Commission targets reinsurance

Date: 05/09/02

By Peter Chapman

THE EU's multi-billion euro reinsurance market is set to be targeted by a new law, filling a void in one of the financial services sector's least regulated areas.

Commission financial services experts say the directive - likely to be unveiled next year - will establish minimum rules for a sector that has crept under the radar screen of Brussels and national regulators.

The new regime will ensure firms that cover other company's risks have enough capital to survive events such as last month's floods in central Europe or the terrorist attacks on 11 September.

'It is true that it is a bit of a black hole,' said one Commission insider. 'We are studying how a supervisory regime could be constructed. We have wide support from member states to do something.'

DG Internal Market is running 'simulations' to show how different rules might work in practice and sharing its findings with experts in member states.

The Commission insider said the planned law was on the drawing board long before 11 September or plummeting confidence in corporate governance after Enron and WorldCom. The EU's market, led by firms such as Munich Re, Swiss Re and Lloyd's of London, had actually weathered recent crises relatively well, he added.

The planned directive is designed to be a safety net, creating a level playing field for firms operating across the Union, with minimum quality standards to ensure they are fit to operate in one of the financial services sector's most critical markets.

Even if the chances of defaults by reinsurance firms are small, experts say the consequences for the EU economy would be dire if the industry ever got its sums wrong and was unable to meet claims.

Currently, most member states have some form of regulation for reinsurance. But levels of supervision tend to be far lower than for traditional insurance companies, while some countries rely mainly on self-regulation by industry associations.

Stephen Searby, reinsurance analyst for credit rating agency Standard and Poor's, said reinsurance firms had traditionally escaped tough regulation because their clients are other big finance companies and not consumers.

But he said a new law - unlikely to be on the EU statute books before mid 2005 - would likely be welcome, though the 'devil will be in the detail'.

He said it was vital the EU did not make it more difficult for reinsurance companies to take business anywhere in the world because such firms traditionally spread their risks so that, for example, an earthquake in Japan would be offset by profits elsewhere.

The EU's multi-billion euro reinsurance market is set to be targeted by a new law, filling a void in one of the financial services sector's least regulated areas.