The directive is alternatively called the Reinsurance Passport Directive or the Reinsurance Framework Directive.

Currently, the level of supervision within Europe is quite different from country to country, he said. Within Europe, this leads to a situation where reinsurers must set up subsidiaries in some countries (the U.K.) so the reinsurer can be regulated locally, while other countries permit a branch, he explained. (If a subsidiary isnt set up in the U.K., for example, the Financial Services Authority wants to supervise the company, not the branch, as if it were domiciled in the United Kingdom.)

This directive brings “reinsurance supervision within the single market framework on a home state regulation basis, so that if you have a license to do business in one market that automatically enables you to do business in the other 14 states, subject to certain reporting requirements and regulator dialogue,” said Marie-Louise Rossi, chief executive of the International Underwriting Association in London.

(Next summer, the EU is expected to increase from 15 states to 25 subject to the results of referendums being conducted in most of the states.)

Ms. Rossi explained that the directive will usher in a level of supervision that is suitable for business-to-business regulation rather than regulation of reinsurance adapted from insurance supervision, which exists in some member states such as the United Kingdom. Reinsurance regulation on such a basis can be viewed as “somewhat over-regulatory.”

Charles Gordon, partner with the international practice of DLA, a London-based law firm, described EU reinsurance regulation as “a complete patchwork.”

Reinsurers in a number of European states are either not regulated at all or are very lightly regulated, he said. “Quite a few countries will have to tighten up the regulation of their local reinsurers if they want them to be able to use the passport arrangement under this directive.”

After harmonization is complete, “we would like recognition of this new supervision by regulators outside of Europe, especially in America where alien reinsurers are required to give guarantees, such as deposits, letters of credit or trust funds, equal to 100 percent of gross liabilities,” Mr. Champvillard asserted.

The directive will create “a set of international standards–cross-border standards–that could be used in future trade liberalization debates and mutual recognition debates between the European Union and other developed economies,” affirmed Ms. Rossi.

At this juncture in the development of the reinsurance directive, Mr. Champvillard said European regulators and the reinsurance industry are debating minimum solvency margins.

“We believe that reinsurers should be subject to the same solvency requirements as insurers; after all, we sometimes are competing for the same business,” he said.

However, some European state regulators are suggesting that reinsurers should have higher net assets than the insurers because they believe reinsurance is much more volatile than direct business, he noted.

“We believe our business is not any more volatile than that of many insurers, like a monoline mutual that writes casualty lines,” he stressed. He admitted, however, that reinsurance sometimes can be more volatile, but it depends on the situation.

“We would like to see equality in terms of competitive advantages,” he continued. “Therefore if a direct insurer has a lower solvency margin requirement, the cost of capital will be less in the pricing of the business, and this would represent unfair competition.”

Ms. Rossi expected a draft directive to come out before the end of the year. Mr. Champvillard said the final form of the directive is projected to be ready early next year. “Then each country will have to adopt it, which will take another year or two.”

Reproduced from National Underwriter Edition, June 23, 2003. Copyright 2003 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.