Disaster insurance payouts at risk from collateral damage

Date: 02/12/04

By Anna McLauchlin

THE new EU proposal to create a level playing field for reinsurers such as Swiss Re and Munich Re will badly weaken the global insurance industry, the French insurance regulator has warned.

Under the European Commission's proposal, currently being examined by the Council of Ministers and the European Parliament, governments will not be able to demand extra funds from foreign reinsurance companies, which insure insurers against large risks, as collateral after 2010.

National regulators will continue to impose a solvency margin on EU reinsurers to protect them against risk, but extra collateral for third-country companies will be phased out.

But Florence Lustman, secretary-general for the CCA (Commissaire Contrôleur des Assurances) in Paris, warned that the removal of collaterals would see non-EU reinsurers creating subsidiaries within the EU to benefit from the new rules.

As the reinsurance market is global, these non-protected risks then could be transferred to any country in the world.

“We have to get rid of this myth that because it is a global market the reinsurance industry is better placed to compensate risks, it is not true,” she told European Voice.

A solid margin against risks was the best guarantee against reinsurers becoming bankrupt following a terrorist attack or environmental disaster, such as the recent cyclones in the Caribbean, said Lustman.

A reinsurer who merely satisfied the EU proposal's requirements before the 11 September 2001 attacks on New York and Washington DC might now be insolvent, she argued.

French regulators want collateral rules to be extended throughout Europe rather than banned entirely as is proposed at the moment.

If this is not possible, Lustman said there should be no ban until the new solvency rules have come in for insurers.

These rules - known as Solvency II - will tighten up the way in which insurance companies calculate their risk and use capital to insure against their risks, replacing the ratio-based structures currently in use.

The Commission is in the process of researching a proposal.

“Until we know what Solvency II is going to say, how can we recommend a ban on collaterals?” Lustman said.

The reinsurance industry argues that posting collateral is both costly and unnecessary.

Collateral requirements in the US for EU reinsurers amount to &036;50 billion at present at an annual cost of &036;500 million per year, argues Bob Howe, chief risk officer at Swiss Re in the UK.

Howe told MEPs at a hearing on Tuesday (30 November): “Collaterals do not guarantee the safety of reinsurance, good management practices do.”

But Lustman disagrees. “It's true that collateral cannot prevent risk by 100%.

“But it does so by 50-60%, so why would you want to remove that and replace it with nothing?”

EU finance ministers will discuss national governments' position on the directive in January 2005, under the Luxembourg presidency.

Sources say that horse-trading has resulted in France, Portugal and possibly Hungary clubbing together within the Council to push for an extended phase-out period as late as 2014.

Opponents, including the reinsurance industry and British Socialist deputy Peter Skinner, who will draft The Parliament's view, say this will make it more difficult to negotiate an end to US collateral demands for EU firms.

“This is a business to business proposal, there are no consumers to protect,” Skinner said.

“There is absolutely no reason for these collaterals to remain in place when most countries do not impose them.”

The French insurance regulator Commissaire Contrôleur des Assurances (CCA) has warned that the new EU proposal to create a level playing field for reinsurers would badly weaken the global insurance industry. Under the European Commission's proposal, being examined by the Council of Ministers and the European Parliament, governments would not be able to demand extra funds from foreign reinsurance companies, which insure insurers against large risks, as collateral after 2010.