Eu Animated Presentation 3 03 2008
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Eu Animated Presentation 3 03 2008

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Comparative Reinsurance Regulation - European Union and United States

Comparative Reinsurance Regulation - European Union and United States

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Eu Animated Presentation 3 03 2008 Eu Animated Presentation 3 03 2008 Presentation Transcript

  • Supervisory Rules for Foreign Reinsurance Undertakings By: Greg Arnold Feb. 19, 2008 Course: Insurance Regulation In the European Union Visiting Professor Pierpaolo Marano
  • Preliminary Basics
    • Institutions of the
    • European Union
    • Council
    • Commission
    • Parliament
    • Court of Justice
    • Court of the Accountings
    • Sources of EU Law
    • --The…
    • Recommendations
    • Regulations
    • Directives
    • EU Treaty
  • Supervisory Rules for Foreign Reinsurance Undertakings EU and U.S. View slide
  • Sources of Foreign Reinsurance Supervision Rules EU Federal-Like Supervision US State Supervision View slide
  • Sources of Foreign Reinsurance Supervisory Rules EU European Parliament and The Council Reinsurance Directive (RID) 2005/68/EC Actual Law (Uniform Rules, 27 EU Member Countries, 30 EEA Countries) US National Association of Insurance Commissioners Nonadmitted Insurance Model Act (NIMA) Recommended Model Laws (Regulation by 51 Jurisdictions)
  • Reinsurance Directive 2005/68/EC Institutional Arrangements – Third Countries
    • TITLE III
    • CONDITIONS GOVERNING THE BUSINESS OF REINSURANCE
    • Cooperation Agreements With Third Countries ( Article 26)
      • TITLE VI
      • REINSURANCE UNDERTAKINGS WHOSE HEAD OFFICES ARE OUTSIDE THE COMMUNITY AND CONDUCTING REINSURANCE ACTIVITIES IN THE COMMUNITY
      • Third Country Reinsurance Undertakings (Article 49)
      • Agreements With Third Countries (Article 50)
  • Article 26 Cooperation Agreements with Third Countries
    • Member States may conclude cooperation agreements providing for
    • exchange of information with the competent authorities of third
    • countries or with authorities or bodies of third countries as defined in
    • Article 28(1) and (2) only if the information disclosed is subject to
    • guarantees of professional secrecy at least equivalent to those
    • referred to in this Section. Such exchange of information shall be
    • intended for the performance of the supervisory task of the
    • authorities or bodies mentioned.
    • Where the information originates in another Member State, it
    • may not be disclosed without the express agreement of the
    • competent authorities which have disclosed it and, where
    • appropriate, solely for the purposes for which those
    • authorities gave their agreement.
  • Article 49 Principle and Conditions for Conducting Reinsurance Business A Member State shall not apply to reinsurance undertakings having their head offices outside the Community and commencing or carrying out reinsurance activities in its territory provisions which result in a treatment more favourable than that accorded to reinsurance undertakings having their head office in that Member State.
  • Article 50 Agreements With Third Countries
    • 1. The Commission may submit proposals to the Council for
    • the negotiation of agreements with one or more third
    • countries regarding the means of exercising supervision over:
    • (a) reinsurance undertakings which have their head offices
    • situated in a third country , and conduct reinsurance
    • business in the Community,
    • (b) reinsurance undertakings which have their head offices in the
    • Community and conduct reinsurance business in the territory of a
    • third country .
  • Article 50, Cont’d
    • 2. The agreements referred to in paragraph 1 shall in particular seek to ensure
    • under conditions of equivalence of prudential regulation, effective market
    • access for reinsurance undertakings in the territory of each contracting party
    • and provide for mutual recognition of supervisory rules and practices on
    • reinsurance . They shall also seek to ensure that:
    • (a) the competent authorities of the Member States are able to obtain the
    • information necessary for the supervision of reinsurance undertakings which
    • have their head offices situated in the Community and conduct business
    • in the territory of third countries concerned,
    • (b) the competent authorities of third countries are able to obtain the information
    • necessary for the supervision of reinsurance undertakings which have their
    • head offices situated within their territories and conduct business in the
    • Community.
    • 3. Without prejudice to Articles 300(1) and (2) of the Treaty, the Commission shall with
    • the assistance of the European Insurance and Occupational Pensions Committee
    • examine the outcome of the negotiations referred to in paragraph 1 of this Article and
    • the resulting situation.
  • Insurance Mediation Directive, IMD
    • Directive 2002/92/EC of the European Parliament and of the Council of 9 December 2002 on Insurance Mediation, also known as the Insurance Mediation Directive, or simply IMD. [1]
    • Under the IMD, Article 1, “Scope”, paragraph 3, “equal treatment” of reinsurance intermediaries is “guaranteed.” In the Reinsurance Directive, or RID, the “pledging of assets” by third-country reinsurers can be requested by an EU Member State. This is arguably not likely to occur given the EU’s attempts at global harmonization of the reinsurance business. Under the RID, EU Member States cannot offer terms to third-country reinsurers on terms more favorable than those offered to Community members. That refers to reinsurance companies, not intermediaries. Thus, under the IMD, equal treatment to intermediaries is guaranteed, with no mention of treatment of companies. Under the RID, equal treatment of companies is not guaranteed. Any attempts by the EU to require pledging of assets by third countries could be met with claims of discrimination. If the complainer is a U.S. reinsurance company, such complaints would be met with no sympathy – see the discussion of the collateral debate, infra.
    • [1] Available at www.eur-lex.europa.cu/LexUriServ/LexUriServe.do?uri=CELEX:32002L0092:EN:NOT.
  • RID Highlights
    • “ I will highlight that the Reinsurance Directive gives reinsurers not based in an EU Member state the opportunity to conduct business in the EU without the need to establish a branch.” – Syllabus
    • Art. 26: “Cooperation agreements…information exchange”
    • --”guarantee of secrecy”
    • Art. 49: “…no more favourable than that accorded to reinsurance undertakings having their head
    • office in that Member State.”
    • Compared with U.S. regime, infra.
  • RID Highlights (Cont’d)
    • Art. 50: “…negotiation of agreements with…third countries regarding means of supervision over” “(a) reinsurance undertakings which have their head offices situated in a third country, and conduct reinsurance business within the Community
    • IMD – EU can require collateral (“pledging of assets”) of third countries such as the U.S.
    • Compared with U.S. regime, infra.
  • Implementation Into National Law UK Sources of Foreign Reinsurance Supervision EU European Parliament and The Council Reinsurance Directive (RID) 2005/68/EC Actual Law (Uniform Rules, 27 EU Member Countries, 30 EEA Countries) US National Association of Insurance Commissioners Nonadmitted Insurance Model Act (NIMA) Recommended Model Laws (Regulation by 51 Jurisdictions)
  • Implementation Into National Law UK Financial Services and Markets Act 2000 The RID came into force Dec. 10, 2005 and was originally to be implemented by Dec. 10, 2007 (extended to October 2008). The UK Financial Services Authority (“FSA”) states that most of the provisions of the RID had already been implemented by the UK prior to the planned effective date. The next slides will discuss what was done for full implementation.
  • Financial Services and Markets Act 2000 2006 Implementations (cont’d) On 31 December 2006 the FSA introduced prudential changes for insurers which included the introduction of a principles-based approach to asset admissibility, the reduction of certain reinsurance solvency requirements and the authorization and supervision of insurance special purpose vehicles. Source: Implementation of the Reinsurance Directive in the UK , Clyde & CO LLP Newsletter, January 2008, available at http://www.runoffmarket.com/docs/a014/Run-off-Jan-2008.pdf .
  • Financial Services and Markets Act 2000 2006 Implementations (cont’d)
    • The FSA’s proposed new measurers are discussed in its publication entitled Consultant Paper, Implementing the Reinsurance Directive , June 2006. The FSA implemented these new measures on December 31, 2006:
    • Removed restrictions on the assets held by reinsurers ;
    • The pre-existing prescriptive rules on admissible assets and quantitative limits were removed for pure reinsurers and replaced by high level "prudent person" investment principles covering liquidity, security, quality, profitability and matching of assets.
  • FSA’s 2006 Measures (Cont’d)
    • Removing restrictions on the assets held by reinsurers;
    • Changed the life reinsurance rules on capital requirements and technical provisions;
    • Pure reinsurers and mixed insurers carrying on life reinsurance protection business and permanent health insurance can now determine their minimum capital requirement using the non-life solvency tests. Furthermore, pure reinsurers can now calculate their technical provisions on a basis which has less of a margin of prudence built in than was required. The FSA estimates that the combined effect of these is a significant increase in excess capital of UK pure reinsurers. A certain proportion of that capital is needed to meet the individual capital adequacy standards that the FSA imposes on each firm. But even taking that into account the FSA estimates the changes resulted in the potential freeing up of capital of approximately £730 million.
  • FSA’s 2006 Measures (cont’d)
    • Removing restrictions on the assets held by reinsurers;
    • Changing the life reinsurance rules on capital requirements and technical provisions;
    • Relaxed restrictions on reinsurers' activities;
    • Previously reinsurers could only carry on reinsurance business and activities directly arising from that business. The FSA relaxed that restriction for pure reinsurers so as to permit them to carry on related operations such as providing actuarial advice or claims management services for their clients.
  • FSA’s 2007 Measures Dec. 31, 2007
    • Financial Services and Markets Act 2000 (Reinsurance Directive) Regulation 2007 No 3255:
    • This provides that a proposed transfer by a reinsurance undertaking must be publicized and notified to policyholders. That requirement can be waived by the court in certain circumstances.
  • FSA’s 2007 Measures Dec. 31, 2007
    • Financial Services and Markets Act 2000 (Reinsurance Directive) Regulation 2007 No 3255:
    • Services and Markets Act 2000 (Reinsurance Directive) Order 2007 No. 3254
    • This makes clear that the term "a relevant reinsurer" (as used in Statutory Instrument No. 2001/544) includes reinsurers that fall within the RID as well as other foreign reinsurers. The instrument also deals with Gibraltar-based firms, extending to Gibraltar-based firms carrying on reinsurance within the meaning of the RID the right to establish branches in the UK, which Gibraltar-based firms carrying on direct insurance business already had.
  • FSA’s 2007 Measures Dec. 31, 2007
    • Financial Services and Markets Act 2000 (Reinsurance Directive) Regulation 2007 No 3255;
    • Services and Markets Act 2000 (Reinsurance Directive) Order 2007 No. 3254;
    • The Reinsurance Directive Regulations 2007 No. 3253
    • A new procedure for reinsurance transfers. It was already possible, prior to the RID, to transfer reinsurance portfolios under Part VII of FSMA, but changes were required to the UK procedure to comply with the RID and in particular the need for home state authorization of transfers by UK branches of pure reinsurers. Also, the Treasury chose to simplify the Part VII process as it applies to reinsurance transfers, so that where the consent of all the policyholders has been obtained, an application to court will not be necessary, although a solvency certificate (which is a minimum requirement under the RID) will have to be obtained. There is also provision to clarify the application of the requirements for certificates as to solvency and consent of certain regulators to transfers by non-EEA insurers with a branch in the UK, and to transfers to branches of non-EEA insurers elsewhere in the EEA.
  • Sources of Foreign Reinsurance Supervisory Rules EU European Parliament and The Council Reinsurance Directive (RID) 2005/68/EC Actual Law (Uniform Rules, 27 EU Member Countries, 30 EEA Countries) US National Association of Insurance Commissioners Nonadmitted Insurance Model Act (NIMA) Recommended Model Laws (Regulation by 51 Jurisdictions)
  • NAIC Nonadmitted Insurance Model Act (“NIMA”) 2007
    • Section 4.F(3) Placement of Insurance Business
    • (a) the assuming insurer must be authorized to do a reinsurance business by its domiciliary jurisdiction and be authorized to write the type of reinsurance in its domiciliary jurisdiction; and (b) must satisfy all legal requirements for such reinsurance in the state of domicile of the ceding insurer
    • Section 5 Surplus Lines Insurance
    • C(2)(c), Lloyd’s Plans:
    • (i) Maintain a trust fund consisting of trusteed funds representing the group’s liabilities attributable to business written in the U.S., and
    • (ii) Maintain a trusteed surplus of $100 million.
  • NAIC Nonadmitted Insurance Model Act (“NIMA”) 2007 (cont’d)
    • Section 5.C(2)(d) Group of incorporated Insurers Under Common Administration,
    • Which Has Continuously Transacted An insurance Business Outside the United States
    • for at Least Three Years…
    • (i) Maintain aggregate policyholders’ surplus of $10
    • Billion;
    • (ii) Maintain a trusteed surplus in amount of $100 Million;
    • (iii) Each individual insurer shall maintain capital and
    • surplus of not less than $25 Million.
    • Section 5.C(2)(e) An insurer not domiciled in the U.S.
    • Maintain capital and surplus requirements under the laws of ___ state; or $15 Million (Subsection C(2)(a) and shall have in force a trust fund of not less than the greater of (i) $5,400,000; or (ii) 30% of the U.S. surplus lines gross liabilities, excluding aviation, wet marine and transportation insurance liabilities, not to exceed $60,000,000 (or $18,000,000).
    • Subsection (ii) can be waived by way of credit for diversification among several lines of insurance and geographic location [Subsection (e)]; and the past and projected trend in the size of the company’s capital and surplus considering such factors as premium growth, operating history, loss and expense ratios, or other appropriate criteria [Subsection (f)]
    • Section 5.C(4) Provide Annual Accounting
  • Highlights EU/RID NAIC/NIMA
    • The RID gives reinsurers not based in an EU Member state the opportunity to conduct business in the EU without the need to establish a branch.
    • Art. 26: “Cooperation agreements…information exchange”
    • --”guarantee of secrecy”
    • Art. 49: “…no more favourable than that accorded to reinsurance undertakings having their head
    • office in that Member State.”
    • Same. But, unlike EU, which can assess collateral but doesn’t, the U.S. does require collateral as a proxy to a branch, financial strength rating, equalization reserves, etc.
    • No counterpart. Likely in
    • future State regulations (information sharing part of NYS proposal).
    • Certainly nonadmitted reinsurers are not treated more favorably than admitted/licensed reinsurers. Also not treated more favorably than domestic, unlicensed reinsurers who must post collateral.
  • Highlights (Cont’d) EU/RID NAIC/NIMA
    • Art. 50: “…negotiation of agreements with…third countries regarding means of supervision over…
    • “ (a) reinsurance undertakings which have their head offices situated in a third country, and conduct reinsurance business within the Community”
    • EU insurers can require pledging of assets by third-country reinsurers.
    • No counterpart in NIMA. But, such negotiations are quite likely in the future, by both the NAIC and individual States.
    • States must require collateral of alien reinsurers not licensed in the U.S.
  • Implementation Into National Law UK Adoption into State Law New York State Sources of Foreign Reinsurance Supervision EU European Parliament and The Council Reinsurance Directive (RID) 2005/68/EC Actual Law (Uniform Rules, 27 EU Member Countries, 30 EEA Countries) US National Association of Insurance Commissioners Nonadmitted Insurance Model Act (NIMA) Recommended Model Laws (Regulation by 51 Jurisdictions)
  • New York State Regulation 20 (11 NYCRR 125)
    • (c) (1) In the case of an alien assuming insurer, not otherwise entered as a United States branch in another state, such assuming insurer meets the standards of solvency required of licensed insurers of like character, such terms and conditions as prescribed by the superintendent, and otherwise complies substantially with related requirements, and such assuming insurer has deposited and continues to maintain in one or more New York state banks and/or members of the Federal Reserve System located in New York state, a trust fund or trust funds, constituting a trusteed surplus, in cash, readily marketable securities, or letters of credit, in an amount of not less than $20,000,000 for the protection of the United States insurers, and United States beneficiaries under reinsurance policies (contracts) issued by such alien assuming insurers. Such trusteed amount shall be in addition to any other trust fund required by this department, including, but not limited to, a trusteed amount at least equal to the liabilities attributable to United States insurers and United States beneficiaries under reinsurance policies (contracts) issued by such alien assuming insurers. As used in this subdivision, surplus means the balance remaining after subtracting the liabilities, attributable to reinsurance policies (contracts) issued in the name of such alien assuming insurer from the total assets deposited in the trust fund or trust funds
  • New York State Regulation 20 (11 NYCRR 125)
    • Lloyd’s
    • Finally, in the case of “a group located outside the United States whose
    • members consist of individuals incorporated assuming insurers who are not
    • engaged in any business other than underwriting as a member of the group
    • and individual unincorporated assuming insurers” (referring to Lloyd’s-style
    • reinsurers without mentioning any company or market names), there is an
    • additional requirement of trusteed surplus funds in the amount of
    • $100,000,000. [1] Lloyd’s has always been a market, not a company or
    • insurance corporation, and it thus appears this section is in reference to
    • Lloyd’s.
    • Thus, Lloyd’s is required to post collateral (a) equal to liabilities under
    • reinsurance contracts, plus (b) trusteed surplus funds in the amount of
    • $20,000,000, and (c) trusteed surplus funds in the amount of $100,000,000.
    • Therefore, as discussed later in this section, it is not surprising that Lloyd’s is
    • the most vocal opponent of the U.S. reinsurance collateral requirements, and
    • the leader of the Pan-European effort to abolish such requirements.
    • [1] §125.4 ( c) (5) (d) (1) (iv) (a) Regulation No. 20, available at
    • http://www.ins.state.ny.us/r_finala/2003/pdf/fr20a9tx.pdf.
  • New York State Proposed Regulation for 2008
    • The Superintendent of Insurance for the NYSID has announced proposed new reinsurance collateral rules. Alien and domestic unauthorized reinsurance companies with the highest credit ratings will be treated the same as authorized companies. Weaker reinsurance companies will be required to post collateral on a sliding scale from 10 to 100 percent. Unauthorized reinsurers with a triple A credit rating from two rating agencies would not have to post collateral. Unauthorized reinsurers with a double A or equivalent rating would have to post collateral equal to 10 percent of claims, single A 20 percent, and triple B 50 percent. Unauthorized reinsurers having a credit rating below triple B would still be required to post 100 percent collateral.
  • New York State Proposed Regulation for 2008 (cont’d)
    • Other requirements would be as follows:
    • An unauthorized reinsurer must:
    • Meet the standards of solvency, including standards for capital adequacy, established by its domestic regulator;
    • Be authorized in its domiciliary jurisdiction to assume the specific kind of reinsurance it is offering;
    • Maintain a policyholder's surplus or equivalent in excess of $250,000,000;
    • Accept required contract terms, including consent to the jurisdiction of U.S. courts for disputes;
    • Have a primary regulator that has a memorandum of understanding with the NYSID that addresses information sharing and considers such matters as regulatory equivalency and enforceability of judgments ;
    • Be domiciled in a country that allows U.S. reinsurers access to its market on similar terms; and Post 100 percent collateral upon the entry of an order of rehabilitation, liquidation or conservation against the ceding insurance company.
    • Collateral requirements will not change for authorized reinsurers; they will still not be required to post any collateral. However, new safeguards will be put in place to help ensure the ability of these reinsurers to cover claims and thus protect consumers.
    • Insurance companies ceding risk to reinsurers have responsibility for vetting those reinsurers and developing risk management plans for their reinsurance placements.
    • The Superintendent of Insurance will retain final authority over any particular transaction.
    • Source : NYSID