Currently there is no harmonisation in the regulation of reinsurance across the EEA, with each Member State deciding independently whether or not to regulate reinsurance. However, this is soon to change as the Reinsurance Directive is due to be implemented by Member States by 10 December 2007.
The Reinsurance Directive is an interim measure intended to harmonise the prudential regulation of reinsurance across Member States pending the implementation of the Solvency II project, which will introduce a solvency system for the insurance industry as a whole. In summary, the main elements of the Reinsurance Directive are as follows.
- It applies to pure reinsurers, ie, those which carry on only reinsurance business. The activities of those entities which carry on both insurance and reinsurance are governed by the Insurance Directives.
- Each Member State is required to regulate reinsurers whose head office is in its territory. Reinsurers in the UK are already regulated by the FSA so to a large extent in the UK little will change.
- A passport regime will exist so that reinsurers that are authorised in one Member State will be able to conduct business in another Member State, whether by establishing a branch or by simply providing services from their home state or another Member State.
- Non-EEA reinsurers will be required to obtain authorisation in each Member State unless they establish a subsidiary in a Member State.
- The Directive sets out prudential rules for the supervision of reinsurance undertakings. These include the establishment of technical provisions, ie, the amount that a reinsurance undertaking must set aside to pay its contractual commitments, and rules on the investment of assets covering those technical provisions.
- The Directive also lays down rules on solvency margins and minimum capital requirements, along with rules on measures to be adopted by the regulators if reinsurers are in financial difficulty.
- Each Member State will be able to authorise reinsurers who have their head office within its territory to transfer all or part of its portfolio to an accepting office in the EEA if the home states of the accepting office meets the necessary solvency requirements.
- The Directive also sets out provisions relating to finite reinsurance and insurance special purpose vehicles.
The UK already regulates reinsurance in much the same way as insurance, and the changes necessary to implement the Reinsurance Directive have already been implemented. Accordingly, the changes to reinsurance in the UK are likely to be less profound than elsewhere in the EEA.