a surprise to more than one insurance company to discover that it could not automatically turn its London reinsurance subsidiary into a home-regulated branch.

What changed between 1964 and 1994 was the meaning of “freedom of services”. By the time the third insurance directives came into force, this meant the ability to offer services freely across national borders, in most classes of business, without necessarily having any local physical representation (motor liability being the main exception), and subject solely to home country control and a notification requirement.

In 1964, “freedom of services” also meant cross-border business, but in terms of establishment, primarily the abolition of national discrimination - which was a significant step forward at the time. Host country control remains in place.

We, thus, arrive at the following paradox: reinsurance was deregulated first because there were no issues of consumer protection, but reinsurers now have less ability to offer services freely than life insurers, where there are undoubtedly many.

It is tempting to believe - and not entirely impossible - that this anomaly escaped the attention of the legislators. In the run-up to the disclosure of the market value of most categories of investment by German insurers under the provisions of the Insurance Accounts Directive, there were certainly few people who were aware that for Munich Re, the parent company was already required to provide a market valuation of its investments in its DTI return, because it operates in London through a branch. Even fewer are now aware that the DTI return also provides a market valuation for categories of investment for which the EU directive does not.

It is also still common to encounter non-specialists who assume that the third directives do apply to reinsurance. The British have no excuse for this, but for some other EU citizens, the confusion is more understandable. Not every state has traditionally drawn any distinction between insurance and reinsurance, and in those countries, the transposition into national insurance legislation of the third directives made them applicable to reinsurance companies too. Others draw a distinction, but supervise reinsurers either not at all, to a lesser extent than primary insurers, or only in so far as they operate on home soil.It is, therefore, equally possible that freedom of services in reinsurance has not been extended beyond freedom of establishment because of the cultural shift, and practical challenge, which proper regulation would present for some member states - much the same reason, in fact, why there is still no directive on insurance intermediaries.

Mr Kessler was therefore quite right to link real freedom of services in reinsurance in the EU to real control, and real approval procedures, not just as the only possible basis for real harmonisation but also to enhance the reputation of EU reinsurers in general in other markets, and in particular the United States. (The inadequacies of the US regulatory system itself are a separate topic.)

This was one of the reasons (and the main publicly-expressed one: the other was domestic and delicate) why French reinsurers themselves lobbied to be brought within the ambit of the insurance control commission, although the degree of supervision is still less than that of primary insurers. This is similar to the position in Austria and Italy. In the Netherlands, there is no direct supervision, but regulations on technical reserves must be complied with.In the UK, all reinsurers require authorisation, as they do in Finland, Luxembourg, Spain and Sweden. In Denmark, they do too, as no distinction is drawn between insurance and reinsurance.

German reinsurers are not required to meet solvency guidelines, although they must file returns and other information if requested. This hardly seems to matter in practice, since Germany boasts both the largest and the oldest reinsurers in the world, no doubt due to the traditional reliance of the supervisory authorities on direct intervention. The same cannot be said for countries such as Belgium and Ireland, where there is no supervision over companies defining themselves as reinsurers at all, provided they do not do any business locally.

Trevor Petch is an insurance analyst with Robert Fleming Securities Ltd.