Legal - Flying the flag for change.

(From Reinsurance)

Byline: Richard Spiller, head of corporate at Kendall Freeman.

The European Commission's (EC) only directive applying specifically to the regulation of reinsurance in the European Union (EU) was in February 1964 - council directive 64/225. This is the directive that obliged member states to abolish all restrictions on freedom of establishment and freedom to provide services in the EU, so far as the provision of reinsurance and retrocession was concerned. In practice this has meant that EU reinsurers who wish to establish branches in member states that regulate reinsurance have to seek authorisation and be regulated in respect of each branch.

The member states have had complete freedom with regard to how much they regulate reinsurers. So, some - Belgium, Ireland and Greece - have no regulation, while others have a spectrum of regulatory approaches. Reinsurers in Germany, France and the Netherlands are subject to certain elements of the regime for direct insurers. In Austria, Italy, Spain and Sweden the regulators operate a reduced licensing system for reinsurers compared to direct insurers (only the latter two impose solvency margin requirements).

A comprehensive regulation system is applied in Denmark, Finland, Portugal and the UK.

Whether or not a company is regulated in its home country (where it is headquartered), it may either sell reinsurance into other member states from its home state office under the right to provide cross-border services or establish a branch in another member state by applying for authorisation under the rules of the state. It is also true that even where reinsurance is regulated it is often administered with a 'lighter touch' than insurance supervision - with the logic that it is a professional market and the public is not involved. The UK is the exception to this - regulating with comparable scope and supervision for reinsurers as direct insurers.

In 2000 the EC began a project to consider establishing a framework for reinsurance supervision in the EU. Since then it has issued a number of consultation papers and since the end of 2002 has been consulting on a draft directive. It will apply to direct insurers accepting reinsurance business as well as pure reinsurers and aims to create a level playing field throughout the EU by setting minimum regulatory standards for reinsurers headquartered in the EU. The last published draft does not cater for Lloyd's, which unless the directive is amended would not benefit from the mutual recognition provisions.