Opinion of the European Economic and Social Committee on the ‘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’(COM(2004) 273 final – 2004/0097 (COD))
Date: 2004-10-27
Institutions: European Economic and Social Committee
Subjects: ESC opinion, financial solvency, insurance company, insurance contract, insurance law, insured risk, reinsurance

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II

(Preparatory Acts)

EUROPEAN ECONOMIC AND SOCIAL COMMITTEE

412th PLENARY SESSION OF 27/28 OCTOBER 2004

Opinion of the European Economic and Social Committee on the ‘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’

(COM(2004) 273 final – 2004/0097 (COD))

(2005/C 120/01)

On 10 June 2004 the Council decided to consult the European Economic and Social Committee, under
Article 95 of the Treaty establishing the European Community, on the abovementioned proposal.

The Section for the Single Market, Production and Consumption, which was responsible for preparing the
Committee's work on the subject, adopted its opinion on 6 October 2004. The rapporteur was Mr von
Fürstenwerth.

At its 412th plenary session of 27/28 October 2004 (meeting of 27 October) the European Economic and
Social Committee adopted the following opinion 158 votes to four with three abstentions:

1. Introduction

2. The Commission proposals

There is currently no harmonised framework for the
1.1
supervision of reinsurance undertakings in the EU. As a result,
reinsurance supervision regimes vary widely from one Member
State to another.

On 21 April 2004, therefore, the Commission submitted
1.2
a proposal
for a Directive on reinsurance and amending
Council Directives 73/239/EEC, 92/49/EEC and Directives
98/78/EC and 2002/83/EC. Its key features are as follows:

— a supervisory approach based on harmonisation and
recognition and underpinned by current direct

mutual
supervision rules;

— a fast-track approach by a directive based on current direct

supervision rules;

— a mandatory licensing system;

— solvency margin requirements in line with those for direct
insurance, with, however, the possibility of increasing this
margin through comitology.

The purpose of the directive is to establish a harmonised
and

2.1
supervisory framework for
captives (1) in the European Union.

reinsurance undertakings

2.2
The proposal lays down the minimum conditions neces-
sary to obtain official authorisation. Among other things, these
conditions stipulate that the undertaking in question must have
a specific legal form. It must submit a scheme of operations
and must also hold a minimum guarantee fund. Business is
limited to reinsurance and related operations and the qualifying
shareholders and management of
the undertaking are also
subject to checks. An authorisation, once granted, is valid for
the entire Community.

The directive seeks to prohibit reinsurers from depos-
2.3
iting security with primary insurers, where this is required
under Member States' national law. Contractual deposits remain

(1) A reinsurance captive is a reinsurer belonging to a company or a
group of companies where that company or group of companies is
not engaged in primary insurance or reinsurance. A captive operates
only to offer reinsurance protection to the company or group of
companies in question.

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unaffected.
In addition to establishing a functioning single
market, the Commission is also seeking to lay down an interna-
tional benchmark to alleviate worldwide the constraints placed
on European reinsurers as a result of the deposit of security.

2.4
the
Under the solvency provisions for undertakings,
solvency requirements that apply to primary non-life insurance
companies are also to apply to the non-life reinsurance busi-
ness. These requirements may be increased by up to 50 %
through the comitology procedure. The solvency provisions for
life reinsurance undertakings are to be based on those that
apply to primary life insurance undertakings. Where an under-
taking conducts life and non-life reinsurance business simulta-
neously, the total sum must be covered by its own funds. Like
primary insurance undertakings, reinsurance undertakings will
also be required to maintain a minimum guarantee fund of not
less than EUR 3 million. For captive reinsurance undertakings,
that figure may be reduced to EUR 1 million.

2.5
The proposed directive lays down specific supervisory
powers in cases where a company's financial situation deterio-
rates, where no adequate technical provisions are in place or
where there is insufficient solvency. These powers match those
in the primary insurance sector and provide scope to require
the submission of a plan for the restoration of a sound financial
situation, a finance scheme and a financial recovery plan, and
to withdraw authorisation.

Reinsurance undertakings which were

2.6
entitled or
authorised to conduct reinsurance business before the date of
implementation of the directive may continue to do so without
requesting authorisation. They are subject to the substantive
provisions of the directive, although the Member States may
grant an additional transitional period of two years.

The proposal gives

2.7
the Commission implementing
powers to make technical adjustments to the directive (‘comi-
tology’).

premiums and outstanding claims provisions (prohibition
of deposit of security);

— primary insurance undertakings that also offer reinsurance
are subject to the same solvency requirements as reinsur-
ance undertakings;

— the insurance groups directive is being amended to place
reinsurance undertakings on the same footing as primary
insurance undertakings.

3. General comments

3.1
The Committee welcomes the Commission's proposal
which will help consolidate Europe's position as a financial
centre by ensuring that reinsurance undertakings and captives
have adequate capital at their disposal to meet their obligations.
This will give a lasting boost to the position of European rein-
surance undertakings on the international insurance markets.

3.2
The Committee would expressly point out the impor-
tance of the reinsurance industry for Europe's position as a
financial centre. In 2002, the total reinsurance premium of the
40 largest reinsurers amounted to USD 138 601 200 000, of
which USD 58 544 000 000 stemmed from EU reinsurers.

The reinsurance business is concerned mainly with the
3.3
relationship between primary insurers and reinsurers. However,
the loss of one or more reinsurers may have an impact on
consumers if, as a result, a primary insurer is no longer able to
meet its obligations. The Committee therefore recognises that
the proposed directive also indirectly boosts EU consumer
protection. The Committee also draws attention to the benefit
to consumers of adequate reinsurance cover. That
in turn
requires the availability on the European market of sufficient
reinsurance capacity at reasonable premiums.

The life, non-life and insurance groups directives are
2.8
also to be adapted in line with the supervision rules for reinsur-
ance undertakings. Thus,

The Committee welcomes the Commission's fast-track
3.4
i.e. that the reinsurance supervision rules are be
approach,
adopted on the basis of the current primary insurance supervi-
sion rules. This is the right approach, not least in the light of
the ongoing Solvency II project.

— the supervisory authority may not refuse a reinsurance
contract on the grounds directly related to the financial
soundness of an EU insurance or reinsurance undertaking;

— there must be no provision for a system of gross reserving
which requires the pledging of assets to cover unearned

A key fact about reinsurance is that

3.5
is a global
market. In the ongoing consultations on the directive, there-
fore, the Committee would ask the European Parliament, the
Council and the Commission to pay particular attention to the
international competitiveness of
the European reinsurance
industry.

it

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3.6
The Committee recognises that the European reinsur-
ance industry in particular proved its financial soundness in the
wake of the 11 September 2001 attacks. Thus, any new burden
placed on the European reinsurance industry should be subject
to a rigorous cost-benefit analysis.

The Committee acknowledges that, up to now, different
3.7
supervision regimes have been in operation in the EU, invol-
ving a mix of solvency, capital investment and deposit-related
rules. Under the Commission proposal, the current rules for
deposits in particular are set to disappear. It is vital to ensure
that the supervisory authorities concerned develop sufficient
trust in the future supervisory mechanisms and their uniform
application across the EU.

4. Solvency requirements for life reassurance activities

(Article 38)

the Commission proposes

Under the proposed directive, the provisions for calcu-
4.1
lating the solvency margin of primary life insurance undertak-
ings are also to apply to life reinsurance undertakings. For life
reinsurance,
adoption –
unchanged – of the solvency rules of the primary insurance
sector. The solvency calculation comprises two elements: 3‰
of the sum at risk and 4 % of the mathematical provisions. The
Committee feels that this places a disproportionate burden on
European life reassurance undertakings. The Commission's
proposal:

the

— fails to reflect the business and risk profile of life reinsur-
ance activities and results in a disproportionate overcapitali-
sation of life reinsurers;

— puts European life reinsurers at a substantial disadvantage
compared with
(cf.
appendix) and raises fears of a further depletion of reinsur-
ance capacity;

international

competitors

their

— makes reinsurance cover considerably more expensive;

— may contribute to the destabilisation of

the financial
increased costs mean that primary insurance

markets if
undertakings do not buy the requisite reinsurance cover;

— places a considerable additional cost burden on private

funded pension schemes.

4.2
In Europe, the risk structure of primary life insurance
undertakings and life reinsurers differs considerably. In the life
reinsurance business,
risk generally
remains with the primary insurer. That difference alone shows
that the solvency formula for primary life insurance cannot
adequately reflect the risk structure in the life reinsurance busi-
ness.

the capital

investment

It

4.3
is clear from a comparison with the calculation
methods used by rating agencies that the proposed EU require-
ments would seem excessive. US solvency requirements for
instance, while based on the amount at risk, also include a vari-
able factor contingent on the size of the relevant portfolio
(0.8‰ on holdings over EUR 25 billion – see appendix). The
Canadian supervisory authorities and rating agencies take a
similar approach.

4.4 While the primary insurance business between insurer
and client still bears national hallmarks, reinsurance has always
been an international operation, not least because of the need
for international risk diversification. It is therefore necessary to
establish a level playing field between providers within the
Union and international competitors in the USA, Bermuda and
Switzerland.

4.5
The fear for European reinsurers competing globally is
that they would be placed at a serious disadvantage compared
with their rivals outside Europe, where capital requirements are
lower. Much of the reinsurance business could well shift to
non-European reinsurance centres such as Bermuda or the
USA. Any shift in reinsurance capacity would considerably
weaken Europe's position as a financial centre. The excessive
requirements would inevitably deplete reinsurance capacity
and/or make reinsurance more expensive. Such price hikes for
reinsurance will inevitably be reflected in the cost of primary
insurers' products and thus filter down to consumers too. In
turn higher prices will inevitably also have an adverse impact
on the establishment of private funded pension schemes that is
so urgently needed.

4.6
The Committee feels that none of these developments
are conducive to promoting the European single market. The
new EU Member States in particular are keen to have a prop-
erly working single European market in reinsurance and would
be particularly affected by any adverse changes in the structure
of reinsurance provision.

The Committee therefore concludes that the method for
4.7
calculating the solvency margin for life reinsurance activities
proposed in the draft directive could damage European rein-
surers' competitiveness. It thus feels that significant changes are
needed to the Commission's proposed solvency provisions of
life reinsurance undertakings.

Building on that,

4.8
the
solvency calculation for non-life reinsurers should also be taken
as a guide for the life reinsurance sector.

the Committee proposes that

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4.8.1
In terms of risk and competition, the solvency calcula-
tion method for non-life insurers is more than adequate. The
non-life solvency formula is broadly consistent with compar-
able international solvency requirements so that there is little
chance of European reinsurers being placed at a competitive
disadvantage.

5.3
The proposed directive was conceived as a fast-track
project, not as a framework directive within the Lamfalussy
procedure. The solvency requirements should only be amended
as part of the more far-reaching Solvency II project.

4.8.2
The non-life formula adequately meets the needs of
the life reinsurance sector. Because of its overwhelming reliance
on existing calculations of mortality risk, the life reinsurance
business has more in common with the primary non-life insur-
ance and the non-life reinsurance sectors than with the primary
life insurance business.

5.4
Nor is there any material case for applying the Lamfa-
lussy procedure. Capital requirements for reinsurance undertak-
ings are not in any sense implementing measures under the
terms of the Lamfalussy procedure. As is readily clear from the
protracted Basle II negotiations in the banking sector, capital
requirements are the very core of the future supervisory system
and not some downstream detail.

4.8.3
can easily be incorporated under the Solvency II project.

Individual risks not reflected in the non-life formula

4.8.4
From a legislative standpoint, the non-life formula is
easy to implement as the Commission has already submitted a
finished text in its draft proposal for a directive (revision 3).

4.8.5
By using the non-life formula, life reinsurance under-
takings are able to determine their solvency requirements
quickly since companies already have the requisite data which
does not therefore need to be collected. The non-life formula is
especially useful given the lack of information in international
business.

4.8.6
The non-life solvency formula is particularly well
suited to a fast-track approach. It is easy to apply as it needs no
further adjustment in cases where,
for instance, contractual
deposits are placed.

5. Solvency provisions for non-life reinsurance activities

(Articles 37 and 55)

5.1
The proposed directive applies the provisions for calcu-
lating the solvency margin of primary non-life insurance activ-
ities to the non-life reinsurance business as well. The proposal
also allows for
increasing the solvency
requirements for non-life reinsurance by up to 50 % under the
Lamfalussy procedure.

the possibility of

The Committee feels that, under the fast-track proce-
5.2
it is appropriate to transfer, unchanged, the solvency
dure,
to non-life reinsurers.
for primary non-life insurers
rules
However, the Committee has considerable misgivings about
extending the Lamfalussy procedure in the area of solvency
requirements.

5.5
The Committee feels that the specific capital require-
ments should be made clear in the directive itself and not in
downstream Community legislation. This distinction is also
backed up by the current Convention draft, which requires that
substantive provisions be incorporated into the directive itself.
The Commission's reference to extensive consultation of the
relevant stakeholders does not therefore go far enough.

6. Reinsurance and retrocession factors (Articles 37 and

38)

6.1
Under the proposed directive, retrocession to other rein-
surers may be taken into account in solvency calculations only
up to a ceiling of 50 % of the gross amount of claims. This is
in line with the current rules for primary insurers in the life
and non-life sectors. The draft directive on the supervision of
reinsurance undertakings is designed to make a substantial
contribution to boosting the financial soundness of the reinsur-
ance sector within the European Union. The Committee there-
fore feels that full recognition of cessions of primary insurers
and retrocessions of reinsurers is warranted, provided the
ceding or retroceding undertaking concerned is subject
to
supervision within the EU.

6.2
The Committee would recommend increasing the rein-
surance and retrocession factors, not least given the increased
demands made on the insurance industry to resolve issues
facing society as a whole. Because of the low reinsurance and
retrocession factor,
it has not always been possible to offer
economical solutions, e.g. in response to the calls made in the
wake of the 11 September 2001 attacks to cover industry and
the aviation sector against terrorist risks.
In some Member
States, the low retrocession factor has so far prevented the
development of insurance cover for terrorist risks.

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7. Investment rules (Article 34)

7.1
The Committee accepts the qualitative prudential rules
provided for in Article 34 (the ‘prudent person principle’).
Given the special features and, in particular, the international
nature of the reinsurance business, such an approach is more
appropriate than a rigid quantitative one. The EU is thus
pursuing a modern approach that is also recommended by the
International Association of Insurance Supervisors (IAIS). At
the same time, however, the Committee recognises that a quali-
tative approach is not a blank cheque, but requires undertak-
ings to continuously monitor and improve the capital invest-
ment process.

regards depositing security

As the directive restricts or repeals existing prudential
7.2
rules
the
(as
Committee recommends that the directive should give Member
States the option of requiring the application of additional
quantitative investment rules for reinsurers established in their
territory. Any such rules must, however, be justified under the
‘prudent person principle’ and the obligations entered into.

instance),

for

8. Transitional periods (Article 51)

As things stand, reinsurance undertakings are not subject to
any uniform EU legal framework. The Committee would there-
fore recommend that the Commission examine closely whether
additional transitional arrangements are required. Such arrange-

Brussels, 27 October 2004.

ments could, for example, affect capital instruments currently
used by reinsurers, which are not recognised under the capital
requirements for primary insurers.

9. Conclusions

9.1
The Committee backs the Commission's 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 subject to
the reservations set out above. It considers that the proposal
covers almost all areas relating to the supervision of reinsur-
ance undertakings. The full implementation of the directive will
go a considerable way to meeting the Commission's objective
of strengthening and stabilising the reinsurance markets in the
European Union.

the
Having examined the Commission document,
9.2
Committee has addressed selected aspects of the proposal for a
directive in order, among other things, to give the Commission
practical pointers and suggestions for further deliberations and
analysis. The Committee proposes that the solvency calculation
for non-life reinsurers should be taken as a basis for the life
reinsurance sector as well. The solvency requirements should
remain outside the scope of Lamfalussy procedure. The
Committee considers this to be a key directive and therefore
calls for a rapid legislative process.

The President

of the European Economic and Social Committee

Anne-Marie SIGMUND