Bolkestein gets tough as EU reinsurers urge US solution

By Peter Chapman

Date: 18/03/04

THE European Commission is preparing to unleash a tough new law allowing tit-for-tat measures against American reinsurance operators in the Union - as European reinsurers play shuttle diplomacy with US regulators to get them to back down in a multi-billion euro trade dispute.

Reinsurance firms are essentially specialist companies that agree to underwrite policies written by mainstream insurers.

Currently, American authorities impose stricter rules on European operators selling reinsurance on the US market than they do upon US-based firms. These are designed to cover the worst-case scenario that a reinsurer cannot pay out on its claims.

In practice, this means EU firms, such as Munich Re, Hanover Re or Lloyd's of London have to lodge billions of euro in the US, in the form of letters of credit or in trust funds amounting to 100% of their gross liabilities - essentially expected payouts - to their American customers.

These huge sums are tied up so that firms cannot earn interest on the money, or use it to pay out claims. Moreover, they have to pay banking charges to the finance houses handling the collateral.

European firms claim this is an unfair restriction - and they are pushing the National Association of Insurance Commissioners (NAIC) to approve new rules granting fairer access.

"We are in a situation at the moment where non-US reinsurers are faced with quite onerous obligations," said David Matcham, director of operations at the London-based International Underwriting Association (IUA).

EU operators alone were forced to place €20-25 billion in the US to cover collateral requirements, he said, adding that transaction costs on these sums would cost European firms more than €200 million per year.

However, European Voice has learned that a draft law on reinsurance, now being finalized by Frits Bolkestein, the internal market commissioner could be used to pressure the United States into relaxing its regime.

That is because the law would force EU-based regulators to target non-Union firms coming from countries that the Commission believes are imposing unfair restrictions on EU companies.

In such cases, national regulators must halt authorizations for foreign operators to conduct business in EU markets and stop them taking share-holdings in Union-based firms. These restrictions would be in place while the Commission tries to negotiate better market access for EU firms.

But if these negotiations fail, they could be made permanent if a qualified majority of member states agrees.

"The Americans won't be very keen on that," said the IUA's Matcham.

In public, Commission officials deny claims that the law is meant to coerce American insurance watchdogs.

Instead, they say, the existence of new EU regulations would help reassure US authorities that European firms are effectively supervised. This would, thus, encourage them to rethink their regime viz-à-viz Europeans operating in American markets.

Bolkestein told a London conference that a "secure EU framework will hopefully help us to negotiate mutual recognition agreements with major trading partners, notably the United States".

The reinsurance issue is already one of Trade Commissioner Pascal Lamy's priorities in the current round of trade liberalization talks.

However, slow progress in the Doha round has frustrated efforts to open up the sector.

Matcham met NAIC, which recommends rules which US states should apply, in New York this week. He said his group was pushing a fairer system taking into account the financial stability of the most prestigious foreign firms.

He added the NAIC promised to increase its efforts to reach a compromise deal with Europe during recent talks on the issue.

The meeting is the latest in a round of top-level gatherings of EU and US executives, which Europeans hope will unlock a deal long before the EU's rules take effect

Lloyd's of London executives confirmed that the market's chairman, Lord Levene, was also in New York earlier this month to share his thoughts with NAIC bosses and US industry over the issue.

Alastair Evans, head of government affairs at Lloyd's, a complex grouping of insurance syndicates operating under one roof, says Lloyd's is particularly irked by special rules that insist it must lodge an additional $100 million margin in US bank vaults, above and beyond its liabilities.

Other EU reinsurers must only put up one-fifth of that amount.

US reinsurance groups oppose weakening their rules, arguing that they are necessary to guarantee the health of its financial services sector and protect consumers against European insurance industry meltdowns.

Members representing more than 90% of the property and casualty market say they oppose the European proposals.

European insurance firms want the US National Association of Insurance Commissioners (NAIC) to approve new rules granting fairer access to the US market for non-US reinsurers.

http://ec.europa.eu/comm/internal_market/insurance/reinsurance_en.htm http://ec.europa.eu/comm/internal_market/insurance/reinsurance_en.htm

http://www.naic.org/ http://www.naic.org/

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