UK: Preparing For The Reinsurance Directive

Last Updated: 29 November 2007
Article by Ashley Prebble

The Reinsurance Directive was approved by the European Parliament in June 2005. European Member States have until 10 December 2007 to implement the Directive into their national law. For many countries within the EU the Directive will introduce regulation of the reinsurance industry for the first time. The Directive is an interim measure introducing a minimum level of harmonised prudential supervision of reinsurance across the EU, in advance of a wider directive applying to all insurers – Solvency II.

The Reinsurance Directive is expected to make a significant impact upon the reinsurance market as it will allow for the "passporting" of reinsurance business across the EU and is predicted to persuade the US to alter its rules on collateral requirements for non-US reinsurers. The Directive also allows Member States the option to establish Insurance Special Purpose Vehicles (ISPVs).

The UK has now completed its consultation process and implemented the Directive by making appropriate amendments to the FSA Handbook.

In this brochure we examine the current state of reinsurance regulation in the EU, examine the consequences of the Reinsurance Directive and look at the implementation from the perspective of a number of key EU jurisdictions.

European reinsurance regulation prior to the Reinsurance Directive

Prior to the Reinsurance Directive the regulation of reinsurance in the EU could at best be described as a patchwork of inconsistent regimes. There was no overall regulatory framework for reinsurance, and reinsurers were subject to different requirements, both in terms of licensing and applicable prudential requirements, depending on which Member State they were in. The existing European insurance directives largely cover the life and non-life insurance activities of direct insurers including their reinsurance activities. However, "pure" reinsurance was not covered by the existing insurance directives. The inconsistencies were of a fundamental nature. For example, in the UK, Finland, Denmark, Luxembourg and Portugal, reinsurers were regulated in the same way as direct insurance firms, whilst in Belgium and Greece there was (and still is) no supervision of reinsurance at all. There were no regulatory solvency requirement for reinsurers in Austria, Germany, Italy, France, the Netherlands, Belgium, Ireland or Greece.

Further, certain Member States (for example, France, Spain and Portugal) have traditionally had collateral requirements (direct and indirect) which effectively make it obligatory for foreign reinsurers wishing to write reinsurance business in those countries to pledge assets as collateral for their liabilities.

The regime clearly needed reform. It has been criticised by both the Financial Services Action Plan and the International Monetary Fund. Hence the need for European legislation in the form of the Reinsurance Directive. The rationale behind the Directive is that an unregulated reinsurance market exposes the primary insurance market to greater risk. Reinsurance is, of course, a significant asset of primary insurers and therefore has a direct impact upon the security of their policyholders.

The Reinsurance Directive

The Reinsurance Directive was approved by the European Parliament on 7 June 2005. It establishes a legal framework for the regulation and prudential supervision of reinsurers that have their head office in one of the 27 countries of the European Union. The Reinsurance Directive is required to be implemented by each Member State by 10 December 2007.

The Reinsurance Directive will be an interim measure as Solvency II will replace the prudential requirements at the end of the decade. The aim of Solvency II is to link an insurer’s capital to its business risks. Solvency II will update the whole system of solvency requirements for the insurance industry, including reinsurance. It will take account of changes in the financial markets, such as the use of derivatives, new insurance products, and new risk management techniques introduced since the current insurance directives were first introduced in the 1970s.

Key elements of the Reinsurance Directive:

  • A requirement for all EU reinsurers to be authorised – each reinsurer must be licensed by the state in which that reinsurer has its head office.
    • A single passport regime – as with direct insurers, this enables a reinsurer authorised in any Member State to carry on business in any country within the EU, on either a branch or services basis, by using the passport regime.
    • Responsibility for financial supervision for each reinsurer to rest with the home state.
    • Prudential supervision – rules about solvency margins and minimum guarantee fund to apply throughout the EU.
    • Member States will not be allowed to require reinsurers to pledge assets to cover its part of cedant’s technical provisions.
    • Provisions permitting the use of finite insurance and special purpose vehicles in accordance with the rules of the home Member State.

    Ancillary elements:

  • Reinsurance undertakings must limit their objects to reinsurance "and related operations". Specifically, reinsurers are prohibited from carrying on any unrelated banking or financial services activities.
    • Portfolio transfers – these must be in line with the single authorisation provided for in the Reinsurance Directive.
    • There is a duty on auditors to report to regulators if they become aware of facts which are liable to have a serious effect on the financial situation or administrative or accounting organisation of a reinsurer.
    • Reinsurers will be subject to the Insurance Groups Directive (Directive 98/78/EC) and the Financial Groups Directive (Directive 2002/87/EC).

    To access the full document click here.

    The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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