Brussels, 03/12/2004 (Agence Europe) - The EP Committee on Economic and Financial Affairs held on 30 November a public hearing on the proposal for a European directive on reinsurance during which prudential measures guaranteeing reinsurance company solvency were the main theme of the debate (see EUROPE of 23 April). On one side, reinsurers mainly challenge the calculation of solvency margins imposed upon them. On the other, suppression of collateral envisaged by the proposal of directive is a matter of great concern to the insurance control committee in France, a Member State where such a technique is currently used. Reinsurance is insurance for insurers. It can happen that an insurer gives up part of his commitments to one or several reinsurers. In this case, the insurer no longer exclusively owns the investment corresponding to premiums given up, but holds a credit on the reinsurer, who must intervene when a claim is made. Whatever happens, the direct insurer remains the only person accountable to the persons insured, even when a reinsurer becomes bankrupt.
Florence Lustman, Secretary General of the French Insurance Control Commission, consider "it is difficult to appreciate the soundness of the reinsurance claim. The choice of reinsurer is free and fluctuates in time. Reinsurers themselves reinsure themselves and the final risk bearer and his solvency are therefore not necessarily known". There is therefore a real risk that the reinsurer will default due to this multi-tier system. "This is not a study case. There are many examples of painful bankruptcies on the market", Ms Lutsman admits. The two representatives of the reinsurance companies present at the public hearing do not share this point of view. Bob Howe, who represents the "Risk" department of Swiss Reinsurance Company UK Ltd, considers reinsurers are the buffers that absorb any extraordinary shocks, which makes insurance safer and less costly. Thomas Fiedler, Head of the Legal Department at Hannover Rückversicherungs AG, believes the commitment taken by reinsurance companies for solvency is acquired with the "Solvency II" package. "We do not need anything else, and current rules have shown their worth", he said. "Solvency II" reform is aimed at establishing a solvency system by 2009 which corresponds more closely to the true risks encountered by the whole of the insurance sector.
The Commission's proposal of directive bans the regulatory use of collateral for reinsurers by 2010. Collateral - or security - ensures guarantee of insurer credits on the reinsurer. Florence Lustman considers that collateral is the best protection to date against the risk of non-payment by reinsurers. She said the United States, for example, imposes collateral on all non-domestic reinsurers. A practice that is widespread in the banking sector, collateral is not compulsory and does not introduce any competition distortion because of its uniform application. Its ban is inconsistent, she went on, with the will to protect the financial systems. This, she concludes, would result in a considerable weakening of the means implemented to ensure insurer security, when no impact study has enacted on the adverse nature of collateral for reinsurers. Thomas Fiedler felt the cost of collateral is high: "For Hannover Rückversicherungs, the cost of collateral is EUR 5.5 billion. This money is placed in a trust fund and its returns are therefore low. To this must be added the costs reserved for intermediaries that we estimate at 1% of the total, or EUR 55 million". This rise in costs would come in addition to the strengthened capital requirements entailed by over-high solvency margins and would considerably harm the competitiveness of the reinsurance sector which would pass the rise on to those insured and would be tempted by relocation to third countries. Furthermore, Bob Howe considers the effectiveness of collateral is not totally reliable: "Collateral only gives an appearance of greater security in the case of reinsurer default and there are other parries to default also. Real security essentially comes from good management practices. We explain our structures and working methods to regulators and to control agencies". MEP Peter Skinner (British Labour member), rapporteur on this dossier, noted that "collateral is only used in two Member States" and this practice is therefore only marginally used in the EU.
The question of a transitional period for abolition of collateral was raised during the public hearing. Thomas Fiedler is in favour of a period of five to six years. MEP Jean-Paul Gauzès (EPP-ED, France) considers "the prudential methods contained in the Commission's proposal of directive before abolishing collateral must be tested". The idea of a transitional period of figures "terrifies" Florence Lustman who prefers to hear of "adjustment of the duration of this period with the entry into force of the future "Solvency II" rules and with a test of the new standards provided for in the new directive also".