Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on reinsurance and amending Council Directives 73/239/EEC, 92/49/EEC and Directives 98/78/EC and 2002/83/EC {SEC(2004)443}

(presented by the Commission)

EXPLANATORY MEMORANDUM

1. GENERAL COMMENTS [1]

[1] For more extensive presentation of the issues included in this chapter, see the Extended Impact Assessment concerning the Proposal for a Reinsurance Directive available at the Commission website: http://europa.eu.int/comm/internal_market/ insurance/reinsurance_en.htm

A single financial market in the EU will be a key factor in promoting the competitiveness of the European economy and the lowering the capital cost to companies. An integrated market, properly regulated and prudentially sound, will deliver major benefits to consumers and other market actors, through increased security against institutional default. The vehicle to achieve this integrated market is the Financial Services Action Plan. The Financial Services Action Plan announces a proposal for a directive on reinsurance supervision at the beginning of 2004.

Reinsurance is a structured risk transfer between an insurance undertaking and a reinsurance company. Reinsurance fulfils the following functions for an insurance company: reduction of technical risks, permanent transfer of technical risks to the reinsurer, increase of homogeneity of insurance portfolio, reduction of volatility of technical results, substitute for capital/own funds, supply of funds for financing purposes and supply of service provision.

In spite of its obvious connection to direct insurance business, there are some specific characteristics of reinsurance that may be important to highlight. There is no direct contractual relationship between the reinsurer and the original insured, and the policyholders have normally no priority to the assets of the reinsurer to cover their claims. Furthermore reinsurance is a business activity between professional parties. Reinsurance business is more international and has higher degrees of diversity in respect of geography and combinations of insured lines than direct insurance business.

The reinsurance sector plays a key role in the economy by providing wholesale cover for the risks assumed by insurance companies on behalf of their clients. While the average cession level in the EU is rather low (i.e. some 10% of all insurance premiums are reinsured), the cession level is relatively high for certain activities (i.e. 18% of non-life insurance premiums are reinsured, compared to 3% for life insurance premiums on average). Besides insuring insurers, reinsurers are also major financial intermediaries and institutional investors and reinsurers' financial assets represented 1% of the global securities market in 2001 [2]. Accordingly, the stability of the reinsurance sector is not only vital to the stability of the insurance sector generally but also has important implications for the financial system as a whole.

[2] Source: "Reinsurance - a systemic risk?"; Sigma 5/2003, Swiss Re.

Recent evidence of financial strain among reinsurers has focused the attention on the level and nature of risk assumed within the sector. Reinsurers face two risks in addition to those faced by primary insurers. First, they are usually exposed to greater volatility in their financial results because they protect the primary market against peak exposures such as catastrophe risks. In consequence of this risk, they need to maintain relatively high levels of capitalisation. Second, they may be called upon to support ailing subsidiaries, as they are often the top trading company in a group structure. Despite these additional risks, reinsurers operate in a global market where their activities are often not subject to prudential oversight or the regime is lighter than that applying to primary insurers. Moreover, there is no global framework for reinsurance supervision. This situation has raised concern about potential risks in the reinsurance industry. One the other hand, reinsurers can benefit from significant geographical and sectoral diversification effects to a greater extent than direct companies.

Reinsurance is a highly international industry with a limited number of large companies. In 2002, the total reinsurance premium of the 40 largest reinsurance groups amounted to USD 138 601 200 000, whereof USD 58 544 000 000 stemmed from EU reinsurers [3]. In the EU, Germany has a dominant position with companies as Munich Re, Hannover Re and Allianz Re. Lloyd's is the largest UK writer of reinsurance, and SCOR together with Axa Re are the largest French reinsurers.

[3] Standard & Poor's, Global Reinsurance Highlights 2003 Edition, London/New York 2003.

1) The need for a European legal framework for reinsurance supervision

There are currently no harmonised reinsurance supervision rules in the EU. The lack of an EU regulatory framework for reinsurance has resulted in significant differences in the level of supervision of reinsurance undertakings in the EU. The different national rules have created uncertainty for direct insurance companies (and their policyholders), barriers to trade within the internal market, administrative burden and costs as well as weakening the EU position in international trade negotiations:

Uncertainty for direct insurance undertakings (and their policyholders): The different reinsurance supervision regimes in the EU have resulted in increased difficulties for direct insurance undertakings to choose their reinsurers in a prudent and cost-efficient way. The selection of reinsurers is of decisive importance for an insurance company, and could also affect the company's ability to pay claims towards policyholders.

Barriers to trade: Certain EU countries use systems where assets of the reinsurer must be pledged (collateralised) in order to cover outstanding claims provisions. This makes optimal investment management more difficult and thus results in higher operational costs for reinsurance undertakings. This could in fact increase the price the reinsurer charges for taking over risks from direct insurance companies. Reinsurance companies may also decide not to be active in markets where the posting of collaterals is required, and consequently the availability of reinsurance protection will be more restricted.

Administrative burden: In the EU, the Comité Européen des Assurances (CEA) and the OECD have identified administrative impediments for cross-border reinsurance services. The lack of mutual recognition between EU supervisory authorities in reinsurance in certain cases means that reinsurance undertakings are subject to different supervisory rules in several Member States. For reinsurance companies this could lead to significant double work and increased administrative burdens. Examples of burdensome administrative measures are the multiple fit and proper checks of the group's highest management, double requirement for auditors' confirmation of balances as well as the obligation for branches to issue financial statements according to local GAAP (generally accepted accounting principles) for the whole group.

International trade negotiations: It is argued that the lack of a harmonised EU system makes international mutual recognition agreements more difficult. The absence of such agreements means that European reinsurers are confronted with important barriers to entry into foreign markets, such as the requirement of posting collateral for the value of their commitments in the foreign market where the reinsurer intends to conduct business.

If no actions are taken at EU level, there is a risk that the internal market for reinsurance services would continue to work in a suboptimal way, which would harm the EU reinsurance industry. Negotiations with third markets on mutual recognition agreements could be significantly more difficult.

Internationally significant attention has been paid in recent years to reinsurance supervision. G7 and the IMF have expressed concern that lack of reinsurance regulation could impede international financial stability. In fact, at recent Financial Sector Assessment Programme (FSAP) reviews in Member States, IMF has reiterated the need for legislation in this field. The FSF (Financial Stability Forum) has repeatedly expressed concerns about the transparency of the reinsurance market and has therefore created a task force to address the issue. The OECD has ongoing work in the reinsurance field, particularly as concerns exchange of reinsurance company information between supervisors. The IAIS (International Association of Insurance Supervisors) reinsurance work is closely coordinated with the EU fast-track project. A set of principles for minimum requirements for supervision of reinsurers as well as a standard on reinsurance supervision have been adopted.

2) The approach of the Directive

Early in the reinsurance supervision work, the Commission Services established three guiding principles for a future EU reinsurance supervision regime:

* The system should establish a sound and prudent regime in the interest of insurance policyholders. Strong and well-supervised reinsurers contribute to a stronger internal market and international financial stability.

* The system should build on essential coordination of Member States' legislation and mutual recognition of the supervision in the Member State where the reinsurance undertaking is licensed. Once licensed by its home Member State a reinsurance undertaking should automatically be allowed to conduct reinsurance business all over the European Community under the freedom of establishment and the freedom to provide services. No additional supervision of or checks on the reinsurance undertaking should be performed by supervisors in host Member States. This approach has shown its suitability during many years in the direct insurance field, where it was introduced by the Third Insurance Directives [4].

[4] Directive 92/49/EEC (OJ L 228, 11.8.1992, p. 1, as last amended by Directive 2002/87/EC of the European Parliament and of the Council (OJ L 35, 11.2.2003, p. 1), and Directive 92/96/EEC (OJ L 360, 9.12.1992, p.1), this Directive has been recast by Directive 2002/83/EC (OJ L 19.12.2002, p. 1).

* The introduction of a harmonised system for reinsurance supervision should lead to the abolition of systems with pledging of assets to cover outstanding claims provisions.

After extensive consultation, the Commission has chosen to present a proposal for a directive with the following features:

* a supervisory approach based on harmonisation and mutual recognition

* fast-track approach for a directive based primarily on current direct supervision rules

* mandatory licensing system

* solvency margin requirements in line with those of direct insurance, however with the possibility to increase this margin up to 50 % through comitology for non-life reinsurance when this is objectively justified.

An EU supervisory approach should be based on harmonised legal rules ensuring mutual recognition between Member States. The Commission believes that insurance and reinsurance supervision is a public concern and requires public regulation. Other systems (for example, voluntary, disclosure-based approaches) would not provide sufficient trust in the supervisory system. The lack of tangible sanctions in such a disclosure-based approach could make the system less efficient when addressing potential problems in reinsurance undertakings.

The Commission believes that there is a need for expedient action to achieve tangible results in a short to medium-term perspective. Such a "fast-track" solution would take its starting point in current direct supervision rules and business practice, when appropriate with adjustments. The long-term project "Solvency II" for direct insurance will however also affect reinsurance, and this work could to a fairly large extent build on the achievements in a fast-track project.

The proposed Directive requires reinsurance undertakings - like direct insurance companies - to be licensed in order to conduct reinsurance business. The efficiency of a licensing system has been proved by its wide use in the financial sector. Such a system also gives a clear mandate to supervisors, including the power to remove unsuited companies from the reinsurance market. A licensing system will furthermore ensure consistent treatment of all reinsurance entities in the EU, which would not have been the case had a so called "passport" solution (in which a company itself could choose whether to apply for a passport) been chosen. Moreover, this system will increase the responsibility of the Home Member State's supervisory authorities, as they become the sole competent authority for the prudential supervision of the reinsurance undertaking within the Community. The system will require enhanced cooperation between Member States' competent authorities.

Insurance and reinsurance are related activities and consequently the solvency requirements for the two activities should be similar. The proposed Directive does therefore contain solvency requirements for life reinsurance that are identical to those of life insurance. For non-life reinsurance the starting point is that similar rules should apply. However, for non-life reinsurance the proposed Directive contains a possibility for increased solvency requirement after a comitology decision. The Commission considers this "class enhancement" possibility for certain reinsurance classes or types of reinsurance contracts (up to 50%) as an essential part of the proposed Directive. It will provide an important tool to fine-tune the solvency requirements to better fit the nature of reinsurance business. The comitology option will only be used after detailed analysis and extensive consultation with interested parties. In order to ensure a level playing field between reinsurance undertakings and insurance undertakings carrying on reinsurance activities, the proposal also provides for the subsequent adaptations to the non-life insurance Directive 73/239/EEC and life assurance Directive 2002/83/EC. Accordingly, insurance undertakings which conduct reinsurance by way of acceptances activities shall be subject to the provisions of the reinsurance directive in respect of the required solvency margin, where the volume of their reinsurance activities represents a significant part of their entire business (Articles 57(5) and 59(8)). These provisions will only be applicable when the decision adjusting the required solvency margin for non-life reinsurance activities has been adopted by the Commission.

2. Consultation of stakeholders and interested parties and impact assessment

a) Consultation of stakeholders and interested parties

Stakeholders have been consulted regularly during the project, and have provided the Commission with very important input. In the beginning of the project, a major hearing with over 100 participants was organised, and subsequently all participants (as well as other interested parties) were included in a mailing -list that received all documents produced under the project or a message stating that new documents have been posted on the Commission's reinsurance website. A study on reinsurance supervision was also published. [5]

[5] http://europa.eu.int/comm/internal_market/ insurance/studies/reins-sup_en.htm

The project has been followed by interested parties from a broad variety of sectors and professions. The sectors consulted are basically the following: insurance (commercial companies, mutuals, cooperatives etc), insurance associations (EU level as well as nationally), insurance intermediaries (brokers etc), accounting associations, actuarial associations, industry general (UNICE), analysts, risk/captive managers, SME-organisation (BEUC), consulting firms, banks, lawyer firms, rating agencies.

The Commission has benefited significantly from the input given by stakeholders and interested parties, particularly as the project has involved many very difficult technical matters. The documents send out for comments dealt with policy issues as well as detailed matters.

Comments received on the objectives of the reinsurance project

Commentators have generally been very supportive of all the three major objectives of the project. A few Member States have raised comments on the fact that the essential coordination of national's legislation and mutual recognition would prohibit additional checks or requirements by Host States. In particular, the Member States that currently use collateralisation have obviously expressed objections to abolition of systems with pledging of assets to cover outstanding claims technical provisions. However all other stakeholders have unanimously supported the objective as formulated by the Commission services. Certain Member States have commented on the difference in collaterals between the life and non-life insurance fields.

Comments received on the major policy issues

Approach to a supervisory framework for reinsurance

Most commentators have been in favour of a supervisory approach to reinsurance. Certain companies have argued in favour of voluntary solutions, but a greater number of companies and associations have stated that only a supervisory solution would give an additional quality mark to EU reinsurance. A status quo alternative has not been supported by any of the major stakeholders.

Member States have argued in favour of a fast-track approach, and this has also been the clear view of the Insurance Committee. Other stakeholders have also been very supportive of a fast-track solution based on current direct supervision rules. Technical specialists (like actuaries and accountants) have however pointed out that the restricted time frame scheduled (2004) would limit the number of possible solutions, thereby postponing the introduction of certain methods until the Solvency II project is finalised.

Solvency requirements for non-life reinsurance: The reactions from stakeholders on the level of the solvency requirements have been many and strong. There has been a large number of meetings with interested parties, particularly the insurance industry, the captive reinsurance industry, risk managers, actuaries, consultants and accountants. Generally, industry representatives and insurance consultants have argued that reinsurance is an activity that is close to direct insurance and therefore the same solvency requirements should apply. Some insurance supervisors have however strongly taken the view that reinsurance is more volatile and difficult to supervise and consequently a slightly higher requirement would be appropriate. The Commission has taken account of the different views expressed when elaborating the solvency requirements laid down in the proposal for a Directive. (Articles 37 and 40)

Solvency requirements for life reinsurance: This issue has also been the subject of much discussion, both as regards the actual requirements as the calculation methods. The Commission's Services have in fact consulted on different solutions. Considering the comments received, the Commission has concluded that the same approach as direct insurance (use direct life rules for life reinsurance, direct non-life rules for non-life reinsurance) would be preferable (Articles 38- 40).

Comments received on detailed legal issues.

During 2003 there have also been several consultations on detailed legal issues. The current proposal has been prepared taking account of comments from interested parties, in particular the insurance industry and the actuarial profession. Some of the submissions were very detailed and provided very useful input to the work of the Commission Services.

b) Impact assessment

An extended impact assessment has been carried out in order to identify whether there is a need for action at EU level and in case of a positive reply, the action required.

The impact assessment shows an overall agreement on the need for such an action if the objectives referred to in Section 1 of this explanatory memorandum were to be achieved.

With regard to the different policy alternatives considered to reach these objectives, three main options were considered:

1. Status quo, i.e. no changes to the current situation

2. Market mechanism solution/voluntary disclosure of reinsurance information, and alternatively a recommendation concerning indirect supervision practice.

3. Supervisory solutions.

As stated earlier in Section 2, the majority of Member States and industry organisations believe that there is a need for supervisory action in the field. Option 1 has not received support by practically no commentator. Option 2 was also thought as not providing sufficient trust in the supervisory system. The lack of tangible sanctions in such a disclosure-based approach could make the system less efficient when addressing potential problems in reinsurance undertakings.

As far as the option 3 is concerned (supervisory approach), two alternatives were considered:

1. A voluntary passport system for companies wanting to adhere to the system

2. A mandatory licensing system.

After wide consultation with Member State, insurance industry and other interested parties the Commission has decided to propose a licensing system. A licensing system is in line with the approach carried out by the EU in order to achieve the internal market in the financial sector in general and in insurance in particular (single license and home country control of prudential issues). Such a system has showed its efficiency since its establishment by the third insurance Directives in 1994. It ensures the financial soundness of reinsurance undertakings, and therefore the stability of insurance markets, since it applies to any Community reinsurance undertaking and not only those having a European perspective. A licensing system would furthermore lead to more coordination between Member States' treatments of all reinsurers and it will best suited to meet the objective of establishing a true internal market for reinsurance. Last the introduction of a supervisory regime based on supervision of all reinsurance undertakings by public competent authorities is also in line with the direction of the ongoing reinsurance supervision project carried out by IAIS, to which all Member States and the European Commission are members.

The extended impact assessment also was conducted in respect of quantitative solvency requirements for reinsurance undertakings. Two basic possible approaches were discussed:

1. alternatives where solvency requirements for reinsurance undertakings are close to those required for direct insurance

2. alternatives where solvency requirements for reinsurance undertakings are higher than those required for direct insurance.

The Commission has finally decided to set up a regime which is built on the solvency requirements set out in existing insurance Directives. However, in order to take account of the specificities of some types of reinsurance contracts or specific lines of business in non-life reinsurance, the proposal provides for the possibility of increasing the required solvency margin up to 50% for classes other than liability risks. This increasing shall be made by the Commission, in the exercise of its implementing powers, after having consulted the Insurance Committee.

3. legal basis of the proposal

This proposal is based on Articles 47(2) and 55 of the Treaty, which are the legal basis to adopt Community measures aimed at achieving the Internal Market in the services sector. The chosen instrument is the Directive, since it appears to be the most appropriate to achieve the objectives pursued. Moreover the legislative action of the European Union to achieve the internal market in insurance has been carried out by means of Directives based on these provisions of the Treaty. Last, the provisions of this Directive do not go beyond what it is necessary to achieve the objectives pursued.

4. Comments on the articles

This Proposal lays down a supervisory regime for reinsurance which is consistent with the existing legal framework for insurance. It is built on the approach followed by the current existing insurance Directives. Some of the provisions of Directives 73/239/EEC, 92/49/EEC and 2002/83/EC which are reproduced in this Directive are long; this is in particular the case of the provisions concerning the conditions of authorisation of a reinsurance undertaking, qualifying holdings, professional secrecy and solvency margin. This often results in complex provisions, which presentation may not be consistent with the current guidelines for drafting Community legislation. It is not necessary for the interpretation that a single article covers an entire aspect of the rules laid down in a legal act. Therefore the provisions of this Proposal are broken down in articles, which are grouped as appropriate in titles, chapters and sections, in order to facilitate their comprehension and clarity.

Article 1: Purpose of the Directive - Scope

The purpose of this Directive is to lay down the legal framework for prudential supervision of reinsurance activities in the Community. As stated earlier, there is currently no Community legislation dealing with reinsurance supervision. As a result, reinsurance undertakings which conduct only reinsurance business (professional reinsurers) are not subject to any particular Community provisions.

The Directive will thus fill a gap in the Community regime of supervision on insurance. It will apply to reinsurance a supervisory regime based on the same principles applicable to direct insurance, namely, the principles of single license and prudential supervision of the reinsurance undertaking by its home Member State's competent authorities.

This Directive applies to reinsurance undertakings having their head office on the Community which conduct only reinsurance business (professional reinsurers). The Directive does not apply to those insurance undertakings already subject to non-life insurance and life assurance Directives [6], since their reinsurance activity by means of acceptances is covered by these Directives. In addition, insurance undertakings and bodies which are excluded from the scope of above Directives are also excluded from the scope of the present Directive. However provisions of this Directive concerning the calculation of the required solvency margin (Articles 35-39) may be applicable to insurance undertakings subject to non-life and life directives in respect of their reinsurance acceptances (See Articles 57(5) and 59(8)).

[6] Directives 73/239/EEC (OJ, L 228, 16.8.1973, p. 3), Directive 92/49/EEC (OJ L 228, 11.8.1992, p. 1), Directive 2002/83/EC (OJ L 345, 19.12.2002, p. 1)

In order to take account of a very special situation that might arise in a Member State where it is not possible to obtain reinsurance cover in the commercial market, the proposal does not apply to the provision of reinsurance cover conducted by a Member State, when it acts as a reinsurer of last resort for reasons of public interest. However this provision does not exempt the Member State from complying with Community provisions concerning competition rules and state aids. An example is the situation that arose in the air insurance sector after the attacks of 11th September 2001, where the reinsurance market failed to provide reinsurance cover for some risks. Member States were Member States were prompted to provide such a reinsurance cover. The schemes set up were examined under EU law and in particular state aid rules before being authorised.

Article 2: Definitions

Article 2 contains definitions concerning the essential concepts employed in the proposal, in order to clarify their meaning and hence contribute to a better understanding. Most of these concepts have already been employed in other Community legal acts applicable to insurance, such as the Directives 2002/83/EC on life assurance, 73/239/EEC and 92/49/EEC on non-life insurance, 98/78/EC on the supplementary supervision of insurance undertakings in an insurance group.

A definition of "captive reinsurance undertaking" is given to refer to those reinsurance undertakings which are owned by one or several industrial or commercial firms or by a financial undertaking other than an insurance undertaking or a reinsurance undertaking or a group of insurance or reinsurance. The objective of such undertakings is to provide reinsurance cover exclusively concerning the risks of the undertaking or group of undertakings to which the captive reinsurer belongs or to an undertaking or group of undertakings of which the reinsurance captive is part. This definition is necessary since the proposal provides for a special regime for these undertakings in respect of the minimum guarantee fund required in Article 40 to conduct reinsurance business.

Articles 3-14: Provisions relating to the taking-up of the business of reinsurance

The proposal for a Directive follows the approach of the current insurance Directives with regard the taking-up of reinsurance activities in the Community. The proposal lays down the principles of single license and home country control for the prudential supervision of reinsurance undertakings. This is possible because of the coordination carried out of the essential aspects regarding the supervision of reinsurance undertakings, which permits the mutual recognition of authorisations and prudential supervisory systems of Member States.

Accordingly, a reinsurance undertaking shall be subject to a prior official authorisation that shall be granted by the competent authorities of its home Member State. The proposal lays down the minimum conditions necessary to obtain the official authorisation. The reinsurance undertaking must have a specific legal form, it must submit a scheme of operations providing essential information on the business plan, it has also to possess the minimum guarantee fund provided for in Article 40. The Directive also requires that the reinsurance undertaking be effectively run by managers who have adequate technical qualifications or experience. The reinsurance undertaking must limit its objects to the business of reinsurance and related operations. This requirement may allow a reinsurance undertaking to carry on, for instance, activities such as provision of statistical or actuarial advice, risk analysis or research for its clients. It may also include a holding company function and activities with respect to financial sector activities within the meaning of Article 2 point 8 of Directive 2002/87/EC. The latter activities will be in any case subject to the provisions laid down on supplementary supervision of insurance or reinsurance groups and financial conglomerates laid down by Directives 98/78/EC and 2002/87/EC (Articles 5-11).

Furthermore, before granting the authorisation, the competent authorities must be informed of the identity of the members or shareholders with a qualifying participation in the reinsurance undertaking. The purpose of this provision is to enable the competent authorities to assess the suitability of the shareholders, in order to ensure the sound and prudent management of the reinsurance undertaking. Should they not be satisfied as to these qualifications, they shall not grant the authorisation. Equally, where close links exist between the reinsurance undertaking and other natural or legal persons, the authorisation shall be refused when those links do not enable the competent authorities to exercise effectively their supervisory functions. These requirements pursue a prudential objective, namely to ensure both that there is in place a sound management and that the supervision of the reinsurance undertaking is effective. Other objectives based on considerations such as industrial or economic policy of the country or market needs are not covered by these provisions and should be prohibited when examining the application for authorisation as they would be in conflict with the principles of the Treaty (Articles 7, 9, 10 and 12).

The application for authorisation has to be considered within a period of six months after it has been submitted by the reinsurance undertaking. The refusal as well as the withdrawal of the authorisation shall be motivated stating the precise grounds for such a rejection. The reinsurance undertaking must have the right to apply to the courts for the legal review of the decision (Article 13).

The authorisation granted is valid for the whole Community. It allows the reinsurance undertaking to conduct business thorough the Community, under the freedom of establishment and the free provision of services, without further formalities (Article 4).

Articles 15-31: Conditions governing the business of reinsurance. Principles and methods of prudential supervision.

A supervisory regime based upon a system of a single authorisation granted by the competent authorities of the Home Member State of the reinsurance undertaking and valid throughout the entire Community calls for devolution of powers to supervision on the competent authorities which granted the authorisation so as to guarantee full compliance with the conditions governing the pursuit of business by the reinsurance undertaking, whether it be by way of establishment or by way of freedom of services.

Article 15 of this proposal sets out the exclusive competence of the home Member State's competent authorities in respect of the financial supervision of the reinsurance undertaking, including the activities it carries on either through branches or by way of freedom of services.

Because of the exclusive competence of the home Member State in respect of supervision of all the financial aspects of a reinsurance undertaking, the competent authorities of a reinsurance undertaking may not refuse a retrocession contract concluded by this reinsurance undertaking with a Community reinsurance undertaking covered by this Directive [7] on the grounds directly related to the financial soundness of that reinsurance (or insurance) undertaking. Such an indirect supervision of these undertakings would mean an interference with the supervisory powers of the competent authorities of these undertakings and would put into question the fundamental principle of the mutual recognition which is at the root of the legal framework laid down by this proposal.

[7] Or a Community insurance undertaking authorised in accordance with the non-life insurance or life assurance Directives (Directives 73/239/EEC and 2002/83/EC).

The reinsurance undertaking must have sound administrative and accounting procedures as well as adequate internal control mechanisms. This is needed to ensure an orderly and financially stable pursuit of the activities. The Home Member State shall establish the conditions to ensure that this requirement is meet.

Article 16 states the right of the Home Member State's competent authorities to carry out on-the-spot verification of branches of the reinsurance undertaking in other Member States. It lays down the procedure to carry out such verification. This provision is similar to those laid down in the non-life and life insurance Directives [8].

[8] Directive 73/239/EEC, art. 16, as amended by Directive 92/49/EEC, art. 11 and Directive 2002/83/EC art. 11.

In order to ensure the efficiency of the supervision carried out over the reinsurance undertaking, the competent authorities must have appropriate powers to make detailed enquiries regarding the reinsurance undertaking, request submission of documents, or take measures, such as sanctions, on the reinsurance undertaking or its directors or managers (Article 17).

Articles 19-23 lay down specific provisions regarding the supervision of qualifying holdings in a reinsurance undertaking. Their purpose is to ensure that the competent authorities are aware of the ownership structure of the reinsurance undertaking. This provision is the corollary of the supervision of qualifying shareholders at the moment of considering the application for the authorisation laid down in Article 12. This regime is the same already applicable to insurance [9] and other financial services.

[9] Directive 92/49/EEC, art. 15 and Directive 2002/83/EC, art. 15.

Articles 24-30 provide for the confidentiality of information held by competent authorities. All persons working or having worked for the competent authorities, included auditors and experts acting on behalf of the competent authorities, shall be bound by the obligation of professional secrecy. The confidential nature of this information does not prevent competent authorities from exchanging information regarding the supervision of reinsurance undertakings, since it aims at ensuring the proper supervision of the reinsurance undertaking. In any case the information exchanged is also subject to the confidentiality requirement and it may only be disclosed with the express consent of the competent authorities which forwarded that information.

Articles 28-30 also sets out the conditions and circumstances under which this information may be disclosed to authorities and bodies other than reinsurance supervisory authorities. The regime laid down is the same applicable to insurance undertakings [10].

[10] Directive 92/49/EEC, art.16 and Directive 2002/83/EC, art. 16.

Article 31 provides the duty for auditors to report promptly to the competent authority of the home Member State any fact or decision concerning the reinsurance undertaking, which affect the conditions governing the pursuit of reinsurance business and which they discover during the performance of their tasks in the reinsurance undertaking or in any undertaking having close links with the reinsurance undertaking. The Directive follows the regime already applied to insurance undertakings. [11]

[11] Directive 92/49/EEC, art 16a) inserted by Directive 95/26/EC (OJ L 168, 18.7.1995, p. 7) and Directive 2002/83/EC, art. 17.

Articles 32-34: Rules relating to technical provisions

Technical provisions are a fundamental part of insurance technique. Indeed they must enable an insurance or reinsurance undertaking to meet its commitments arising out of insurance or reinsurance contracts. For that reason, requiring any insurance (or reinsurance) undertaking to establish adequate technical provisions is a core principle of a supervisory regime for insurance or reinsurance. In a system of single authorisation granted by the home Member State, it is up to the competent authorities of the home Member State to require the insurance reinsurance undertaking to establish adequate technical provisions in respect of the whole business of the undertaking, including those carried on under the freedom of establishment and the free provision of services in the Community. Moreover the home Member State must verify compliance with this requirement and have also at its disposal appropriate means to ensure such compliance.

Article 32 lays down the principle of home country control for the definition and calculation of the technical provisions of reinsurance undertakings. The amount of such technical provisions shall be determined in accordance with the rules laid down in Directive 91/674/EEC on the annual accounts of insurance undertakings and consolidated accounts of insurance undertakings [12]. The proposal also provides that, in respect of life reinsurance activities, the Home Member State may also lay down more specific rules for the calculation of the technical provisions in accordance with the principles set up in Article 20 of Directive 2002/83/EC on life assurance. This provision sets out the actuarial principles to be followed to establish the technical provisions for life assurance activities.

[12] OJ L 374, 31.12.1991 p.7.

The home Member State shall also require its own reinsurance undertakings to set up an equalization reserve in respect of credit reinsurance activities (Article 33). The amount of such reserve shall be calculated in accordance with the rules provided for in Directive 73/239/EEC, in particular the Annex, which sets out four methods regarded as equivalent. The home Member State may exempt reinsurance undertakings for which credit reinsurance does not represent an important part of their activity, from the obligation to set up the equalization reserve.

The home Member State may also require its own reinsurance undertakings to set up equalization reserves for classes of risks other than credit reinsurance, following the rules laid down by that home Member State. This is in line with existing legislation on insurance, in particular Directive 73/239/EEC as well as Directive 91/674/EEC on insurance undertakings annual accounts.

By introducing a supervisory regime for reinsurance undertakings, which so far are not subject to a Community legal framework, the corollary is the abolition of the requirement of pledging of assets used to cover unearned premiums and outstanding claims provisions of a reinsurance undertaking where it is reinsured by a reinsurance undertaking authorised in accordance with this Directive, or an insurance undertaking authorised in accordance with Directives 73/239/EEC (non-life insurance) or 2002/83/EC (life assurance). However a Member State remain competent to impose pledging of assets used to cover the above technical provisions of its own reinsurance undertakings where they are reinsured by non-Community reinsurance undertakings, since these later are not subject to the supervisory regime of single authorisation and mutual recognition of this Directive.

Article 34 proposes a qualitative approach to investment rules. Specificities of reinsurance business make such an approach preferable to the more quantitative method used in the direct insurance field. The article states that the assets should take account of the type of business carried out by the reinsurance entity, the amount and the duration of the expected claims payments in order to secure sufficiency, liquidity, quality, profitability and matching of the investments. For non-life reinsurance, the matching requirement should be seen in the light of business practices and the inherent complexity to determine the duration of the liability cash-flows. The investments should furthermore be diversified and adequately spread in order to enable response to changing economic circumstances.

Articles 35-41: Solvency margin of reinsurance undertakings

A solvency margin is an important element of prudential supervision. This proposal lays down solvency requirements for reinsurance undertakings which are based on the current rules for insurance undertakings. As it has been pointed out earlier, insurance and reinsurance are related activities and consequently the solvency requirements for the two activities should be similar.

Wit regard to non-life reinsurance business, the proposal applies the requirements set out in the non-life insurance Directive 73/239/EEC (Article 37). However, due to the particular nature of some types of reinsurance contracts or specific lines of business, the proposal contains the possibility of increasing the required solvency margin. Already the non-life insurance Directive provides for an increase of 50% for liability insurances, because they are subject to a particularly volatile risk profile. The proposal provides for an increasing up to 50% of the solvency margin in respect of specific types or classes of business other than liability classes. The adjustment of the solvency margin shall be made by the Commission, after consulting the Insurance Committee, in the exercise of its implementing powers conferred on by the Treaty. These measures should be adopted following the regulatory procedure provided for in Article 5 of Decision 1999/648/EC (Article 55). This enhancement of the solvency margin will be only used after detailed analysis and extensive consultation with interested parties.

In order to ensure a level playing field between reinsurance undertakings and insurance undertakings carrying on reinsurance activities, the proposal provides for the subsequent adaptations to the non-life insurance Directive 73/239/EEC and life assurance Directive 2002/83/EC. Accordingly, insurance undertakings which conduct reinsurance by way of acceptances activities shall be subject to the provisions of the reinsurance directive in respect of the required solvency margin, where the volume of their reinsurance activities represents a significant part of their entire business (Articles 57(5) and 59(8)). These provisions will be applicable when the decision adjusting the required solvency margin for non-life reinsurance activities has been adopted by the Commission (Article 43).

As far as life reinsurance is concerned, the required solvency margin shall be calculated in accordance with the rules laid down in the life insurance Directive 2002/83/EC (Article 38).

Where a reinsurance undertaking conducts simultaneously life and non-life reinsurance business, the required solvency margin shall cover the total sum of required solvency margins in respect of both non-life and life reinsurance activities (Article 39).

The available solvency margin shall be represented by the assets listed in Article 36. The assets allowed are those already authorised by non-life and life insurance Directives to represent the solvency margin.

Article 40 refers to the minimum guarantee fund required to conduct reinsurance activities. The guarantee fund refers to the minimum capital requirement that a reinsurance undertaking must permanently have in order to engage in reinsurance business with the appropriate financial soundness. The proposal fixes a guarantee fund which may not be less than EUR 3 million. However, in respect of captive reinsurance undertakings, the home Member State may set the guarantee fund as to EUR 1 million. This provision aims at taking account of the special characteristics of captive reinsurance undertakings, and in particular the fact that they usually are medium/small size undertakings and their activity is confined exclusively to the cover risks concerning the undertakings to which the captive reinsurer belongs.

Articles 42-44: Reinsurance undertakings in difficulty - Withdrawal of the authorisation

The competent authorities of a reinsurance undertaking should have the appropriate powers to take action against a reinsurance undertaking where its financial situation deteriorates, for instance, where it does not establish adequate technical provisions or the solvency margin does not attain the required level. In such cases, the competent authorities shall have the power to require a financial plan, a restoration plan a financial recovery plan or to prohibit the free disposal of assets of the reinsurance undertaking.

Likewise, it is essential to provide that the authorisation granted to the reinsurance undertaking may be withdrawn in certain specific cases (i.e. non fulfilment of the conditions for authorisation, serious failure to comply with the conditions and regulations to conduct business, etc.).

The rules laid down in this proposal are identical to those already applied to insurance undertakings.

Articles 45-46: Reinsurance activities conducted by means of the freedom of establishment and the free provision of services

A reinsurance undertaking duly authorised by the competent authorities of the home Member State is entitled to carry on reinsurance business throughout the entire Community, under either the right of establishment or the freedom to provide services (Article 4(1)).

Article 45 sets out provisions concerning the case where a reinsurance undertaking, acting under the freedom of establishment or the free provision of services, does not comply with the legal provisions applicable in the host Member State. The regime proposed, which is also inspired by the regime laid down in insurance directives, is rooted in the cooperation between the competent authorities of the home and the host Member States.

Article 46 establishes the principle of equality of treatment of all reinsured creditors in the event of the winding-up of a reinsurance undertaking, without any distinction being made on grounds relating to the manner in which reinsurance contracts were underwritten; i.e. freedom of establishment or free provision of services. However this provision does not introduce a co-ordination of national rules on winding-up. Such a co-ordination in respect of insurance undertaking has been carried out by Directive 2001/17/EC (insurance winding-up Directive) [13]. The insurance winding-up Directive may also need to be adapted, after careful examination, at a later stage in order to bring into its scope reinsurance undertakings.

[13] OJ L L 110, 20.04.2001 p.28.

Articles 47-50: Third country reinsurance undertakings.

Reinsurance undertakings which have their head office in a third country and which conduct reinsurance business in a Member State shall not be applied a treatment which is more favourable than that afforded to reinsurance undertakings which have their head office in that Member State (Article 47).

Article 48 provides for the possibility to conclude agreements with third countries regarding the supervision of reinsurance undertakings. The purpose of these international agreements is, in particular, the exchange of information between competent authorities of the EU and the third countries concerned in respect of reinsurance undertakings as well as to provide for mutual recognition of supervisory rules and practices on reinsurance between the EU and the third countries. This provision would be of significant importance in order to tackle regulatory barriers to reinsurance which hinder the entry of Community reinsurance undertakings into third countries.

Articles 51-54: Rights acquired by existing reinsurance undertakings - Reinsurance undertakings in cessation of activities.

A reinsurance undertaking which was entitled or authorised to conduct reinsurance business in accordance with the provisions of its home Member State before the date of implementation of this Directive may continue to do so without requesting an authorisation. However, the reinsurance undertaking shall be subject to the provisions of the Directive, in particular the requirements regarding the financial soundness of the reinsurance undertaking (technical provisions, solvency margin and guarantee fund), the professional capacity and good repute of the managers or the suitability of the qualifying shareholders. The directive allows Member States to grant a transitional period of two years in order to avoid that existing reinsurance undertakings run into financial trouble because of the effort to comply with these requirements (Article 51).

On the other hand, the Directive does not apply to reinsurance undertakings which at the time of implementation of the directive have stopped underwriting new reinsurance contracts and exclusively administer their existing portfolio in order to terminate their activity. However, as these undertakings shall not subject to the single authorisation regime laid down in the Directive, it is essential for the sake of transparency and legal certainty, that Member States draw up the list of the reinsurance undertakings concerned and communicate to all Member States (Article 52).

Lastly Article 53 provides the right for a reinsurance undertaking to apply for judicial review of any decision taken in respect of it by competent authorities when applying their national rules adopted in implementation of this Directive.

Articles 55-56: Implementing powers of the Commission to made technical adjustments to the directive.

The proposal lays down the possibility to make technical adjustments to specific rules of the Directive. The Directive confers on the Commission implementing powers in respect of the provisions expressly listed in Article 56. In the exercise of its implementing powers the Commission is assisted by the Insurance Committee laid down by Directive 91/675/EEC. The measures to be adopted by the Commission shall be subject to the procedure laid down in Article 5(6) of Decision 1999/648/EC which lays down the procedures for the exercise of implementing powers conferred on the Commission.

Implementing powers shall be in particular used to enhance the required solvency margin for specific types or contracts or activities in classes of business other that liability classes (Article 37(3) and (4)).

Articles 57-60: Technical adaptations to Non-life, Life and Insurance Groups Directives

The introduction of a Community regulatory framework for reinsurance has an impact on the existing directives on insurance (non-life, life and insurance groups) [14]. To the extent that the present proposal once adopted shall complete this legislative framework for insurance sector, it appears necessary to take account of it in order to ensure a consistent regulatory framework. Accordingly, the existing insurance directives need to be adapted. This is the case, for instance, of the indirect supervision of a reinsurance undertaking carried out by the competent authorities of the insurance undertaking who has concluded a reinsurance contract with Community reinsurer subject to this Directive [15]. The competent authority of the insurance undertaking may not refuse such a reinsurance contract on the grounds directly related to the financial soundness of that reinsurer.

[14] Non-Life: Directives 73/239/EEC, 88/357/EEC, 92/49/EEC; Life: Directive 2002/83/EEC; Insurance Groups: Directive 98/78/EEC (OJ L 330, 5.12.1998, p. 1).

[15] Or a Community insurance undertaking authorised in accordance with the non-life insurance or life assurance Directives (Directives 73/239/EEC and 2002/83/EC).

The proposal also provides for the abolition of the requirement of pledging of assets used to cover unearned premiums and outstanding claims provisions of an insurance undertaking where it is reinsured by a reinsurance undertaking authorised in accordance with this Directive, or an insurance undertaking authorised in accordance with Directives 73/239/EEC (non-life insurance) or 2002/83/EC (life assurance).

These adaptations are also prompted by the purpose of submitting direct insurance undertakings accepting reinsurance to the solvency requirements which would be laid down for reinsurance undertakings and ensuring a level playing field amongst different undertakings writing inwards reinsurance business.

The insurance groups Directive 98/78/EC is also adapted in order to take account of the fact that EU reinsurance undertakings shall be subject to supervision [16]. A subsequent adaptation of Directive 2002/87/EC relating the financial conglomerates [17] will also be necessary.

[16] OJ L 330, 5.12.1998, p. 1.

[17] OJ L 35, 11.2.2003, p. 1.

Furthermore the Directive 2001/17/EC may also need to be adapted in order to bring into its scope reinsurance undertaking since they are not currently subject to the insurance winding-up Directive. Further work is necessary in this respect in order to identify the issues that need to be considered in order to make appropriate adaptations.

2004/0097 (COD)

Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on reinsurance and amending Council Directives 73/239/EEC, 92/49/EEC and Directives 98/78/EC and 2002/83/EC

(Text with EEA relevance)

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Articles 47(2) and 55 thereof,

Having regard to the proposal from the Commission [18],

[18] OJ C , , p. .

Having regard to the opinion of the European Economic and Social Committee [19],

[19] OJ C , , p. .

Having regard to the opinion of the Committee of the Regions [20],

[20] OJ C , , p. .

Acting in accordance with the procedure laid down in Article 251 of the Treaty [21],

[21] OJ C , , p. .

Whereas:

(1) Council Directive 73/239/EEC of 24 July 1973 on the coordination of laws, regulations and administrative provisions relating to the taking-up and pursuit of the business of direct insurance other than life assurance [22], Council Directive 92/49/EEC of 18 June 1992 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and amending Directives 73/239/EEC and 88/357/EEC [23] and 2002/83/EEC of the European Parliament and of the Council of 5 November 2002 concerning life assurance [24] have laid down the provisions relating to the taking-up and pursuit of direct insurance in the Community.

[22] OJ L 228, 16.8.1973, p.3.

[23] OJ L 228, 11.8.1992 p. 1. Directive as last amended by Directive 2002/87/EC of the European Parliament and of the Council (OJ L 35, 11.2.2003, p. 1)

[24] OJ L 345, 19.12.2002, p. 1.

(2) Those Directives provide for the legal framework for insurance undertakings to conduct insurance business in the internal market, from the point of view both of the right of establishment and of the freedom to provide services, in order to make it easier for insurance undertakings with head offices in the Community to cover commitments situated within the Community and to make it possible for policy holders to have recourse not only to insurers established in their own country, but also to insurers which have their head office in the Community and are established in other Member States.

(3) The regime laid down by those Directives applies to direct insurance undertakings in respect of their entire business carried on, both direct insurance activities as well as reinsurance activities by way of acceptances; however reinsurance activities conducted by specialised reinsurance undertakings are neither subject to this regime nor any other regime provided for by Community law.

(4) Reinsurance is a major financial activity as it allows direct insurance undertakings, by facilitating a wider distribution of risks at worldwide level, to have a higher underwriting capacity to engage in insurance business and provide insurance cover and also to reduce their capital costs; furthermore reinsurance also plays a fundamental role in financial stability, since it is an essential element to ensure the strength of the financial soundness and the stability of direct insurance markets as well as the financial system as a whole, because of its role of a major financial intermediary and institutional investor.

(5) Council Directive 64/225/EEC of 25 February 1964 on the abolition of restrictions on freedom of establishment and freedom to provide services in respect of reinsurance and retrocession [25] has removed the restrictions to the right of establishment and the freedom to provide services related to the nationality or residence of the provider of reinsurance. It has not however removed restrictions caused by divergences between national provisions as regards prudential regulation of reinsurance. This situation has resulted in significant differences in the level of supervision of reinsurance undertakings in the Community, which create barriers to the pursuit of reinsurance business, such as the obligation for the reinsurance undertaking to pledge assets in order to cover its part of the technical provisions of the direct insurance undertaking, as well as the compliance by reinsurance undertakings with different supervisory rules in different Member States in which they conduct business or an indirect supervision of the different aspects of a reinsurance undertaking by the competent authorities of direct insurance undertakings.

[25] OJ 56, 4.4.1964 p.878.

(6) The Action Plan for Financial Services has identified reinsurance as a sector which needs an action at Community level in order to complete the internal market for financial services. Moreover, major financial fora such as the International Monetary Fund and the International Association of Insurance Supervisors (IAIS) have highlighted the lack of harmonised reinsurance supervision rules at Community level as an important gap in the financial services regulatory framework that should be filled.

(7) This Directive aims at establishing a prudential regulatory framework for reinsurance activities in the Community. It forms part of the body of Community legislation in the field of insurance aimed at establishing the Internal Market in the insurance sector.

(8) This Directive is consistent with major international work carried out on reinsurance prudential rules, in particular the Insurance Association of Insurance Supervisors (IAIS).

(9) This Directive follows the approach of Community legislation adopted in respect of direct insurance by carrying out the harmonisation which is essential, necessary and sufficient to ensure the mutual recognition of authorisations and prudential control systems, thereby making it possible to grant a single authorisation valid throughout the Community and apply the principle of supervision by the home Member State.

(10) As a result, the taking up and the pursuit of the business of reinsurance are subject to the grant of a single official authorisation issued by the competent authorities of the Member State in which a reinsurance undertaking has its head office. Such authorisation enables an undertaking to carry on business throughout the Community, under the right of establishment or the freedom to provide services. The Member State of the branch or of the provision of services may not require a reinsurance undertaking which wishes to carry on reinsurance business there and which has already been authorised in its home Member State to seek fresh authorisation. Furthermore a reinsurance undertaking which has already been authorised in its home Member State should not be subject to additional supervision or checks related to its financial soundness which are performed by the competent authorities of an insurance undertaking which is reinsured by that reinsurance undertaking. In addition, Member States should not be allowed to require a reinsurance undertaking authorised in the Community to post collateral of assets in order to cover its part of the cedent's technical provisions. The conditions for the granting or withdrawal of such authorisation should be defined. The competent authorities should not authorise or continue the authorisation of a reinsurance undertaking which do not fulfil the conditions laid down in this Directive.

(11) This Directive should apply to reinsurance undertakings which conduct exclusively reinsurance business and do not engage in direct insurance business; it should also apply to the so-called "captive" reinsurance undertakings created or owned by industrial, commercial or financial firms other than undertakings to which Directive 98/78/EC of the European Parliament and of the Council on the supplementary supervision of insurance undertakings in an insurance group [26] applies, the purpose of which is to provide reinsurance cover exclusively to the risks of the firms to which they belong.

[26] OJ L 330, 5.12.1998, p. 1. Directive as last amended by Directive 2002/87/EC (OJ L 35, 11.2.2003, p 1).

(12) This Directive should however not apply to insurance undertakings which are already subject to Directives 73/239/EEC and 2002/83/EC; however in order to ensure the financial soundness of insurance undertakings which also carry on reinsurance business and that the specific characteristics of these activities is duly taken into account by the capital requirements of these insurance undertakings, the provisions relating the solvency margin of reinsurance undertakings contained in this directive should apply to reinsurance business of these insurance undertakings, if the volume of their reinsurance activities represents a significant part of their entire business.

(13) This Directive should clarify the powers and means of supervision vested in the competent authorities. The competent authorities of the reinsurance undertaking's home Member State should be responsible for monitoring the financial health of reinsurance undertakings, including their state of solvency, the establishment of adequate technical provisions and the covering of those provisions by quality assets.

(14) The competent authorities of the Member States should have at their disposal such means of supervision as are necessary to ensure the orderly pursuit of business by reinsurance undertakings throughout the Community whether carried on under the right of establishment or the freedom to provide services. In particular, they should be able to introduce appropriate safeguards or impose sanctions aimed at preventing irregularities and infringements of the provisions on reinsurance supervision.

(15) Provision should be made for the exchange of information between the competent authorities and authorities or bodies which, by virtue of their function, help to strengthen the stability of the financial system. In order to preserve the confidential nature of the information forwarded, the list of addressees should remain within strict limits. It is therefore necessary to specify the conditions under which the abovementioned exchanges of information are authorised; moreover, where it is stipulated that information may be disclosed only with the express agreement of the competent authorities, these may, where appropriate, make their agreement subject to compliance with strict conditions. In this regard, and in view of ensuring the proper supervision of reinsurance undertakings by the competent authorities, this Directive should provide for rules enabling Member States to conclude agreements on exchange of information with third countries provided that the information disclosed is subject to appropriate guarantees of professional secrecy.

(16) For the purposes of strengthening the prudential supervision of reinsurance undertakings, it should be stipulated that an auditor must have a duty to report promptly to the competent authorities, wherever, as provided for by this Directive, he/she becomes aware, while carrying out his/her tasks, of certain facts which are liable to have a serious effect on the financial situation or the administrative and accounting organisation of a reinsurance undertaking. Having regard to the aim in view, it is desirable for Member States to provide that such a duty should apply in all circumstances where such facts are discovered by an auditor during the performance of his/her tasks in an undertaking which has close links with a reinsurance undertaking. The duty of auditors to communicate, where appropriate, to the competent authorities certain facts and decisions concerning a reinsurance undertaking which they discover during the performance of their tasks in a non-reinsurance undertaking does not in itself change the nature of their tasks in that undertaking nor the manner in which they must perform those tasks in that undertaking.

(17) Provision should be made to define the application of this Directive to existing reinsurance undertakings which were already authorised or entitled to conduct reinsurance business in accordance with the provisions of the Member States before the application of the Directive.

(18) In order to allow a reinsurance undertaking to meet its commitments, the home Member State should require a reinsurance undertaking to establish adequate technical provisions. The amount of such technical provisions should be determined in accordance with Directive 91/674/EEC of 19 December 1991 on the annual accounts and consolidated accounts of insurance undertakings [27] and, in respect of life reinsurance activities, the home Member State should also be allowed to lay down more specific rules in accordance with Directive 2002/83/EC.

[27] OJ L 374, 31.12.1991, p. 7. Directive amended by Directive 2003/51/EC of the European Parliament and of the Council (OJ L 178, 17.7.2003, p. 16).

(19) A reinsurance undertaking conducting reinsurance business in respect of credit insurance, whose credit reinsurance business amounts to more than a small proportion of its total business should be required to set up an equalization reserve which does not form part of the solvency margin; this reserve should be calculated according to the one of the methods laid down in Directive 73/239/EEC and which are recognized as equivalent; furthermore this Directive should allow the home Member State to also require reinsurance undertakings whose head office is situated within its territory to set up equalization reserves for classes of risks other than credit reinsurance, following the rules laid down by that home Member State.

(20) The reinsurance undertaking should have assets to cover technical provisions which shall take account of the type of business carried out by a reinsurance undertaking, in particular the nature, amount and duration of the expected claims payments, in such a way as to secure sufficiency, liquidity, security, quality, profitability and matching of its investments, which the undertaking shall ensure are diversified and adequately spread and which gives the undertaking the possibilities to respond adequately to changing economic circumstances, in particular developments in the financial markets and real estate markets or large impact catastrophic events.

(21) It is necessary that, over and above technical provisions, reinsurance undertakings should possess a supplementary reserve, known as the solvency margin, represented by free assets and, with the agreement of the competent authority, by other implicit assets, which shall act as a buffer against adverse business fluctuations. This requirement is an important element of prudential supervision. Pending the revision of the existing solvency margin regime, which the Commission is carrying on under the so-called "Solvency II project", in order to determine the required solvency margin of reinsurance undertakings the rules provided for in existing legislation in the field of direct insurance should be applicable;

(22) In order to take account of the particular nature of some types of reinsurance contracts or specific lines of business, provision should be made to make adjustments to the calculation of the required solvency margin; these adjustments should be made by the Commission, after consulting the Insurance Committee, set up by Council Directive 91/675/EEC [28] in the exercise of its implementing powers conferred on by the Treaty. These measures should be adopted by the use of the regulatory procedure provided for in Article 5 of Council Decision 1999/468/EC of 28 June 1999 laying down the procedures for the exercise of implementing powers conferred on the Commission [29].

[28] OJ L 374, 31.12.1991, p. 32.

[29] OJ L 184, 17.7.1999 p. 23.

(23) The list of items eligible to represent the available solvency margin laid down by this Directive should be that provided for in Directives 73/239/EEC and 2002/83/EC.

(24) Reinsurance undertakings should also possess a guarantee fund in order to ensure they possess adequate resources when they are set up and that in the subsequent course of business the solvency margin shall in no event fall below a minimum of security; however in order to take account of the specificities of captive reinsurance undertakings, provision should be made to allow the home Member State to set the minimum guarantee fund required to captive reinsurance undertakings at a lower amount.

(25) Certain provisions of this Directive define minimum standards. A home Member State should be able to lay down stricter rules for reinsurance undertakings authorised by its own competent authorities, in particular with respect to solvency margin requirements.

(26) It is necessary to provide for measures in cases where the financial position of the reinsurance undertaking becomes such that it is difficult for it to meet its underwriting liabilities. In specific situations, there is also a need for the competent authorities to be empowered to intervene at a sufficiently early stage, but in the exercise of those powers, competent authorities should inform the reinsurance undertakings of the reasons motivating such supervisory action, in accordance with the principles of sound administration and due process. As long as such a situation exists, the competent authorities should be prevented from certifying that the reinsurance undertaking has a sufficient solvency margin.

(27) It is necessary to make provision for cooperation between the competent authorities of the Member States in order to ensure that a reinsurance undertaking carrying on its activities under the freedom of establishment and the free provision of services complies with the provisions applicable to it in the host Member State.

(28) Provision should be made for the right to apply to the courts should an authorisation be refused or withdrawn.

(29) It is important to provide that reinsurance undertakings whose head office is situated outside the Community and conduct reinsurance business in the Community should not be subject to a treatment which results in a more favourable than that provided to reinsurance undertakings having their head office in a Member State.

(30) In order to take account of the international aspects of reinsurance, provision should be made to enable the conclusion of international agreements with a third country aimed at defining the means of supervision over reinsurance entities who conduct business in the territory of each contracting party.

(31) A provision should be made for a flexible procedure to make it possible to assess prudential equivalence with third countries on a Community basis, so as to improve liberalisation of reinsurance services in third countries, be it through establishment or cross-border provision of services. To that end, this Directive provides for procedures for negotiating with third countries.

(32) The Commission should be empowered to adopt implementing measures provided that these do not modify the essential elements of this Directive. These implementing measures should enable the Community to take account of the future development of reinsurance. The measures necessary for implementation of this Directive should be adopted in accordance with Decision 1999/468/EC

(33) The existing Community legal framework for insurance should be adapted in order to take account of the new supervisory regime for reinsurance undertakings laid down, by this Directive and in order to ensure a consistent regulatory framework for the whole insurance sector. In particular, the existing provisions which permit "indirect supervision" of reinsurance undertakings by the authorities competent for the supervision of direct insurance undertakings should be adapted. Furthermore the current provisions enabling Member States to require pledging of assets covering the technical provisions of an insurance undertaking when the insurer is reinsured by a reinsurance undertaking authorised pursuant to this Directive or by an insurance undertaking should be abolished. Finally, it should be provided that the solvency margin required to insurance undertakings conducting reinsurance activities, when such activities represent a significant part of their business, is subject to the solvency rules provided for reinsurance undertakings in this Directive. Directives 73/239/EEC, 92/49/EEC and 2002/83/EC should therefore be amended accordingly.

(34) Directive 98/78/EC should be amended in order to guarantee that reinsurance undertakings in an insurance or a reinsurance group are subject to supplementary supervision in the same manner as insurance undertakings which are currently part of an insurance group.

(35) Since the objective of the proposed action, namely the establishment of a legal framework for the taking up and pursuit of reinsurance activities, cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale and the effects of the action, be better achieved at Community level, the Community may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty. In accordance with the principle of proportionality, as set out in that Article, this Directive does not go beyond what is necessary in order to achieve this objective. Since this Directive defines minimum standards, Member States may lay down stricter rules.

HAVE ADOPTED THIS DIRECTIVE:

TITLE I - SCOPE AND DEFINITIONS

Article 1 - Scope

1. This Directive lays down rules for the taking up and pursuit of the self-employed activity of reinsurance carried on by reinsurance undertakings, which conduct only reinsurance activities, and which are established in a Member State or wish to become established therein.

2. This Directive shall not apply to the following:

a) insurance undertakings to which Directives 73/239/EEC and 2002/83/EC apply;

b) activities and bodies referred to in Article 3(1) and (2) of Directive 73/239/EEC;

c) activities and bodies referred to in Article 3 of Directive 2002/83/EC;

d) the activity of reinsurance conducted by the government of a Member State when this is acting, for reasons of substantial public interest, in the capacity of reinsurer of last resort in circumstances where such a role is required by a situation in the market in which it is objectively impossible to obtain commercial cover.

Article 2 - Definitions

1. For the purposes of this Directive the following definitions shall apply:

(a) reinsurance means the activity consisting in accepting risks ceded by an insurance undertaking, by another reinsurance undertaking or by an institution for occupational retirement provision falling under the scope of Directive 2003/41/EC of the European Parliament and of the Council [30].

[30] OJ L 235, 23.9.2003, p. 10.

(b) reinsurance undertaking means an undertaking which has received official authorisation in accordance with Article 3;

(c) branch means an agency or a branch of a reinsurance undertaking;

(d) establishment means the head office, branch of a reinsurance undertaking, account being taken of point c);

(e) home Member State means the Member State in which the head office of the reinsurance undertaking is situated;

(f) Member State of the branch means the Member State in which the branch of a reinsurance undertaking is situated;

(g) host Member State means the Member State in which a reinsurance undertaking has a branch or provides services.

(h) control means the relationship between a parent undertaking and a subsidiary, as defined in Article 1 of Council Directive 83/349/EEC [31], or a similar relationship between any natural or legal person and an undertaking;

[31] OJ L 193, 18.7.1983, p. 1.

(i) qualifying holding means a direct or indirect holding in an undertaking which represents 10% or more of the capital or of the voting rights or which makes it possible to exercise a significant influence over the management of the undertaking in which a holding subsists;

(j) parent undertaking means a parent undertaking as defined in Articles 1 and 2 of Directive 83/349/EEC;

(k) subsidiary means a subsidiary undertaking as defined in Articles 1 and 2 of Directive 83/349/EEC;

(l) competent authorities means the national authorities which are empowered by law or regulation to supervise reinsurance undertakings;

(m) close links means a situation in which two or more natural or legal persons are linked by:

(i) participation, which shall mean the ownership, direct or by way of control, of 20% or more of the voting rights or capital of an undertaking, or

(ii) control, in all the cases referred to in Article 1(1) and (2) of Directive 83/349/EEC or a similar relationship between any natural or legal person and an undertaking;

(n) captive reinsurance undertaking means a reinsurance undertaking owned either- by a financial undertaking other than an insurance undertaking or a reinsurance undertaking or a group of insurance or reinsurance undertakings to which Directive 98/78/EC applies, or by one or several non financial undertakings, the purpose of which is to provide reinsurance cover exclusively to the risks of the undertaking or undertakings to which it belongs or to an undertaking or undertakings of the group of which the captive reinsurance undertaking makes part.

2. For the purposes of paragraph 1(c) any permanent presence of an undertaking in the territory of a Member State shall be treated in the same way as an agency or branch, even if that presence does not take the form of a branch or agency, but consists merely of an office managed by the undertaking's own staff or by a person who is independent but has permanent authority to act for the undertaking as an agency would.

For the purposes of paragraph 1(i) , and in the context of Articles 7 and 14 and of the other levels of holding referred to in Article 14, the voting rights referred to in Article 92 of Directive 2001/34/EC [32] shall be taken into account.

[32] OJ L 184, 6.7.2001 p. 66

For the purposes of paragraph 1(k), any subsidiary of a subsidiary undertaking shall also be regarded as a subsidiary of the undertaking which is those undertakings' ultimate parent undertaking.

For the purposes of paragraph 1(m), any subsidiary undertaking of a subsidiary undertaking shall be considered a subsidiary of the parent undertaking which is at the head of those undertakings.

Fort the purposes of paragraph 1(m) a situation in which two or more natural or legal persons are permanently linked to one and the same person by a control relationship shall also be regarded as constituting a close link between such persons.

3. Wherever this Directive refers to the euro, the conversion value in national currency to be adopted shall, as from 31 December of each year, be that of the last day of the preceding month of October for which euro conversion values are available in all the Community currencies.

TITLE II - THE TAKING-UP OF THE BUSINESS OF REINSURANCE

AUTHORISATION OF THE REINSURANCE UNDERTAKING

Article 3 - Principle of authorisation

The taking up of the business of reinsurance shall be subject to prior official authorisation.

Such authorisation shall be sought from the competent authorities of the home Member State by:

(a) any reinsurance undertaking which establishes its head office in the territory of that State;

(b) any reinsurance undertaking which, having received the authorisation, extends its business to other reinsurance activities than those already authorised.

Article 4 - Scope of authorisation

1. An authorisation pursuant to Article 3 shall be valid for the entire Community. It shall permit a reinsurance undertaking to carry on business there, under either the right of establishment or the freedom to provide services.

2. Authorisation shall be granted for non-life reinsurance activities, life reassurance activities or all kinds of reinsurance activities, according to the request made by the applicant.

It shall be considered in the light of the scheme of operations to be submitted pursuant Articles 6(b) and 11 and the fulfilment of the conditions laid down for authorisation by the Member State from which the authorisation is sought.

Article 5 - Form of the reinsurance undertaking

1. The home Member State shall require every reinsurance undertaking for which authorisation is sought to adopt one of the forms set out in Annex I.

A reinsurance undertaking may also adopt the form of a European Company (SE) as defined in Council Regulation (EC) No 2157/2001 [33].

[33] OJ L 294, 10.11.2001.p.1

2. Member States may, where appropriate, set up undertakings in any public-law form provided that such bodies have as their objects reinsurance operations under conditions equivalent to those under which private-law undertakings operate.

Article 6 - Conditions

The home Member State shall require every reinsurance undertaking for which authorisation is sought to:

a) limit its objects to the business of reinsurance and related operations; this requirement may include a holding company function and activities with respect to financial sector activities within the meaning of Article 2 point 8 of Directive 2002/87/EC [34];

[34] OJ L 35, 11.02.2003 p. 1

b) submit a scheme of operations in accordance with Article 11;

c) possess the minimum guarantee fund provided for in Article 40(2);

d) be effectively run by persons of good repute with appropriate professional qualifications or experience.

Article 7 - Close links

1. Where close links exist between the reinsurance undertaking and other natural or legal persons, the competent authorities shall grant authorisation only if those links do not prevent the effective exercise of their supervisory functions.

The competent authorities shall refuse authorisation if the laws, regulations or administrative provisions of a non-member country governing one or more natural or legal persons with which the reinsurance undertaking has close links, or difficulties involved in their enforcement, prevent the effective exercise of their supervisory functions.

2. The competent authorities shall require reinsurance undertakings to provide them with the information they require to monitor compliance with the conditions referred to in paragraph 1 on a continuous basis.

Article 8 - Head office of the reinsurance undertaking

Member States shall require that the head offices of reinsurance undertakings be situated in the same Member State as their registered offices

Article 9 - Policy conditions and scales of premiums

1. This Directive shall not prevent Member States from maintaining in force or introducing laws, regulations or administrative provisions requiring approval of the memorandum and articles of association and communication of any other documents necessary for the normal exercise of supervision.

2. However, Member States may not, however, adopt provisions requiring the prior approval or systematic notification of general and special policy conditions, scales of premiums and forms and other printed documents which a reinsurance undertaking intends to use in its dealings with ceding or retro-ceding undertakings.

Article 10 - Economic requirements of the market

Member States may not require that any application for authorisation be considered in the light of the economic requirements of the market.

Article 11 - Scheme of operations

1. The scheme of operations referred to in Article 6(b) shall include particulars or evidence of:

(a) the nature of the risks which the reinsurance undertaking proposes to cover;

(b) the kinds of reinsurance arrangements which the reinsurance undertaking proposes to make with ceding undertakings;

(c) the guiding principles as to retrocession;

(d) the items constituting the minimum guarantee fund;

(e) estimates of the costs of setting up the administrative services and the organisation for securing business and the financial resources intended to meet those costs.

2. In addition to the requirements in paragraph 1, the scheme of operations shall for the first three financial years contain:

(a) estimates of management expenses other than installation costs, in particular current general expenses and commissions;

(b) estimates of premiums or contributions and claims;

(c) a forecast balance sheet;

(d) estimates of the financial resources intended to cover underwriting liabilities and the solvency margin.

Article 12 - Shareholders and members with qualifying holdings

The competent authorities of the home Member State shall not grant an undertaking authorisation to take up the business of reinsurance before they have been informed of the identities of the shareholders or members, direct or indirect, whether natural or legal persons, who have qualifying holdings in that undertaking and of the amounts of those holdings.

The same authorities shall refuse authorisation if, taking into account the need to ensure the sound and prudent management of a reinsurance undertaking, they are not satisfied as to the qualifications of the shareholders or members.

Article 13 - Refusal of authorisation

Any decision to refuse an authorisation shall be accompanied by the precise grounds for doing so and notified to the undertaking in question.

Each Member State shall make provision for a right to apply to the courts, pursuant to Article 53, should there be any refusal.

Such provision shall also be made with regard to cases where the competent authorities have not dealt with an application for an authorisation upon the expiry of a period of six months from the date of its receipt.

Article 14 - Prior consultation with the competent authorities

of other Member States

1. The competent authorities of the other Member State involved shall be consulted prior to the granting of an authorisation to a reinsurance undertaking, which is:

a) a subsidiary of an insurance or reinsurance undertaking authorised in another Member State; or

b) a subsidiary of the parent undertaking of an insurance or reinsurance undertaking authorised in another Member State; or

c) controlled by the same person, whether natural or legal, who controls an insurance or reinsurance undertaking authorised in another Member State.

2. The competent authority of a Member State involved, who is responsible for the supervision of credit institutions or investment firms shall be consulted prior to the granting of an authorisation to a reinsurance undertaking which is:

a) a subsidiary of a credit institution or investment firm authorised in the Community; or

b) a subsidiary of the parent undertaking of a credit institution or investment firm authorised in the Community; or

c) controlled by the same person, whether natural or legal, who controls a credit institution or investment firm authorised in the Community.

3. The relevant competent authorities referred to in paragraphs 1 and 2 shall in particular consult each other when assessing the suitability of the shareholders and the reputation and experience of directors involved in the management of another entity of the same group. They shall inform each other of any information regarding the suitability of shareholders and the reputation and experience of directors which is of relevance to the other competent authorities involved for the granting of an authorisation as well as for the ongoing assessment of compliance with operating conditions.

TITLE III - CONDITIONS GOVERNING THE BUSINESS OF REINSURANCE

Chapter 1 - Principles and methods of financial supervision

section 1- competent authorities and general rules

Article 15 - Competent authorities and object of supervision

1. The financial supervision of a reinsurance undertaking, including that of the business it carries on either through branches or under the freedom to provide services, shall be the sole responsibility of the home Member State.

If the competent authorities of the host Member State have reason to consider that the activities of a reinsurance undertaking might affect its financial soundness, they shall inform the competent authorities of the reinsurance undertaking's home Member State. The latter authorities shall determine whether the reinsurance undertaking is complying with the prudential rules laid down in this Directive.

2. The financial supervision pursuant to paragraph 1shall include verification, with respect to the reinsurance undertaking's entire business, of its state of solvency, of the establishment of technical provisions and of the assets covering them in accordance with the rules laid down or practices followed in the home Member State under provisions adopted at Community level.

3. The Home Member State of the reinsurance undertaking shall not refuse a retrocession contract concluded by the reinsurance undertaking with a reinsurance undertaking authorised in accordance with this Directive or an insurance undertaking authorised in accordance with Directives 73/239/EEC or 2002/83/EC on the grounds directly related to the financial soundness of that reinsurance undertaking or that insurance undertaking.

4. The competent authorities of the home Member State shall require every reinsurance undertaking to have sound administrative and accounting procedures and adequate internal control mechanisms.

Article 16 - Supervision of branches established in another Member State

The Member State of the branch shall provide that where an reinsurance undertaking authorised in another Member State carries on business through a branch the competent authorities of the home Member State may, after having first informed the competent authorities of the Member State of the branch, carry out themselves or through the intermediary of persons they appoint for that purpose, on-the-spot verification of the information necessary to ensure the financial supervision of the undertaking. The authorities of the Member State of the branch may participate in that verification.

Article 17 - Accounting, prudential and statistical information: Supervisory powers

1) Each Member State shall require every reinsurance undertaking whose head office is situated in its territory to produce an annual account, covering all types of operation, of its financial situation and of its solvency.

2) Member States shall require reinsurance undertakings with head offices within their territories to render periodically the returns, together with statistical documents, which are necessary for the purposes of supervision. The competent authorities shall provide each other with any documents and information that are useful for the purposes of supervision.

3) Every Member State shall take all steps necessary to ensure that the competent authorities have the powers and means necessary for the supervision of the business of reinsurance undertakings with head offices within their territories, including business carried on outside those territories,

In particular, the competent authorities must be enabled to:

(a) make detailed enquiries regarding an reinsurance undertaking's situation and the whole of its business, inter alia, by gathering information or requiring the submission of documents concerning its reinsurance and retrocession business, and by carrying out on-the-spot investigations at the reinsurance undertaking's premises;

(b) take any measures with regard to a reinsurance undertaking, its directors or managers or the persons who control it, that are appropriate and necessary to ensure that that reinsurance undertaking's business continues to comply with the laws, regulations and administrative provisions with which the reinsurance undertaking must comply in each Member State;

(c) ensure that those measures are carried out, if need be by enforcement and where appropriate through judicial channels.

Member States may also make provision for the competent authorities to obtain any information regarding contracts which are held by intermediaries.

Article 18 - Transfer of portfolio

Under the conditions laid down by national law, each Member State shall authorise reinsurance undertakings with head offices within its territory to transfer all or part of their portfolios of contracts, including those concluded either under the right of establishment or the freedom to provide services, to an accepting office established within the Community, if the competent authorities of the home Member State of the accepting office certify that, after taking the transfer into account, the latter possesses the necessary solvency margin referred to in Chapter 3.

section 2- qualifying holdings

Article 19 - Acquisitions

Member States shall require any natural or legal person who proposes to hold, directly or indirectly, a qualifying holding in a reinsurance undertaking first to inform the competent authorities of the home Member State, indicating the size of his intended holding. That person must likewise inform the competent authorities of the home Member State if he proposes to increase his qualifying holding so that the proportion of the voting rights or of the capital he holds would reach or exceed 20%, 33% or 50% or so that the reinsurance undertaking would become his subsidiary.

The competent authorities of the home Member State shall have up to three months from the date of the notification provided for in the first subparagraph to oppose such a plan if, in view of the need to ensure sound and prudent management of the reinsurance undertaking in question, they are not satisfied as to the qualification of the person referred to in the first subparagraph. If they do not oppose the plan in question, they may fix a maximum period for its implementation.

Article 20 - Acquisitions by financial undertakings

If the acquirer of the holdings referred to in Article 19 is an insurance undertaking, a reinsurance undertaking, a credit institution or an investment firm authorised in another Member State, or the parent undertaking of such an entity, or a natural or legal person controlling such an entity, and if, as a result of that acquisition, the undertaking in which the acquirer proposes to hold a holding would become a subsidiary or subject to the control of the acquirer, the assessment of the acquisition must be subject to the prior consultation referred to in Article 14.

Article 21 - Disposals

Member States shall require any natural or legal person who proposes to dispose, directly or indirectly, of a qualifying holding in a reinsurance undertaking first to inform the competent authorities of the home Member State, indicating the size of his intended holding.

Such a person must likewise inform the competent authorities if he proposes to reduce his qualifying holding so that the proportion of the voting rights or of the capital he holds would fall below 20%, 33% or 50% or so that the reinsurance undertaking would cease to be his subsidiary.

Article 22 - Information to the competent authority by the

reinsurance undertaking

On becoming aware of them, reinsurance undertakings shall inform the competent authorities of their home Member States of any acquisitions or disposals of holdings in their capital that cause holdings to exceed or fall below any of the thresholds referred to in Articles 19 and 21.

They shall also, at least once a year, inform them of the names of shareholders and members possessing qualifying holdings and the sizes of such holdings as shown, for example, by the information received at annual general meetings of shareholders or members or as a result of compliance with the regulations relating to companies listed on stock exchanges.

Article 23 - Qualified holdings:

Powers of the competent authority

Member States shall require that, where the influence exercised by the persons referred to in Article 19 is likely to operate against the prudent and sound management of a reinsurance undertaking, the competent authorities of the home Member State shall take appropriate measures to put an end to that situation. Such measures may consist, for example, in injunctions, sanctions against directors and managers, or suspension of the exercise of the voting rights attaching to the shares held by the shareholders or members in question.

Similar measures shall apply to natural or legal persons failing to comply with the obligation to provide prior information imposed pursuant to Article 19. If a holding is acquired despite the opposition of the competent authorities, the Member States shall, regardless of any other sanctions to be adopted, provide either for exercise of the corresponding voting rights to be suspended, or for the nullity of votes cast or for the possibility of their annulment.

section 3 -professional secrecy and

exchanges of