TAIEX Istanbul

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ReinsuranceDirective 2005/68/EC

• The Reinsurance Directive is an interim measure
  that introduces a minimum level of harmonized
  prudential supervision of reinsurance across the
  EU, in advance of a wider directive that will
  apply to all insurers, known as Solvency 2 FSA,
  CP 06/12

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Institutional background of the Directive
2005/68/EC

• Until the recent introduction of the EU
  Reinsurance Directive there were no harmonized
  reinsurance supervision rules in the EU
  (Directive 64/225/EEC Abolition of restrictions
  on freedom of establishment and freedom to
  provide services)
• At the international level, the necessity of a
  prudential framework applicable to reinsurance
  activity has been agreed upon at the level of the
  IAIS (www.iaisweb.org 2002 Principles on the
  Minimum Requirements for the Supervision of
  Reinsurers)
• The Solvency II framework necessitates the
  integration of reinsurers to prudential scrutiny
  since significant part of the risks of the
  insurance industry lies with these professionals

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Industrial background of the Directive 2005/68/EC

• Reinsurance activity is by essence
• a risk mitigating activity (which, e.g.,
  increases the underwriting capacity of individual
  insurers)
• a global, international activity
• an activity between professionals.
• The financial stability of the insurance market
  may be notably affected by the quality of
  reinsurance, so that the absence of prudential
  regulation applicable to reinsurance undertakings
  creates a risk of instability
• Recent events (climatic disasters, terrorist
  attacks, ...) have evidenced the importance of
  reinsurance in holding stability in the insurance
  sector by its capacity to absorb large shocks
• Tremendous evolution of risk assessment and risk
  modeling techniques
• Products innovation in the financial sector
  (Alternative Risk Transfer products,
  securitization)

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Timeline of the Directive 2005/68/EC

• 21 April 2004, the Commission presented its
  proposal for a Directive of the European
  Parliament and of the Council on reinsurance. The
  proposal provides for a regulatory framework
  based on the existing regime introduced by the
  Third Generation Insurance Directives.
• 7 June 2005, the European Parliament voted to
  approve the proposed Directive on reinsurance and
  the Council accepted the European Parliaments
  amendments.
• The EU Council of Ministers approved the
  Directive on 17th October 2005.
• 9 December 2005, the Directive was published in
  the Official Journal
• 13 November 2006, transposition meeting
  (initiative of the Commission) regarding the
  Reinsurance Directive 2005/68/EC
• 10 December 2007,Member States must have
  implemented the Directive (Article 64)
• 10 December 2008, Member States may maintain up
  to 10th December 2008, collateral requirements
  for reinsurance (Article 63)

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Main Provisions of the Directive 2005/68/EC

• The provisions of the Directive apply to
  reinsurance undertakings which conduct only
  reinsurance activities It is not applicable e.g.
  to insurance undertakings to which Directives
  73/239/EEC or 2002/83/EC apply (Article 1)
• The taking up of the business of reinsurance
  shall be subject to prior official authorisation
  (Article 3).

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Provisions of the Directive 2005/68/EC - Summary

• Home Country Control (article 15)
• authorization and financial supervision is the
  responsibility of the supervisory authority of
  the Member State in which the reinsurance
  undertaking has its head office
• Supervision in accordance with harmonized
  (minimal) reinsurance supervision rules.
• Single Passport (Article 4) EU (EEA) reinsurance
  undertakings are able to operate throughout the
  EU, either by establishing themselves in other
  Member States, or by providing services directly
  from their home or another Member State.
• The home Member State of a (re)insurance
  undertaking shall not refuse a reinsurance/retroce
  ssion contract concluded by the (re)insurance
  undertaking with a reinsurance undertaking
  authorized in accordance with this Directive or
  an insurance undertaking authorized in accordance
  with Directives 73/239/EEC or 2002/83/EC on
  grounds directly related to the financial
  soundness of that reinsurance undertaking or that
  insurance undertaking (Article 15.3 of the
  Directive equivalent provisions in the insurance
  directives).

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Main Provisions of the Directive 2005/68/EC -
Authorization conditions

• Form Company or Mutual entity (Article 5 and
  Annex I)
• The object of the business must be limited to
  reinsurance and related operations
• Scheme of operation (Article 11 3 financial
  years)
• Minimum guarantee fund (EUR 3.000.000 Article
  40(2))
• Management Persons of good repute and
  appropriate professional qualifications or
  experience (Article 6)
• Where Close Links exist with other persons,
  those links may not prevent the exercise of
  supervisory functions (Article 7)
• The identity of the shareholders who have
  qualifying holdings must be disclosed and the
  C.A. must satisfied that they will not jeopardize
  the sound and prudent management of the
  undertaking (Article 12)
• The head office and the registered office must be
  one and the same (BCCI test Article 8).

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Main Provisions of the Directive 2005/68/EC -
Conditions governing the Business of Reinsurance

• Usual prudential rules
• Regular financial reporting to the C.A. (Article
  17)
• Adequate organization and control of the
  business
• Internal control
• External auditors (Article 31 sq)
• Powers of the C.A. to supervise (Article 17)
• Communication of information
• On-the-spot investigations
• Transfer of all or a part of a reinsurance
  portfolio subject to authorization (Article 18)
• Control of the modifications of qualifying
  holdings (Article 19-23)
• Reinsurance undertakings in difficulty
• Financial recovery plan emergency action
  (Article 42-44).

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Main Provisions of the Directive 2005/68/EC -
Conditions governing the Business of Reinsurance

• Rules applicable to technical provisions (Article
  32)
• Accounting Rules laid down in the 91/674/EEC
  Directive
• If necessary, rules more specific (Article 20
  2002/83/EC Directive)
• Credit reinsurance Equilization Reserves
  (Article 33)
• Regular financial reporting to the C.A. (Article
  17)
• Rules applicable to assets covering the technical
  provisions
• Prudent Person Principle (Article 34)
• Available Solvency Marigin
• List of Eligible Items (Article 36) same logic
  as 73/329/EEC
• Required Solvency Margin.
• For non-life reinsurance same logic as
  73/329/EEC (Article 37)
• For Life reassurance activity in principle,
  Article 37 but possibility to apply Article 28
  of 2002/83/EC (Article 38)

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Main Provisions of the Directive 2005/68/EC
Finite Reinsurance, SPV

• Finite Reinsurance (Article 45)
• Finite reinsurance is a name for reinsurance
  contracts that limit the amount of risk
  transferred ... Limitation of risk transfer is a
  normal and necessary element of providing
  reinsurance (C.E.A.)
• The rules applicable to finite reinsurance will
  depend on the Home Member State. If a Member
  State do not provide for specific provisions, the
  general provisions applicable to reinsurance will
  apply.
• Special Purpose Vehicles (Article 46)
• Where a Member State decides to allow the
  establishment within its territory of special
  purpose vehicles within the meaning of this
  Directive, it shall require prior official
  authorisation thereof and
• It shall lay down regulatory conditions (scope of
  authorization, management, shareholding,
  organization, reporting, solvency).
• Information of the Commission about the
  frameworks put in place

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Main Provisions of the Directive 2005/68/EC
Institutional arrangements Third Countries

• Cooperation between C.A.
• Exchange of Information (Article 24-30)
• Cooperation in case of difficulties with a branch
  or in case of irregular cross-border provision of
  services (Article 47)
• Third Country Reinsurance Undertakings
• No provisions which results in a treatment more
  favourable than that accorded to reinsurance
  undertakings having their head office in that
  Member State (Article 49).

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Right Acquired by Existing Reinsurers-
 Grandfathering Clause (Article 61)

• 1.- Reinsurance undertakings subject to this
  Directive which were authorized or entitled to
  conduct reinsurance business in accordance with
  the provisions of the Member States in which they
  have their head offices before 10 December 2005
  shall be deemed to be authorized in accordance
  with Article 3.
• However, they shall be obliged to comply with
  the provisions of this Directive concerning the
  carrying on of the business of reinsurance and
  with the requirements set out in Article 6(a),
  (c), (d), Articles 7, 8 and 12 and Articles 32 to
  41 as from 10 December 2007.
• 2.- Member States may allow reinsurance
  undertakings referred to in paragraph 1 which at
  10 December 2005 do not comply with Articles
  6(a), 7, 8 and Articles 32 to 40 a period until
  10 December 2008 in order to comply with such
  requirements.

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Thank you for your attention!

• Jean-Marc GollierAdviserCommission bancaire,
  financière et des assurances
• Rue du Congrès, 14
• 1000 Bruxelles
• Belgium
• jean-marc.gollier_at_cbfa.be