New proposals from the Commission will allow re-insurance firms to operate in other EU territories on the basis of home market approval. Re-insurers, who provide insurance for the direct insurance companies, are an essential part of the insurance business, and the Single Passport approach can boost competitiveness in the sector as well as help reinforce international financial stability.
The introduction of a harmonised system for re-insurance supervision should lead to the abolition of systems in certain Member States which require re-insurers to pledge assets to cover outstanding claims provisions. Such ‘collateralisation’ systems restrict re-insurers’ choice of investments and can make re-insurance cover more expensive. The proposal, adopted by the Commission in April, 2004, is a ‘fast track’ solution for re-insurance pending proposals covering the insurance industry as whole under the long-term “Solvency II” project.
There are currently no harmonised re-insurance supervision rules in the EU. The lack of an EU regulatory framework for re-insurance has resulted in significant differences between different EU Member States at the level of supervision of reinsurance undertakings. These different national rules have created uncertainty for direct insurance companies (and their policy-holders), led to barriers to trade within the Internal Market, and given rise to administrative burdens and costs. The lack of a European framework has also weakened the EU’s position in international trade negotiations aimed at opening up the insurance market worldwide.
The proposal drawn up by the Commission would establish supervision of re-insurers by competent authorities in their ‘home’ country, on the basis of which they could operate throughout the EU. The proposal lays down a licensing regime for re-insurance undertakings and conditions that re-insurers would have to meet before a license could be granted. The proposal includes provisions to guarantee re-insurers’ financial soundness and therefore the stability of EU insurance markets, since the proposed Directive would apply to all EU re-insurance undertakings and not only those active in several Member States.
Once licensed in one Member State a company would automatically be allowed to conduct re-insurance business all over the European Union under the freedom of establishment and the freedom to provide services.
The proposal also sets out prudential rules for the supervision of re-insurance undertakings. It includes rules on the establishment of technical provisions (i.e. the amount that a re-insurance undertaking must set aside to enable it to pay its contractual commitments) and rules on the investment of assets covering those technical provisions. It also lays down rules on required solvency margins and minimum capital requirements, as well as rules on measures to be adopted by regulators if re-insurance undertakings are in financial difficulties. These prudential rules are similar to those already applied in the Insurance Directives.
The proposed Directive is in line with the direction of the ongoing re-insurance supervision project being carried out by the International Association of Insurance Supervisors (IAIS) of which all Member States and the European Commission are members. In addition, it will be a useful tool in international trade negotiations as it could help to improve access for European re-insurers to foreign markets.
Consultation and impact assessment
The proposed Directive follows wide and open consultation with stakeholders and interested parties. This consultation process showed the need to set up a regulatory regime for re-insurance as soon as possible without waiting for proposals under the long-term project ‘Solvency II’. The proposal has also undergone an extended impact assessment.
For further details see: http://ec.europa.eu/internal_market/insurance/reinsurance_en.htm
Jose De Frutos Gomez
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