5 Reinsurance
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8891/04
COM(04) 273
+ ADD1
| Draft Directive on reinsurance and amending Council Directives 73/239/EEC, 92/49/EEC and Directives 98/78/EC and 2002/83/EC
Commission Staff Working Paper: Extended Impact Assessment
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| Legal base | Articles 47(2) and 55 EC; co-decision; QMV
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| Document originated | 21 April 2004
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| Deposited in Parliament | 30 April 2004
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| Department | HM Treasury |
| Basis of consideration | EM of 13 May 2004
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| Previous Committee Report | None
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| To be discussed in Council | Not known
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| Committee's assessment | Politically important
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| Committee's decision | Not cleared; further information requested
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Background
5.1 At present there is no EU legal framework for pure reinsurers,
that is firms that only write reinsurance business, similar to
that for direct insurance. The Commission says there are significant
differences in the level of supervision of reinsurance undertakings
in the Community and has argued that this creates uncertainty
for direct insurance companies (and their policyholders), trade
barriers within the single market and administrative burdens and
costs and weakens the Community position in international trade
negotiations.
The document
5.2 The Commission proposes a draft Directive which would introduce
a mandatory licensing system for the supervision of pure reinsurers.
The proposal has three aims:
- to establish a sound and prudent regime in the interest of
insurance policyholders;
- to build on coordination of Member State legislation
and mutual recognition of supervision in the Member State where
a reinsurance undertaking is licensed; and
- introduction of harmonised system for reinsurance
supervision to lead to the removal of internal barriers to the
underwriting of reinsurance contracts.
5.3 The licensing system would be similar to that
already in place for direct insurance. It would allow reinsurers
to trade throughout the EU under one licence. Such a regime would
remove barriers to free trade in reinsurance, including the obligation
to maintain restrictive reserving requirements under national
rules. The proposed Directive would impose the same solvency
requirements (the reserve of extra capital that insurance institutions
must hold to be able to cope with unforeseen events) on pure reinsurers
as those for direct insurers (subject to an option to increase
certain of the non-life ratios by 50% through a comitology procedure).
The proposals would be consistent with standards adopted by the
International Association of Insurance Supervisors.
5.4 The draft Directive would also make consequential
amendments to the Directives concerned with direct insurance.
5.5 The Commission proposes rapid implementation
of the draft Directive with the intention then to further refine
the regime for reinsurers as part of the Solvency II review[30]
of insurance regulation.
The Government's view
5.6 The Financial Secretary to the Treasury (Ruth
Kelly) says:
"The Government supports the proposed Directive.
Many Member States do not currently regulate reinsurance business.
The proposed Directive will therefore introduce regulation of
reinsurance activities to many Member States and promote the harmonisation
of reinsurance supervision rules in the EU. This will potentially
do two things. First, help raise standards across other Member
States and bring them more in line with UK standards. Second,
a harmonised EU system will make international mutual recognition
agreements easier which will reduce barriers to entry into foreign
markets.
"The proposal will also remove the collateral
requirements in some Member States. A number of EU Member States
require assets to be pledged/collateralised in order to cover
outstanding claims provisions. This prevents some reinsurers
from participating in certain markets and potentially increases
the prices the reinsurer charges for taking over risks from direct
insurance companies.
"The FSA [Financial Services Authority] applies
a similar standard of regulation to non-life reinsurers. However,
the solvency requirements currently applied in the UK to pure
life reinsurers are lower than for life insurers, and lower than
the Commission proposal. This implies an increase in the regulatory
solvency rates of pure life insurers, with the impact varying
from firm to firm."
5.7 The Minister also tells us that the financial
services industry has been consulted in advance of the proposal
and that her department is producing a Regulatory Impact Assessment
on the draft Directive.
Conclusion
5.8 This proposal should produce a useful improvement
in the common market for reinsurance and smooth negotiations on
international mutual recognition agreements. But before considering
the document further we should like to see the Treasury's Regulatory
Impact Assessment. When the Minister sends us this we should
be grateful also for an account of the view of the financial services
industry on the proposal.
30 The Solvency II review will be concerned with updating
the whole system of solvency requirements for the insurance industry,
including reinsurance. Back
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