20.5.2005   

EN

Official Journal of the European Union

C 120/1

1.1

There is currently no harmonised framework for the supervision of reinsurance undertakings in the EU. As a result, reinsurance supervision regimes vary widely from one Member State to another.

1.2

On 21 April 2004, therefore, the Commission submitted a proposal for a Directive on reinsurance and amending Council Directives 73/239/EEC, 92/49/EEC and Directives 98/78/EC and 2002/83/EC. Its key features are as follows:

2.1

The purpose of the directive is to establish a harmonised supervisory framework for reinsurance undertakings and captives (1) in the European Union.

2.2

The proposal lays down the minimum conditions necessary to obtain official authorisation. Among other things, these conditions stipulate that the undertaking in question must have a specific legal form. It must submit a scheme of operations and must also hold a minimum guarantee fund. Business is limited to reinsurance and related operations and the qualifying shareholders and management of the undertaking are also subject to checks. An authorisation, once granted, is valid for the entire Community.

2.3

The directive seeks to prohibit reinsurers from depositing security with primary insurers, where this is required under Member States' national law. Contractual deposits remain unaffected. In addition to establishing a functioning single market, the Commission is also seeking to lay down an international benchmark to alleviate worldwide the constraints placed on European reinsurers as a result of the deposit of security.

2.4

Under the solvency provisions for undertakings, the solvency requirements that apply to primary non-life insurance companies are also to apply to the non-life reinsurance business. These requirements may be increased by up to 50 % through the comitology procedure. The solvency provisions for life reinsurance undertakings are to be based on those that apply to primary life insurance undertakings. Where an undertaking conducts life and non-life reinsurance business simultaneously, the total sum must be covered by its own funds. Like primary insurance undertakings, reinsurance undertakings will also be required to maintain a minimum guarantee fund of not less than EUR 3 million. For captive reinsurance undertakings, that figure may be reduced to EUR 1 million.

2.5

The proposed directive lays down specific supervisory powers in cases where a company's financial situation deteriorates, where no adequate technical provisions are in place or where there is insufficient solvency. These powers match those in the primary insurance sector and provide scope to require the submission of a plan for the restoration of a sound financial situation, a finance scheme and a financial recovery plan, and to withdraw authorisation.

2.6

Reinsurance undertakings which were entitled or authorised to conduct reinsurance business before the date of implementation of the directive may continue to do so without requesting authorisation. They are subject to the substantive provisions of the directive, although the Member States may grant an additional transitional period of two years.

2.7

The proposal gives the Commission implementing powers to make technical adjustments to the directive (‘comitology’).

2.8

The life, non-life and insurance groups directives are also to be adapted in line with the supervision rules for reinsurance undertakings. Thus,

3.1

The Committee welcomes the Commission's proposal which will help consolidate Europe's position as a financial centre by ensuring that reinsurance undertakings and captives have adequate capital at their disposal to meet their obligations. This will give a lasting boost to the position of European reinsurance undertakings on the international insurance markets.

3.2

The Committee would expressly point out the importance of the reinsurance industry for Europe's position as a financial centre. In 2002, the total reinsurance premium of the 40 largest reinsurers amounted to USD 138 601 200 000, of which USD 58 544 000 000 stemmed from EU reinsurers.

3.3

The reinsurance business is concerned mainly with the relationship between primary insurers and reinsurers. However, the loss of one or more reinsurers may have an impact on consumers if, as a result, a primary insurer is no longer able to meet its obligations. The Committee therefore recognises that the proposed directive also indirectly boosts EU consumer protection. The Committee also draws attention to the benefit to consumers of adequate reinsurance cover. That in turn requires the availability on the European market of sufficient reinsurance capacity at reasonable premiums.

3.4

The Committee welcomes the Commission's fast-track approach, i.e. that the reinsurance supervision rules are be adopted on the basis of the current primary insurance supervision rules. This is the right approach, not least in the light of the ongoing Solvency II project.

3.5

A key fact about reinsurance is that it is a global market. In the ongoing consultations on the directive, therefore, the Committee would ask the European Parliament, the Council and the Commission to pay particular attention to the international competitiveness of the European reinsurance industry.

3.6

The Committee recognises that the European reinsurance industry in particular proved its financial soundness in the wake of the 11 September 2001 attacks. Thus, any new burden placed on the European reinsurance industry should be subject to a rigorous cost-benefit analysis.

3.7

The Committee acknowledges that, up to now, different supervision regimes have been in operation in the EU, involving a mix of solvency, capital investment and deposit-related rules. Under the Commission proposal, the current rules for deposits in particular are set to disappear. It is vital to ensure that the supervisory authorities concerned develop sufficient trust in the future supervisory mechanisms and their uniform application across the EU.

4.1

Under the proposed directive, the provisions for calculating the solvency margin of primary life insurance undertakings are also to apply to life reinsurance undertakings. For life reinsurance, the Commission proposes the adoption – unchanged – of the solvency rules of the primary insurance sector. The solvency calculation comprises two elements: 3‰ of the sum at risk and 4 % of the mathematical provisions. The Committee feels that this places a disproportionate burden on European life reassurance undertakings. The Commission's proposal:

4.2

In Europe, the risk structure of primary life insurance undertakings and life reinsurers differs considerably. In the life reinsurance business, the capital investment risk generally remains with the primary insurer. That difference alone shows that the solvency formula for primary life insurance cannot adequately reflect the risk structure in the life reinsurance business.

4.3

It is clear from a comparison with the calculation methods used by rating agencies that the proposed EU requirements would seem excessive. US solvency requirements for instance, while based on the amount at risk, also include a variable factor contingent on the size of the relevant portfolio (0.8‰ on holdings over EUR 25 billion – see appendix). The Canadian supervisory authorities and rating agencies take a similar approach.

4.4

While the primary insurance business between insurer and client still bears national hallmarks, reinsurance has always been an international operation, not least because of the need for international risk diversification. It is therefore necessary to establish a level playing field between providers within the Union and international competitors in the USA, Bermuda and Switzerland.

4.5

The fear for European reinsurers competing globally is that they would be placed at a serious disadvantage compared with their rivals outside Europe, where capital requirements are lower. Much of the reinsurance business could well shift to non-European reinsurance centres such as Bermuda or the USA. Any shift in reinsurance capacity would considerably weaken Europe's position as a financial centre. The excessive requirements would inevitably deplete reinsurance capacity and/or make reinsurance more expensive. Such price hikes for reinsurance will inevitably be reflected in the cost of primary insurers' products and thus filter down to consumers too. In turn higher prices will inevitably also have an adverse impact on the establishment of private funded pension schemes that is so urgently needed.

4.6

The Committee feels that none of these developments are conducive to promoting the European single market. The new EU Member States in particular are keen to have a properly working single European market in reinsurance and would be particularly affected by any adverse changes in the structure of reinsurance provision.

4.7

The Committee therefore concludes that the method for calculating the solvency margin for life reinsurance activities proposed in the draft directive could damage European reinsurers' competitiveness. It thus feels that significant changes are needed to the Commission's proposed solvency provisions of life reinsurance undertakings.

4.8

Building on that, the Committee proposes that the solvency calculation for non-life reinsurers should also be taken as a guide for the life reinsurance sector.

4.8.1

In terms of risk and competition, the solvency calculation method for non-life insurers is more than adequate. The non-life solvency formula is broadly consistent with comparable international solvency requirements so that there is little chance of European reinsurers being placed at a competitive disadvantage.

4.8.2

The non-life formula adequately meets the needs of the life reinsurance sector. Because of its overwhelming reliance on existing calculations of mortality risk, the life reinsurance business has more in common with the primary non-life insurance and the non-life reinsurance sectors than with the primary life insurance business.

4.8.3

Individual risks not reflected in the non-life formula can easily be incorporated under the Solvency II project.

4.8.4

From a legislative standpoint, the non-life formula is easy to implement as the Commission has already submitted a finished text in its draft proposal for a directive (revision 3).

4.8.5

By using the non-life formula, life reinsurance undertakings are able to determine their solvency requirements quickly since companies already have the requisite data which does not therefore need to be collected. The non-life formula is especially useful given the lack of information in international business.

4.8.6

The non-life solvency formula is particularly well suited to a fast-track approach. It is easy to apply as it needs no further adjustment in cases where, for instance, contractual deposits are placed.

5.1

The proposed directive applies the provisions for calculating the solvency margin of primary non-life insurance activities to the non-life reinsurance business as well. The proposal also allows for the possibility of increasing the solvency requirements for non-life reinsurance by up to 50 % under the Lamfalussy procedure.

5.2

The Committee feels that, under the fast-track procedure, it is appropriate to transfer, unchanged, the solvency rules for primary non-life insurers to non-life reinsurers. However, the Committee has considerable misgivings about extending the Lamfalussy procedure in the area of solvency requirements.

5.3

The proposed directive was conceived as a fast-track project, not as a framework directive within the Lamfalussy procedure. The solvency requirements should only be amended as part of the more far-reaching Solvency II project.

5.4

Nor is there any material case for applying the Lamfalussy procedure. Capital requirements for reinsurance undertakings are not in any sense implementing measures under the terms of the Lamfalussy procedure. As is readily clear from the protracted Basle II negotiations in the banking sector, capital requirements are the very core of the future supervisory system and not some downstream detail.

5.5

The Committee feels that the specific capital requirements should be made clear in the directive itself and not in downstream Community legislation. This distinction is also backed up by the current Convention draft, which requires that substantive provisions be incorporated into the directive itself. The Commission's reference to extensive consultation of the relevant stakeholders does not therefore go far enough.

6.1

Under the proposed directive, retrocession to other reinsurers may be taken into account in solvency calculations only up to a ceiling of 50 % of the gross amount of claims. This is in line with the current rules for primary insurers in the life and non-life sectors. The draft directive on the supervision of reinsurance undertakings is designed to make a substantial contribution to boosting the financial soundness of the reinsurance sector within the European Union. The Committee therefore feels that full recognition of cessions of primary insurers and retrocessions of reinsurers is warranted, provided the ceding or retroceding undertaking concerned is subject to supervision within the EU.

6.2

The Committee would recommend increasing the reinsurance and retrocession factors, not least given the increased demands made on the insurance industry to resolve issues facing society as a whole. Because of the low reinsurance and retrocession factor, it has not always been possible to offer economical solutions, e.g. in response to the calls made in the wake of the 11 September 2001 attacks to cover industry and the aviation sector against terrorist risks. In some Member States, the low retrocession factor has so far prevented the development of insurance cover for terrorist risks.

7.1

The Committee accepts the qualitative prudential rules provided for in Article 34 (the ‘prudent person principle’). Given the special features and, in particular, the international nature of the reinsurance business, such an approach is more appropriate than a rigid quantitative one. The EU is thus pursuing a modern approach that is also recommended by the International Association of Insurance Supervisors (IAIS). At the same time, however, the Committee recognises that a qualitative approach is not a blank cheque, but requires undertakings to continuously monitor and improve the capital investment process.

7.2

As the directive restricts or repeals existing prudential rules (as regards depositing security for instance), the Committee recommends that the directive should give Member States the option of requiring the application of additional quantitative investment rules for reinsurers established in their territory. Any such rules must, however, be justified under the ‘prudent person principle’ and the obligations entered into.

9.1

The Committee backs the Commission's Proposal for a Directive of the European Parliament and of the Council on reinsurance and amending Council Directives 73/239/EEC, 92/49/EEC and Directives 98/78/EC and 2002/83/EC subject to the reservations set out above. It considers that the proposal covers almost all areas relating to the supervision of reinsurance undertakings. The full implementation of the directive will go a considerable way to meeting the Commission's objective of strengthening and stabilising the reinsurance markets in the European Union.

9.2

Having examined the Commission document, the Committee has addressed selected aspects of the proposal for a directive in order, among other things, to give the Commission practical pointers and suggestions for further deliberations and analysis. The Committee proposes that the solvency calculation for non-life reinsurers should be taken as a basis for the life reinsurance sector as well. The solvency requirements should remain outside the scope of Lamfalussy procedure. The Committee considers this to be a key directive and therefore calls for a rapid legislative process.