Explanatory Memorandum to COM(2004)273 - Reinsurance - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2004)273 - Reinsurance. |
|---|---|
| source | COM(2004)273  |
| date | 21-04-2004 |
A single financial market in the EU will be a key factor in promoting the competitiveness of the European economy and the lowering the capital cost to companies. An integrated market, properly regulated and prudentially sound, will deliver major benefits to consumers and other market actors, through increased security against institutional default. The vehicle to achieve this integrated market is the Financial Services Action Plan. The Financial Services Action Plan announces a proposal for a directive on reinsurance supervision at the beginning of 2004.
Reinsurance is a structured risk transfer between an insurance undertaking and a reinsurance company. Reinsurance fulfils the following functions for an insurance company: reduction of technical risks, permanent transfer of technical risks to the reinsurer, increase of homogeneity of insurance portfolio, reduction of volatility of technical results, substitute for capital/own funds, supply of funds for financing purposes and supply of service provision.
In spite of its obvious connection to direct insurance business, there are some specific characteristics of reinsurance that may be important to highlight. There is no direct contractual relationship between the reinsurer and the original insured, and the policyholders have normally no priority to the assets of the reinsurer to cover their claims. Furthermore reinsurance is a business activity between professional parties. Reinsurance business is more international and has higher degrees of diversity in respect of geography and combinations of insured lines than direct insurance business.
The reinsurance sector plays a key role in the economy by providing wholesale cover for the risks assumed by insurance companies on behalf of their clients. While the average cession level in the EU is rather low (i.e. some 10% of all insurance premiums are reinsured), the cession level is relatively high for certain activities (i.e. 18% of non-life insurance premiums are reinsured, compared to 3% for life insurance premiums on average). Besides insuring insurers, reinsurers are also major financial intermediaries and institutional investors and reinsurers' financial assets represented 1% of the global securities market in 2001 i. Accordingly, the stability of the reinsurance sector is not only vital to the stability of the insurance sector generally but also has important implications for the financial system as a whole.
Recent evidence of financial strain among reinsurers has focused the attention on the level and nature of risk assumed within the sector. Reinsurers face two risks in addition to those faced by primary insurers. First, they are usually exposed to greater volatility in their financial results because they protect the primary market against peak exposures such as catastrophe risks. In consequence of this risk, they need to maintain relatively high levels of capitalisation. Second, they may be called upon to support ailing subsidiaries, as they are often the top trading company in a group structure. Despite these additional risks, reinsurers operate in a global market where their activities are often not subject to prudential oversight or the regime is lighter than that applying to primary insurers. Moreover, there is no global framework for reinsurance supervision. This situation has raised concern about potential risks in the reinsurance industry. One the other hand, reinsurers can benefit from significant geographical and sectoral diversification effects to a greater extent than direct companies.
Reinsurance is a highly international industry with a limited number of large companies. In 2002, the total reinsurance premium of the 40 largest reinsurance groups amounted to USD 138 601 200 000, whereof USD 58 544 000 000 stemmed from EU reinsurers i. In the EU, Germany has a dominant position with companies as Munich Re, Hannover Re and Allianz Re. Lloyd's is the largest UK writer of reinsurance, and SCOR together with Axa Re are the largest French reinsurers.
& Poor's, Global Reinsurance Highlights 2003 Edition, London/New York 2003.
Contents
- 1) The need for a European legal framework for reinsurance supervision
- 2) The approach of the Directive
- 2. Consultation of stakeholders and interested parties and impact assessment
- Comments received on the objectives of the reinsurance project
- Comments received on the major policy issues
- b) Impact assessment
- 1. Status quo, i.e. no changes to the current situation
- 1. A voluntary passport system for companies wanting to adhere to the system
- 1. alternatives where solvency requirements for reinsurance undertakings are close to those required for direct insurance
- 3. legal basis of the proposal
- 4. Comments on the articles
- Article 1: Purpose of the Directive - Scope
- Article 2: Definitions
- Articles 3-14: Provisions relating to the taking-up of the business of reinsurance
- Articles 32-34: Rules relating to technical provisions
- Articles 35-41: Solvency margin of reinsurance undertakings
- Articles 42-44: Reinsurance undertakings in difficulty - Withdrawal of the authorisation
- Articles 45-46: Reinsurance activities conducted by means of the freedom of establishment and the free provision of services
- Articles 57-60: Technical adaptations to Non-life, Life and Insurance Groups Directives
There are currently no harmonised reinsurance supervision rules in the EU. The lack of an EU regulatory framework for reinsurance has resulted in significant differences in the level of supervision of reinsurance undertakings in the EU. The different national rules have created uncertainty for direct insurance companies (and their policyholders), barriers to trade within the internal market, administrative burden and costs as well as weakening the EU position in international trade negotiations:
Uncertainty for direct insurance undertakings (and their policyholders): The different reinsurance supervision regimes in the EU have resulted in increased difficulties for direct insurance undertakings to choose their reinsurers in a prudent and cost-efficient way. The selection of reinsurers is of decisive importance for an insurance company, and could also affect the company's ability to pay claims towards policyholders.
Barriers to trade: Certain EU countries use systems where assets of the reinsurer must be pledged (collateralised) in order to cover outstanding claims provisions. This makes optimal investment management more difficult and thus results in higher operational costs for reinsurance undertakings. This could in fact increase the price the reinsurer charges for taking over risks from direct insurance companies. Reinsurance companies may also decide not to be active in markets where the posting of collaterals is required, and consequently the availability of reinsurance protection will be more restricted.
Administrative burden: In the EU, the Comité Européen des Assurances (CEA) and the OECD have identified administrative impediments for cross-border reinsurance services. The lack of mutual recognition between EU supervisory authorities in reinsurance in certain cases means that reinsurance undertakings are subject to different supervisory rules in several Member States. For reinsurance companies this could lead to significant double work and increased administrative burdens. Examples of burdensome administrative measures are the multiple fit and proper checks of the group's highest management, double requirement for auditors' confirmation of balances as well as the obligation for branches to issue financial statements according to local GAAP (generally accepted accounting principles) for the whole group.
International trade negotiations: It is argued that the lack of a harmonised EU system makes international mutual recognition agreements more difficult. The absence of such agreements means that European reinsurers are confronted with important barriers to entry into foreign markets, such as the requirement of posting collateral for the value of their commitments in the foreign market where the reinsurer intends to conduct business.
If no actions are taken at EU level, there is a risk that the internal market for reinsurance services would continue to work in a suboptimal way, which would harm the EU reinsurance industry. Negotiations with third markets on mutual recognition agreements could be significantly more difficult.
Internationally significant attention has been paid in recent years to reinsurance supervision. G7 and the IMF have expressed concern that lack of reinsurance regulation could impede international financial stability. In fact, at recent Financial Sector Assessment Programme (FSAP) reviews in Member States, IMF has reiterated the need for legislation in this field. The FSF (Financial Stability Forum) has repeatedly expressed concerns about the transparency of the reinsurance market and has therefore created a task force to address the issue. The OECD has ongoing work in the reinsurance field, particularly as concerns exchange of reinsurance company information between supervisors. The IAIS (International Association of Insurance Supervisors) reinsurance work is closely coordinated with the EU fast-track project. A set of principles for minimum requirements for supervision of reinsurers as well as a standard on reinsurance supervision have been adopted.
Early in the reinsurance supervision work, the Commission Services established three guiding principles for a future EU reinsurance supervision regime:
* The system should establish a sound and prudent regime in the interest of insurance policyholders. Strong and well-supervised reinsurers contribute to a stronger internal market and international financial stability.
* The system should build on essential coordination of Member States' legislation and mutual recognition of the supervision in the Member State where the reinsurance undertaking is licensed. Once licensed by its home Member State a reinsurance undertaking should automatically be allowed to conduct reinsurance business all over the European Community under the freedom of establishment and the freedom to provide services. No additional supervision of or checks on the reinsurance undertaking should be performed by supervisors in host Member States. This approach has shown its suitability during many years in the direct insurance field, where it was introduced by the Third Insurance Directives i.
* The introduction of a harmonised system for reinsurance supervision should lead to the abolition of systems with pledging of assets to cover outstanding claims provisions.
After extensive consultation, the Commission has chosen to present a proposal for a directive with the following features:
* a supervisory approach based on harmonisation and mutual recognition
* fast-track approach for a directive based primarily on current direct supervision rules
* mandatory licensing system
* solvency margin requirements in line with those of direct insurance, however with the possibility to increase this margin up to 50 % through comitology for non-life reinsurance when this is objectively justified.
An EU supervisory approach should be based on harmonised legal rules ensuring mutual recognition between Member States. The Commission believes that insurance and reinsurance supervision is a public concern and requires public regulation. Other systems (for example, voluntary, disclosure-based approaches) would not provide sufficient trust in the supervisory system. The lack of tangible sanctions in such a disclosure-based approach could make the system less efficient when addressing potential problems in reinsurance undertakings.
The Commission believes that there is a need for expedient action to achieve tangible results in a short to medium-term perspective. Such a 'fast-track' solution would take its starting point in current direct supervision rules and business practice, when appropriate with adjustments. The long-term project 'Solvency II' for direct insurance will however also affect reinsurance, and this work could to a fairly large extent build on the achievements in a fast-track project.
The proposed Directive requires reinsurance undertakings - like direct insurance companies - to be licensed in order to conduct reinsurance business. The efficiency of a licensing system has been proved by its wide use in the financial sector. Such a system also gives a clear mandate to supervisors, including the power to remove unsuited companies from the reinsurance market. A licensing system will furthermore ensure consistent treatment of all reinsurance entities in the EU, which would not have been the case had a so called 'passport' solution (in which a company itself could choose whether to apply for a passport) been chosen. Moreover, this system will increase the responsibility of the Home Member State's supervisory authorities, as they become the sole competent authority for the prudential supervision of the reinsurance undertaking within the Community. The system will require enhanced cooperation between Member States' competent authorities.
Insurance and reinsurance are related activities and consequently the solvency requirements for the two activities should be similar. The proposed Directive does therefore contain solvency requirements for life reinsurance that are identical to those of life insurance. For non-life reinsurance the starting point is that similar rules should apply. However, for non-life reinsurance the proposed Directive contains a possibility for increased solvency requirement after a comitology decision. The Commission considers this 'class enhancement' possibility for certain reinsurance classes or types of reinsurance contracts (up to 50%) as an essential part of the proposed Directive. It will provide an important tool to fine-tune the solvency requirements to better fit the nature of reinsurance business. The comitology option will only be used after detailed analysis and extensive consultation with interested parties. In order to ensure a level playing field between reinsurance undertakings and insurance undertakings carrying on reinsurance activities, the proposal also provides for the subsequent adaptations to the non-life insurance Directive 73/239/EEC and life assurance Directive 2002/83/EC. Accordingly, insurance undertakings which conduct reinsurance by way of acceptances activities shall be subject to the provisions of the reinsurance directive in respect of the required solvency margin, where the volume of their reinsurance activities represents a significant part of their entire business (Articles 57 i and 59(8)). These provisions will only be applicable when the decision adjusting the required solvency margin for non-life reinsurance activities has been adopted by the Commission.
a) Consultation of stakeholders and interested parties
Stakeholders have been consulted regularly during the project, and have provided the Commission with very important input. In the beginning of the project, a major hearing with over 100 participants was organised, and subsequently all participants (as well as other interested parties) were included in a mailing -list that received all documents produced under the project or a message stating that new documents have been posted on the Commission's reinsurance website. A study on reinsurance supervision was also published. i
The project has been followed by interested parties from a broad variety of sectors and professions. The sectors consulted are basically the following: insurance (commercial companies, mutuals, cooperatives etc), insurance associations (EU level as well as nationally), insurance intermediaries (brokers etc), accounting associations, actuarial associations, industry general (UNICE), analysts, risk/captive managers, SME-organisation (BEUC), consulting firms, banks, lawyer firms, rating agencies.
The Commission has benefited significantly from the input given by stakeholders and interested parties, particularly as the project has involved many very difficult technical matters. The documents send out for comments dealt with policy issues as well as detailed matters.
Commentators have generally been very supportive of all the three major objectives of the project. A few Member States have raised comments on the fact that the essential coordination of national's legislation and mutual recognition would prohibit additional checks or requirements by Host States. In particular, the Member States that currently use collateralisation have obviously expressed objections to abolition of systems with pledging of assets to cover outstanding claims technical provisions. However all other stakeholders have unanimously supported the objective as formulated by the Commission services. Certain Member States have commented on the difference in collaterals between the life and non-life insurance fields.
Approach to a supervisory framework for reinsurance
Most commentators have been in favour of a supervisory approach to reinsurance. Certain companies have argued in favour of voluntary solutions, but a greater number of companies and associations have stated that only a supervisory solution would give an additional quality mark to EU reinsurance. A status quo alternative has not been supported by any of the major stakeholders.
Member States have argued in favour of a fast-track approach, and this has also been the clear view of the Insurance Committee. Other stakeholders have also been very supportive of a fast-track solution based on current direct supervision rules. Technical specialists (like actuaries and accountants) have however pointed out that the restricted time frame scheduled (2004) would limit the number of possible solutions, thereby postponing the introduction of certain methods until the Solvency II project is finalised.
Solvency requirements for non-life reinsurance: The reactions from stakeholders on the level of the solvency requirements have been many and strong. There has been a large number of meetings with interested parties, particularly the insurance industry, the captive reinsurance industry, risk managers, actuaries, consultants and accountants. Generally, industry representatives and insurance consultants have argued that reinsurance is an activity that is close to direct insurance and therefore the same solvency requirements should apply. Some insurance supervisors have however strongly taken the view that reinsurance is more volatile and difficult to supervise and consequently a slightly higher requirement would be appropriate. The Commission has taken account of the different views expressed when elaborating the solvency requirements laid down in the proposal for a Directive. (Articles 37 and 40)
Solvency requirements for life reinsurance: This issue has also been the subject of much discussion, both as regards the actual requirements as the calculation methods. The Commission's Services have in fact consulted on different solutions. Considering the comments received, the Commission has concluded that the same approach as direct insurance (use direct life rules for life reinsurance, direct non-life rules for non-life reinsurance) would be preferable (Articles 38- 40).
Comments received on detailed legal issues.
During 2003 there have also been several consultations on detailed legal issues. The current proposal has been prepared taking account of comments from interested parties, in particular the insurance industry and the actuarial profession. Some of the submissions were very detailed and provided very useful input to the work of the Commission Services.
An extended impact assessment has been carried out in order to identify whether there is a need for action at EU level and in case of a positive reply, the action required.
The impact assessment shows an overall agreement on the need for such an action if the objectives referred to in Section 1 of this explanatory memorandum were to be achieved.
With regard to the different policy alternatives considered to reach these objectives, three main options were considered:
2. Market mechanism solution/voluntary disclosure of reinsurance information, and alternatively a recommendation concerning indirect supervision practice.
3. Supervisory solutions.
As stated earlier in Section 2, the majority of Member States and industry organisations believe that there is a need for supervisory action in the field. Option 1 has not received support by practically no commentator. Option 2 was also thought as not providing sufficient trust in the supervisory system. The lack of tangible sanctions in such a disclosure-based approach could make the system less efficient when addressing potential problems in reinsurance undertakings.
As far as the option 3 is concerned (supervisory approach), two alternatives were considered:
2. A mandatory licensing system.
After wide consultation with Member State, insurance industry and other interested parties the Commission has decided to propose a licensing system. A licensing system is in line with the approach carried out by the EU in order to achieve the internal market in the financial sector in general and in insurance in particular (single license and home country control of prudential issues). Such a system has showed its efficiency since its establishment by the third insurance Directives in 1994. It ensures the financial soundness of reinsurance undertakings, and therefore the stability of insurance markets, since it applies to any Community reinsurance undertaking and not only those having a European perspective. A licensing system would furthermore lead to more coordination between Member States' treatments of all reinsurers and it will best suited to meet the objective of establishing a true internal market for reinsurance. Last the introduction of a supervisory regime based on supervision of all reinsurance undertakings by public competent authorities is also in line with the direction of the ongoing reinsurance supervision project carried out by IAIS, to which all Member States and the European Commission are members.
The extended impact assessment also was conducted in respect of quantitative solvency requirements for reinsurance undertakings. Two basic possible approaches were discussed:
1. alternatives where solvency requirements for reinsurance undertakings are close to those required for direct insurance
2. alternatives where solvency requirements for reinsurance undertakings are higher than those required for direct insurance.
The Commission has finally decided to set up a regime which is built on the solvency requirements set out in existing insurance Directives. However, in order to take account of the specificities of some types of reinsurance contracts or specific lines of business in non-life reinsurance, the proposal provides for the possibility of increasing the required solvency margin up to 50% for classes other than liability risks. This increasing shall be made by the Commission, in the exercise of its implementing powers, after having consulted the Insurance Committee.
This proposal is based on Articles 47 i and 55 of the Treaty, which are the legal basis to adopt Community measures aimed at achieving the Internal Market in the services sector. The chosen instrument is the Directive, since it appears to be the most appropriate to achieve the objectives pursued. Moreover the legislative action of the European Union to achieve the internal market in insurance has been carried out by means of Directives based on these provisions of the Treaty. Last, the provisions of this Directive do not go beyond what it is necessary to achieve the objectives pursued.
This Proposal lays down a supervisory regime for reinsurance which is consistent with the existing legal framework for insurance. It is built on the approach followed by the current existing insurance Directives. Some of the provisions of Directives 73/239/EEC, 92/49/EEC and 2002/83/EC which are reproduced in this Directive are long; this is in particular the case of the provisions concerning the conditions of authorisation of a reinsurance undertaking, qualifying holdings, professional secrecy and solvency margin. This often results in complex provisions, which presentation may not be consistent with the current guidelines for drafting Community legislation. It is not necessary for the interpretation that a single article covers an entire aspect of the rules laid down in a legal act. Therefore the provisions of this Proposal are broken down in articles, which are grouped as appropriate in titles, chapters and sections, in order to facilitate their comprehension and clarity.
The purpose of this Directive is to lay down the legal framework for prudential supervision of reinsurance activities in the Community. As stated earlier, there is currently no Community legislation dealing with reinsurance supervision. As a result, reinsurance undertakings which conduct only reinsurance business (professional reinsurers) are not subject to any particular Community provisions.
The Directive will thus fill a gap in the Community regime of supervision on insurance. It will apply to reinsurance a supervisory regime based on the same principles applicable to direct insurance, namely, the principles of single license and prudential supervision of the reinsurance undertaking by its home Member State's competent authorities.
This Directive applies to reinsurance undertakings having their head office on the Community which conduct only reinsurance business (professional reinsurers). The Directive does not apply to those insurance undertakings already subject to non-life insurance and life assurance Directives i, since their reinsurance activity by means of acceptances is covered by these Directives. In addition, insurance undertakings and bodies which are excluded from the scope of above Directives are also excluded from the scope of the present Directive. However provisions of this Directive concerning the calculation of the required solvency margin (Articles 35-39) may be applicable to insurance undertakings subject to non-life and life directives in respect of their reinsurance acceptances (See Articles 57 i and 59(8)).
In order to take account of a very special situation that might arise in a Member State where it is not possible to obtain reinsurance cover in the commercial market, the proposal does not apply to the provision of reinsurance cover conducted by a Member State, when it acts as a reinsurer of last resort for reasons of public interest. However this provision does not exempt the Member State from complying with Community provisions concerning competition rules and state aids. An example is the situation that arose in the air insurance sector after the attacks of 11th September 2001, where the reinsurance market failed to provide reinsurance cover for some risks. Member States were Member States were prompted to provide such a reinsurance cover. The schemes set up were examined under EU law and in particular state aid rules before being authorised.
Article 2 contains definitions concerning the essential concepts employed in the proposal, in order to clarify their meaning and hence contribute to a better understanding. Most of these concepts have already been employed in other Community legal acts applicable to insurance, such as the Directives 2002/83/EC on life assurance, 73/239/EEC and 92/49/EEC on non-life insurance, 98/78/EC on the supplementary supervision of insurance undertakings in an insurance group.
A definition of 'captive reinsurance undertaking' is given to refer to those reinsurance undertakings which are owned by one or several industrial or commercial firms or by a financial undertaking other than an insurance undertaking or a reinsurance undertaking or a group of insurance or reinsurance. The objective of such undertakings is to provide reinsurance cover exclusively concerning the risks of the undertaking or group of undertakings to which the captive reinsurer belongs or to an undertaking or group of undertakings of which the reinsurance captive is part. This definition is necessary since the proposal provides for a special regime for these undertakings in respect of the minimum guarantee fund required in Article 40 to conduct reinsurance business.
The proposal for a Directive follows the approach of the current insurance Directives with regard the taking-up of reinsurance activities in the Community. The proposal lays down the principles of single license and home country control for the prudential supervision of reinsurance undertakings. This is possible because of the coordination carried out of the essential aspects regarding the supervision of reinsurance undertakings, which permits the mutual recognition of authorisations and prudential supervisory systems of Member States.
Accordingly, a reinsurance undertaking shall be subject to a prior official authorisation that shall be granted by the competent authorities of its home Member State. The proposal lays down the minimum conditions necessary to obtain the official authorisation. The reinsurance undertaking must have a specific legal form, it must submit a scheme of operations providing essential information on the business plan, it has also to possess the minimum guarantee fund provided for in Article 40. The Directive also requires that the reinsurance undertaking be effectively run by managers who have adequate technical qualifications or experience. The reinsurance undertaking must limit its objects to the business of reinsurance and related operations. This requirement may allow a reinsurance undertaking to carry on, for instance, activities such as provision of statistical or actuarial advice, risk analysis or research for its clients. It may also include a holding company function and activities with respect to financial sector activities within the meaning of Article 2 point 8 of Directive 2002/87/EC. The latter activities will be in any case subject to the provisions laid down on supplementary supervision of insurance or reinsurance groups and financial conglomerates laid down by Directives 98/78/EC and 2002/87/EC (Articles 5-11).
Furthermore, before granting the authorisation, the competent authorities must be informed of the identity of the members or shareholders with a qualifying participation in the reinsurance undertaking. The purpose of this provision is to enable the competent authorities to assess the suitability of the shareholders, in order to ensure the sound and prudent management of the reinsurance undertaking. Should they not be satisfied as to these qualifications, they shall not grant the authorisation. Equally, where close links exist between the reinsurance undertaking and other natural or legal persons, the authorisation shall be refused when those links do not enable the competent authorities to exercise effectively their supervisory functions. These requirements pursue a prudential objective, namely to ensure both that there is in place a sound management and that the supervision of the reinsurance undertaking is effective. Other objectives based on considerations such as industrial or economic policy of the country or market needs are not covered by these provisions and should be prohibited when examining the application for authorisation as they would be in conflict with the principles of the Treaty (Articles 7, 9, 10 and 12).
The application for authorisation has to be considered within a period of six months after it has been submitted by the reinsurance undertaking. The refusal as well as the withdrawal of the authorisation shall be motivated stating the precise grounds for such a rejection. The reinsurance undertaking must have the right to apply to the courts for the legal review of the decision (Article 13).
The authorisation granted is valid for the whole Community. It allows the reinsurance undertaking to conduct business thorough the Community, under the freedom of establishment and the free provision of services, without further formalities (Article 4).
Articles 15-31: Conditions governing the business of reinsurance. Principles and methods of prudential supervision.
A supervisory regime based upon a system of a single authorisation granted by the competent authorities of the Home Member State of the reinsurance undertaking and valid throughout the entire Community calls for devolution of powers to supervision on the competent authorities which granted the authorisation so as to guarantee full compliance with the conditions governing the pursuit of business by the reinsurance undertaking, whether it be by way of establishment or by way of freedom of services.
Article 15 of this proposal sets out the exclusive competence of the home Member State's competent authorities in respect of the financial supervision of the reinsurance undertaking, including the activities it carries on either through branches or by way of freedom of services.
Because of the exclusive competence of the home Member State in respect of supervision of all the financial aspects of a reinsurance undertaking, the competent authorities of a reinsurance undertaking may not refuse a retrocession contract concluded by this reinsurance undertaking with a Community reinsurance undertaking covered by this Directive i on the grounds directly related to the financial soundness of that reinsurance (or insurance) undertaking. Such an indirect supervision of these undertakings would mean an interference with the supervisory powers of the competent authorities of these undertakings and would put into question the fundamental principle of the mutual recognition which is at the root of the legal framework laid down by this proposal.
The reinsurance undertaking must have sound administrative and accounting procedures as well as adequate internal control mechanisms. This is needed to ensure an orderly and financially stable pursuit of the activities. The Home Member State shall establish the conditions to ensure that this requirement is meet.
Article 16 states the right of the Home Member State's competent authorities to carry out on-the-spot verification of branches of the reinsurance undertaking in other Member States. It lays down the procedure to carry out such verification. This provision is similar to those laid down in the non-life and life insurance Directives i.
In order to ensure the efficiency of the supervision carried out over the reinsurance undertaking, the competent authorities must have appropriate powers to make detailed enquiries regarding the reinsurance undertaking, request submission of documents, or take measures, such as sanctions, on the reinsurance undertaking or its directors or managers (Article 17).
Articles 19-23 lay down specific provisions regarding the supervision of qualifying holdings in a reinsurance undertaking. Their purpose is to ensure that the competent authorities are aware of the ownership structure of the reinsurance undertaking. This provision is the corollary of the supervision of qualifying shareholders at the moment of considering the application for the authorisation laid down in Article 12. This regime is the same already applicable to insurance i and other financial services.
Articles 24-30 provide for the confidentiality of information held by competent authorities. All persons working or having worked for the competent authorities, included auditors and experts acting on behalf of the competent authorities, shall be bound by the obligation of professional secrecy. The confidential nature of this information does not prevent competent authorities from exchanging information regarding the supervision of reinsurance undertakings, since it aims at ensuring the proper supervision of the reinsurance undertaking. In any case the information exchanged is also subject to the confidentiality requirement and it may only be disclosed with the express consent of the competent authorities which forwarded that information.
Articles 28-30 also sets out the conditions and circumstances under which this information may be disclosed to authorities and bodies other than reinsurance supervisory authorities. The regime laid down is the same applicable to insurance undertakings i.
Article 31 provides the duty for auditors to report promptly to the competent authority of the home Member State any fact or decision concerning the reinsurance undertaking, which affect the conditions governing the pursuit of reinsurance business and which they discover during the performance of their tasks in the reinsurance undertaking or in any undertaking having close links with the reinsurance undertaking. The Directive follows the regime already applied to insurance undertakings. i
Technical provisions are a fundamental part of insurance technique. Indeed they must enable an insurance or reinsurance undertaking to meet its commitments arising out of insurance or reinsurance contracts. For that reason, requiring any insurance (or reinsurance) undertaking to establish adequate technical provisions is a core principle of a supervisory regime for insurance or reinsurance. In a system of single authorisation granted by the home Member State, it is up to the competent authorities of the home Member State to require the insurance reinsurance undertaking to establish adequate technical provisions in respect of the whole business of the undertaking, including those carried on under the freedom of establishment and the free provision of services in the Community. Moreover the home Member State must verify compliance with this requirement and have also at its disposal appropriate means to ensure such compliance.
Article 32 lays down the principle of home country control for the definition and calculation of the technical provisions of reinsurance undertakings. The amount of such technical provisions shall be determined in accordance with the rules laid down in Directive 91/674/EEC on the annual accounts of insurance undertakings and consolidated accounts of insurance undertakings i. The proposal also provides that, in respect of life reinsurance activities, the Home Member State may also lay down more specific rules for the calculation of the technical provisions in accordance with the principles set up in Article 20 of Directive 2002/83/EC on life assurance. This provision sets out the actuarial principles to be followed to establish the technical provisions for life assurance activities.
The home Member State shall also require its own reinsurance undertakings to set up an equalization reserve in respect of credit reinsurance activities (Article 33). The amount of such reserve shall be calculated in accordance with the rules provided for in Directive 73/239/EEC, in particular the Annex, which sets out four methods regarded as equivalent. The home Member State may exempt reinsurance undertakings for which credit reinsurance does not represent an important part of their activity, from the obligation to set up the equalization reserve.
The home Member State may also require its own reinsurance undertakings to set up equalization reserves for classes of risks other than credit reinsurance, following the rules laid down by that home Member State. This is in line with existing legislation on insurance, in particular Directive 73/239/EEC as well as Directive 91/674/EEC on insurance undertakings annual accounts.
By introducing a supervisory regime for reinsurance undertakings, which so far are not subject to a Community legal framework, the corollary is the abolition of the requirement of pledging of assets used to cover unearned premiums and outstanding claims provisions of a reinsurance undertaking where it is reinsured by a reinsurance undertaking authorised in accordance with this Directive, or an insurance undertaking authorised in accordance with Directives 73/239/EEC (non-life insurance) or 2002/83/EC (life assurance). However a Member State remain competent to impose pledging of assets used to cover the above technical provisions of its own reinsurance undertakings where they are reinsured by non-Community reinsurance undertakings, since these later are not subject to the supervisory regime of single authorisation and mutual recognition of this Directive.
Article 34 proposes a qualitative approach to investment rules. Specificities of reinsurance business make such an approach preferable to the more quantitative method used in the direct insurance field. The article states that the assets should take account of the type of business carried out by the reinsurance entity, the amount and the duration of the expected claims payments in order to secure sufficiency, liquidity, quality, profitability and matching of the investments. For non-life reinsurance, the matching requirement should be seen in the light of business practices and the inherent complexity to determine the duration of the liability cash-flows. The investments should furthermore be diversified and adequately spread in order to enable response to changing economic circumstances.
A solvency margin is an important element of prudential supervision. This proposal lays down solvency requirements for reinsurance undertakings which are based on the current rules for insurance undertakings. As it has been pointed out earlier, insurance and reinsurance are related activities and consequently the solvency requirements for the two activities should be similar.
Wit regard to non-life reinsurance business, the proposal applies the requirements set out in the non-life insurance Directive 73/239/EEC (Article 37). However, due to the particular nature of some types of reinsurance contracts or specific lines of business, the proposal contains the possibility of increasing the required solvency margin. Already the non-life insurance Directive provides for an increase of 50% for liability insurances, because they are subject to a particularly volatile risk profile. The proposal provides for an increasing up to 50% of the solvency margin in respect of specific types or classes of business other than liability classes. The adjustment of the solvency margin shall be made by the Commission, after consulting the Insurance Committee, in the exercise of its implementing powers conferred on by the Treaty. These measures should be adopted following the regulatory procedure provided for in Article 5 of Decision 1999/648/EC (Article 55). This enhancement of the solvency margin will be only used after detailed analysis and extensive consultation with interested parties.
In order to ensure a level playing field between reinsurance undertakings and insurance undertakings carrying on reinsurance activities, the proposal provides for the subsequent adaptations to the non-life insurance Directive 73/239/EEC and life assurance Directive 2002/83/EC. Accordingly, insurance undertakings which conduct reinsurance by way of acceptances activities shall be subject to the provisions of the reinsurance directive in respect of the required solvency margin, where the volume of their reinsurance activities represents a significant part of their entire business (Articles 57 i and 59(8)). These provisions will be applicable when the decision adjusting the required solvency margin for non-life reinsurance activities has been adopted by the Commission (Article 43).
As far as life reinsurance is concerned, the required solvency margin shall be calculated in accordance with the rules laid down in the life insurance Directive 2002/83/EC (Article 38).
Where a reinsurance undertaking conducts simultaneously life and non-life reinsurance business, the required solvency margin shall cover the total sum of required solvency margins in respect of both non-life and life reinsurance activities (Article 39).
The available solvency margin shall be represented by the assets listed in Article 36. The assets allowed are those already authorised by non-life and life insurance Directives to represent the solvency margin.
Article 40 refers to the minimum guarantee fund required to conduct reinsurance activities. The guarantee fund refers to the minimum capital requirement that a reinsurance undertaking must permanently have in order to engage in reinsurance business with the appropriate financial soundness. The proposal fixes a guarantee fund which may not be less than EUR 3 million. However, in respect of captive reinsurance undertakings, the home Member State may set the guarantee fund as to EUR 1 million. This provision aims at taking account of the special characteristics of captive reinsurance undertakings, and in particular the fact that they usually are medium/small size undertakings and their activity is confined exclusively to the cover risks concerning the undertakings to which the captive reinsurer belongs.
The competent authorities of a reinsurance undertaking should have the appropriate powers to take action against a reinsurance undertaking where its financial situation deteriorates, for instance, where it does not establish adequate technical provisions or the solvency margin does not attain the required level. In such cases, the competent authorities shall have the power to require a financial plan, a restoration plan a financial recovery plan or to prohibit the free disposal of assets of the reinsurance undertaking.
Likewise, it is essential to provide that the authorisation granted to the reinsurance undertaking may be withdrawn in certain specific cases (i.e. non fulfilment of the conditions for authorisation, serious failure to comply with the conditions and regulations to conduct business, etc.).
The rules laid down in this proposal are identical to those already applied to insurance undertakings.
Articles 45-46: Reinsurance activities conducted by means of the freedom of establishment and the free provision of services
A reinsurance undertaking duly authorised by the competent authorities of the home Member State is entitled to carry on reinsurance business throughout the entire Community, under either the right of establishment or the freedom to provide services (Article 4(1)).
Article 45 sets out provisions concerning the case where a reinsurance undertaking, acting under the freedom of establishment or the free provision of services, does not comply with the legal provisions applicable in the host Member State. The regime proposed, which is also inspired by the regime laid down in insurance directives, is rooted in the cooperation between the competent authorities of the home and the host Member States.
Article 46 establishes the principle of equality of treatment of all reinsured creditors in the event of the winding-up of a reinsurance undertaking, without any distinction being made on grounds relating to the manner in which reinsurance contracts were underwritten; i.e. freedom of establishment or free provision of services. However this provision does not introduce a co-ordination of national rules on winding-up. Such a co-ordination in respect of insurance undertaking has been carried out by Directive 2001/17/EC (insurance winding-up Directive) i. The insurance winding-up Directive may also need to be adapted, after careful examination, at a later stage in order to bring into its scope reinsurance undertakings.
Articles 47-50: Third country reinsurance undertakings.
Reinsurance undertakings which have their head office in a third country and which conduct reinsurance business in a Member State shall not be applied a treatment which is more favourable than that afforded to reinsurance undertakings which have their head office in that Member State (Article 47).
Article 48 provides for the possibility to conclude agreements with third countries regarding the supervision of reinsurance undertakings. The purpose of these international agreements is, in particular, the exchange of information between competent authorities of the EU and the third countries concerned in respect of reinsurance undertakings as well as to provide for mutual recognition of supervisory rules and practices on reinsurance between the EU and the third countries. This provision would be of significant importance in order to tackle regulatory barriers to reinsurance which hinder the entry of Community reinsurance undertakings into third countries.
Articles 51-54: Rights acquired by existing reinsurance undertakings - Reinsurance undertakings in cessation of activities.
A reinsurance undertaking which was entitled or authorised to conduct reinsurance business in accordance with the provisions of its home Member State before the date of implementation of this Directive may continue to do so without requesting an authorisation. However, the reinsurance undertaking shall be subject to the provisions of the Directive, in particular the requirements regarding the financial soundness of the reinsurance undertaking (technical provisions, solvency margin and guarantee fund), the professional capacity and good repute of the managers or the suitability of the qualifying shareholders. The directive allows Member States to grant a transitional period of two years in order to avoid that existing reinsurance undertakings run into financial trouble because of the effort to comply with these requirements (Article 51).
On the other hand, the Directive does not apply to reinsurance undertakings which at the time of implementation of the directive have stopped underwriting new reinsurance contracts and exclusively administer their existing portfolio in order to terminate their activity. However, as these undertakings shall not subject to the single authorisation regime laid down in the Directive, it is essential for the sake of transparency and legal certainty, that Member States draw up the list of the reinsurance undertakings concerned and communicate to all Member States (Article 52).
Lastly Article 53 provides the right for a reinsurance undertaking to apply for judicial review of any decision taken in respect of it by competent authorities when applying their national rules adopted in implementation of this Directive.
Articles 55-56: Implementing powers of the Commission to made technical adjustments to the directive.
The proposal lays down the possibility to make technical adjustments to specific rules of the Directive. The Directive confers on the Commission implementing powers in respect of the provisions expressly listed in Article 56. In the exercise of its implementing powers the Commission is assisted by the Insurance Committee laid down by Directive 91/675/EEC. The measures to be adopted by the Commission shall be subject to the procedure laid down in Article 5 i of Decision 1999/648/EC which lays down the procedures for the exercise of implementing powers conferred on the Commission.
Implementing powers shall be in particular used to enhance the required solvency margin for specific types or contracts or activities in classes of business other that liability classes (Article 37 i and (4)).
The introduction of a Community regulatory framework for reinsurance has an impact on the existing directives on insurance (non-life, life and insurance groups) i. To the extent that the present proposal once adopted shall complete this legislative framework for insurance sector, it appears necessary to take account of it in order to ensure a consistent regulatory framework. Accordingly, the existing insurance directives need to be adapted. This is the case, for instance, of the indirect supervision of a reinsurance undertaking carried out by the competent authorities of the insurance undertaking who has concluded a reinsurance contract with Community reinsurer subject to this Directive i. The competent authority of the insurance undertaking may not refuse such a reinsurance contract on the grounds directly related to the financial soundness of that reinsurer.
The proposal also provides for the abolition of the requirement of pledging of assets used to cover unearned premiums and outstanding claims provisions of an insurance undertaking where it is reinsured by a reinsurance undertaking authorised in accordance with this Directive, or an insurance undertaking authorised in accordance with Directives 73/239/EEC (non-life insurance) or 2002/83/EC (life assurance).
These adaptations are also prompted by the purpose of submitting direct insurance undertakings accepting reinsurance to the solvency requirements which would be laid down for reinsurance undertakings and ensuring a level playing field amongst different undertakings writing inwards reinsurance business.
The insurance groups Directive 98/78/EC is also adapted in order to take account of the fact that EU reinsurance undertakings shall be subject to supervision i. A subsequent adaptation of Directive 2002/87/EC relating the financial conglomerates i will also be necessary.
Furthermore the Directive 2001/17/EC may also need to be adapted in order to bring into its scope reinsurance undertaking since they are not currently subject to the insurance winding-up Directive. Further work is necessary in this respect in order to identify the issues that need to be considered in order to make appropriate adaptations.