Mutual Regulatory Recognition Required
You would expect international insurance and reinsurance to be at the forefront of liberalization in the worlds economic system. Reinsurance, in particular, is one of the most global of industries. The products it sells know no natural boundaries in an age of e-commerce.
Whereas a car manufacturer in, say, Japan must ship its products to its export markets, a reinsurance contract faces no such obstacles. The restraints that our industry faces are generally man-made–specifically, political and regulatory.
Countless hours of talks aimed at creating a freer trading environment for reinsurance have produced progress at a frustratingly slow pace. Even the United States, widely regarded as a beacon of free enterprise, has strong protectionist instincts in this particular area of commerce.
Overseas reinsurers trading in the United States must overcome stringent trust fund liabilities amounting to 100 percent of liabilities. This is despite the fact that many of the companies involved are among the financially strongest in the world and U.S. reinsurers operating in Europe face no such restrictions.
One of the challenges yet to overcome is the need to persuade governments in all parts of the world that reinsurance is an integral part of the infrastructure of any modern economy, and it is of national benefit if domestic customers have access to the widest possible choice of providers.
Unlike transport or manufacturing or even banking, reinsurance is intangible and its benefits more difficult to explain. Effectively used, however, it has much to offer any country in terms of economic certainty and efficient use of capital. Provided the necessary safeguards are in place, a free market in reinsurance is in the interests of customers and ultimately the countrys industrial base and its public.
Unfortunately, the message is proving hard to sell. One often finds that many of those working in developing economies are adamantly opposed to allowing overseas reinsurers into their own national markets. They feel that governments have a duty to protect the local reinsurance industry from North American and European competition.
It is difficult to explain how self-defeating this is. Denying local firms access to international capital and security constrains the activities of local insurers, leading to a depressing effect on the whole economy.
Entrenched as these attitudes are, the movement towards free trade has gained an unstoppable momentum. It has been encouraging that countries as diverse as China, India, Brazil (until recently), and many Eastern and Central European nations have taken significant steps towards liberalizing their insurance and reinsurance sectors.
In the European Union, the Commission has accepted in principle a proposal put to it by the Comit? Europ?en des Assurances (a Paris-based federation of European insurance trade associations) to allow a single reinsurance passport among all member states. If all goes to plan, it could become enshrined in a directive within the next few years. This would represent an important gain, but it would be just one part of the jigsaw.
The London-based International Underwriting Association (which represents international insurers and reinsurers) is pressing for greater mutual recognition of regulatory regimes, especially in the wholesale insurance and reinsurance market.
In the long run, we would like to see European reinsurers allowed to trade freely in North America on the basis of home state supervision. U.S. and European regulators are already extensively used as a benchmark and guide for regulators in emerging economies. If the same mutual recognition concept implied in a single passport could be extended to the North America Free Trade Area, there then would be a basis for a new international regulatory order.
An alternative or supplement to a series of bilateral regulatory arrangements would be to agree to work through a single world body, such as the International Association of Insurance Supervisors, to develop certain recognized regulatory values. This would still allow for local variations, but under the umbrella of shared standards.
The IUA is also pressing for regulators everywhere to adopt a flexible and light approach when it comes to wholesale international products, such as reinsurance. Governments should recognize the sophisticated nature of buyers in these markets, and restrict themselves to prudential supervision of solvency and the fitness of the management.
This would promote free trade and the development of new products and services to the benefit of all concerned. It could also assist the growing market in alternative risk transfer and financial risk products. In the medium term, there is likely to be increasing cooperation and ultimately convergence between banking and insurance regulators.
This trend has already started to become apparent in some countries. In the United Kingdom, for example, the Financial Services Authority, according to its new rule book that will come into force in November, will work on the principle of concentrating resources on the areas and companies that are most vulnerable.
It will require each company to produce evidence of a robust risk strategy, including scenario testing and strong internal controls and risk management. In the banking industry this risk-based approach is already well established. It could become a guide for international supervision of the wholesale insurance market worldwide.
Marie-Louise Rossi is chief executive of the International Underwriting Association of London.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 10, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.