EU Debates Reinsurer Single PassportInternational Editor

London

The move by the European Union to create a directive to setminimum standards for reinsurers in all the member states is beingapplauded by many reinsurers.

We want to have freedom of establishment within Europe so thatwe can operate branch offices anywhere in Europe with regulatorysupervision done from the home country,” said Pierre-DenisChampvillard, group executive vice president of Scor, theParis-based reinsurer. He also is chairman of the internationalcommittee of the F?d?ration Fran?aise de Soci?t?s dAssurances, theParis-based insurance association.

The directive is alternatively called the Reinsurance PassportDirective or the Reinsurance Framework Directive.

Currently, the level of supervision within Europe is quitedifferent from country to country, he said. Within Europe, thisleads to a situation where reinsurers must set up subsidiaries insome countries (the U.K.) so the reinsurer can be regulatedlocally, while other countries permit a branch, he explained. (If asubsidiary isnt set up in the U.K., for example, the FinancialServices Authority wants to supervise the company, not the branch,as if it were domiciled in the United Kingdom.)

This directive brings “reinsurance supervision within the singlemarket framework on a home state regulation basis, so that if youhave a license to do business in one market that automaticallyenables you to do business in the other 14 states, subject tocertain reporting requirements and regulator dialogue,” saidMarie-Louise Rossi, chief executive of the InternationalUnderwriting Association in London.

(Next summer, the EU is expected to increase from 15 states to25 subject to the results of referendums being conducted in most ofthe states.)

Ms. Rossi explained that the directive will usher in a level ofsupervision that is suitable for business-to-business regulationrather than regulation of reinsurance adapted from insurancesupervision, which exists in some member states such as the UnitedKingdom. Reinsurance regulation on such a basis can be viewed as“somewhat over-regulatory.”

Charles Gordon, partner with the international practice of DLA,a London-based law firm, described EU reinsurance regulation as “acomplete patchwork.”

Reinsurers in a number of European states are either notregulated at all or are very lightly regulated, he said. “Quite afew countries will have to tighten up the regulation of their localreinsurers if they want them to be able to use the passportarrangement under this directive.”

After harmonization is complete, “we would like recognition ofthis new supervision by regulators outside of Europe, especially inAmerica where alien reinsurers are required to give guarantees,such as deposits, letters of credit or trust funds, equal to 100percent of gross liabilities,” Mr. Champvillard asserted.

The directive will create “a set of internationalstandards–cross-border standards–that could be used in future tradeliberalization debates and mutual recognition debates between theEuropean Union and other developed economies,” affirmed Ms.Rossi.

At this juncture in the development of the reinsurancedirective, Mr. Champvillard said European regulators and thereinsurance industry are debating minimum solvency margins.

“We believe that reinsurers should be subject to the samesolvency requirements as insurers; after all, we sometimes arecompeting for the same business,” he said.

However, some European state regulators are suggesting thatreinsurers should have higher net assets than the insurers becausethey believe reinsurance is much more volatile than directbusiness, he noted.

“We believe our business is not any more volatile than that ofmany insurers, like a monoline mutual that writes casualty lines,”he stressed. He admitted, however, that reinsurance sometimes canbe more volatile, but it depends on the situation.

“We would like to see equality in terms of competitiveadvantages,” he continued. “Therefore if a direct insurer has alower solvency margin requirement, the cost of capital will be lessin the pricing of the business, and this would represent unfaircompetition.”

Ms. Rossi expected a draft directive to come out before the endof the year. Mr. Champvillard said the final form of the directiveis projected to be ready early next year. “Then each country willhave to adopt it, which will take another year or two.”

Reproduced from National Underwriter Edition, June 23, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.