Reinsurers opt for a single market

Date: 09/11/1995

By Tim Jones

THE London market for reinsurance has decided to open its borders and permit insurers in any member state to transact international business without setting up a subsidiary branch in the City.

As the European Commission holds the threat of aggressive market-opening measures action against operators in the telecommunications and energy sectors under its fearsome Article 90 powers, the reinsurers have acted alone to open up their market.

“We are effectively creating our own single market,” says Nick Lowe, a representative of the London Insurance and Reinsurance Market Association (LIRMA).

Reinsurers step in when an insurer is concerned by the size of the risk he is underwriting. In this case, the insurer can opt to sign over part of the risk by reinsuring it with another insurer while offering the reinsurer a cut of the premium.

The London market, which processes premiums worth 12 billion ecu every year, is effectively the European insurance and reinsurance market.

Until now, LIRMA club rules have insisted that any underwriter wanting to process a claim on its market must open a subsidiary or branch in London and register with the UK Department of Trade and Industry.

When LIRMA decided to extend its facility for European brokers to deal directly and process claims through its system, it was surprised to learn from its legal advisers that it had probably been unknowingly breaking EU single market rules.

From now on, huge reinsurance companies like Munich Re or Swiss Re will no longer have to operate London branches, although LIRMA expects they will want to maintain their presence.

“We don't expect them to close their offices,” says Nick Lowe. “If they open up, they will reduce costs because the London market still requires a relationship between brokers and their clients. We think they will do more business on the London market if they have this extra facility.”

The London market will offer its London Processing Centre the opportunity to allow new members to process their international insurance and reinsurance, effectively reducing costs for existing customers.

However, LIRMA's ambitions do not stop with opening up its market to the EU and Switzerland.

“Our ultimate aim is to have a world-wide system,” says Lowe, who was in Brussels two weeks ago to meet officials in DGXV, the Directorate-General responsible for the internal market, to explain the system.

At the same time, London's reinsurers were also in Brussels to express their opinion on early proposals from DGXI, the Directorate-General for the environment, on systems of compensation for environmental damage.

LIRMA is keen to ensure that the plans do not lead to a repetition of problems experienced in the US with the 'polluter pays' principle. A series of court cases established the principle that polluters could be liable for damage caused before environmental legislation was put in place. In addition, 'joint and several liability' could mean that if a large area of land was polluted in the past and only one insurer remained in business from that time, it could be wholly liable to pay for the retrospective damage.

“The insurance industry is concerned they will come up with something retrospective,” Lowe said. “We are happy with the 'polluter pays' principle but we don't want to have to pay for the past.”