Regulation plans could release capital

By Anna McLauchlin

Date: 04/11/04

Reinsurers are hoping that European Union plans to regulate their industry might eventually stop the US from requiring that they tie up huge amounts of capital as risk protection.

US state insurance commissioners will meet their EU counterparts in Brussels on 7-8 November to discuss collateral obligations.

The EU's reinsurance directive, as proposed by the European Commission in April 2004, would give EU reinsurers - the companies that insure direct insurers - a single licence to practise anywhere in the EU and would lay down minimum regulatory standards.

But there is also a clause covering third countries which, according to Alastair Evans, head of government affairs at Lloyd's of London, "could open the door to retaliatory measures in cases where EU insurers face trading barriers outside the EU".

Currently, US regulations require foreign reinsurers to post collateral equal to 100% of their gross liabilities in order to offer insurance for US companies, to guard against risk for companies over which the US has no regulatory powers.

But in most EU countries there is no obligation for US firms to do the same.

Evans, who is also chairman of the European Insurers' Association's international affairs committee, says Lloyd's underwriters are required to maintain l5.8 billion in US reinsurance trust funds that can only be invested in assets that produce a modest rate of return. If the reinsurance directive paves the way for a properly regulated single EU reinsurance market, the argument is that there is no reason for the US to demand such high-risk protection.

A US official told European Voice that policy officers in America dealing with this issue were in the process of "reaching out" to US reinsurance companies to find out how worried they were about reciprocity. "We're still trying to determine what our view of this situation is. But the last time I looked, EU reinsurers wrote over half of the US market, so it's obviously not a barrier to operations there," he said.

But Evans responded: "It is possible to operate in a country and still face disproportionate and discriminatory measures."

Commissioners from the US National Association of Insurance Commissioners will meet EU officials in Brussels next week to become "better educated on the EU insurance industry" and the matter will be raised. "We do recognize that it's an international business and we support the creation of an integrated EU market," the official said.

One potential obstacle to successful dialogue with the US is that there is still internal wrangling over the demands from France and, to a lesser extent, Portugal for collateral requirements for reinsurers.

Under the EU-wide draft reinsurance directive, they would no longer be able to make such requirements - but Paris is fighting for a 14-year phase-out period.

As contracts are awarded on an annual basis in France, some member states feel there should be a minimum, or no, transition period.

UK Socialist MEP Peter Skinner, who is in charge of drafting the European Parliament's view, told European Voice that he was committed to agree a shorter phase-out.

"If some of our member states are still demanding collateral from foreign companies we won't be able to do anything about the US situation," he said.

The first hearing on the directive will be held in the Parliament in the last week of November and the first reading is planned for February or March. Under the 'Lamfalussy' legislative procedure for financial services, the directive can be approved by Parliament in just one reading.

Article says that European reinsurance companies - companies that insure direct insurers - were hoping that European Union plans to regulate their industry might eventually stop the US from requiring that they tie up huge amounts of capital as risk protection. The EU's reinsurance directive, as proposed by the European Commission in April 2004, would give EU reinsurers a single licence to practise anywhere in the EU and would lay down minimum regulatory standards. A clause relating to third countries could open the door to retaliatory measures in cases where EU insurers face trading barriers outside the EU.