What The Directive Says About Finite Reinsurance?
The European Directive on Reinsurance (article 44a of the approved draft):
o Defines "finite reinsurance" on a European-wide basis:
"[F]inite reinsurance means reinsurance under which the explicit maximum loss potential, expressed as the maximum economic risk transferred, arising both from a significant underwriting risk and timing risk transfer, exceeds the premium over the lifetime of the contract, for a limited but significant amount, together with at least one of the following two features:
(i) explicit and material consideration of the time value of money;
(ii) contractual provisions to moderate the balance of economic experience between the parties over time to achieve the target risk transfer." (article 2(1)(nnn).
o Identifies six requirements that European Member States could implement to regulate this activity (article 44a(1)).
These conditions concern: administrative, accounting prudential and statistical procedures, adequate internal control mechanisms and risk management requirements, mandatory conditions for inclusion in all policies issued, technical provisions, and solvency issues.
o Leaves a wide margin of discretion to European Member States to regulate finite reinsurance as they see fit (Recital 25(a)).
The Recital of the Directive states that "due to the special nature of this line of reinsurance activity, the home Member State should be given the option to lay down specific provisions for the pursuit of finite reinsurance activities. These provisions could differ from the general regime laid down in this Directive on a number of specific points." This reflects a process of optional and not mandatory harmonization at a European level.
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