EU rules concerning nonlife insurance and reinsurance solvency

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• EU rules concerning non-life insurance and
  reinsurance solvency
• Workshop on EU Insurance Legislation, Istanbul
  23-24 June 2005
• Ulf Linder
• European Commission

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• Establishment of technical provisions

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• Technical provisions
• should be adequate in respect of the entire
  business of the company
• provision for unearned premiums, life assurance
  provision, claims outstanding, equalisation
  provision, and other technical provisions
• generally set in a conservative way

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• Calculation basis for technical provisions
• case by case calculations
• estimated ultimate cost
• set in order to ensure that there is not adverse
  run off
• best estimate
• Different traditions exist in Member States

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• Requirements only for assets covering technical
  provisions (direct non-life)
• General principleassets covering the technical
  provisions shall take account of the type of
  business carried out by an undertaking in such a
  way as to secure the safety, yield and
  marketability of its investment, which the
  undertaking shall ensure are diversified and
  adequately spread

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• Rules for investment diversification
• The home Member State shall require every
  assurance undertaking to invest no more than
• (a) 10 of its total gross technical provisions
  in any one piece of land or building,
• (b) 5 of its total gross technical provisions in
  shares and other negotiable securities treated
  from the same undertaking,
• (c) 5 of its total gross technical provisions in
  unsecured loans,
• (d) 3 of its total gross technical provisions in
  the form of cash in hand
• (e) 10 of its total gross technical provisions
  in shares and other securities not traded on a
  regulated market.

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• Rules for currency matching
• The commitments are considered to be payable in
  the same currency in which the contract is
  expressed.
• Insurance undertakings may hold non-matching
  assets to cover an amount not exceeding 20 of
  their commitments in a particular currency.
• Exceptions exist if the currency if the currency
  is subject to transfer restrictions.

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• Solvency margins and minimum guarantee fund
  (non-life)

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• Available solvency margin
• Every insurance undertaking is required to
  establish an available solvency margin in respect
  of its entire business.
• The solvency margin shall correpond to the assets
  of the undertaking free of any forseeable
  liabilities less any intangible item.
• Detailed rules of assets that can be included in
  the available solvency margin

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• Minimum solvency margin
• The required solvency margin is the higher of two
  results.
• The first is based on the annual amount of
  premiums (the premiums basis)
• The second is based on average claims for the
  past three years (the claims basis)

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• The premiums basis
• The premium basis shall be calculated using the
  higher of the gross written premiums or gross
  earned premium.
• Premiums in the classes aircraft liability, ship
  liability and general liability should be
  enhanced with 50.
• The amount so obtained shall be divided into two
  portions. The first up to 50 million EUR, the
  second comprising the excess. 18 and 16 of
  these portions should be calculated and added
  together.
• This sum should be multiplied with the ratio
  (retained claims/total claims) for the last three
  years of the enterprise. This ratio not be less
  than 50.

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• The claims basis
• The premium basis shall be calculated using the
  higher of the gross written premiums or gross
  earned premium.
• Claims, provisions and recoveries in the classes
  aircraft liability, ship liability and general
  liability should be enhanced with 50.
• The third (or one seventh) of the amount so
  obtained shall be divided into two portions. The
  first up to 35 million EUR, the second comprising
  the excess. 26 and 23 of these portions should
  be calculated and added together.
• This sum should be multiplied with the ratio
  (retained claims/total claims) for the last three
  years of the enterprise. This ratio not be less
  than 50.

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• The minimum guarantee fund
• One third of the required solvency margin shall
  constitute the guarantee fund
• No less than EUR 2 million
• If motor vehicle, aircraft, ship liability,
  general liability credit or surety insurance is
  included, then EUR 3 million.

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• Reinsurance Directive between the current
  system and Solvency II?

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General Characteristics of a future EU
Reinsurance Supervision System

• An approach based on harmonisation and mutual
  recognition.
• A fast-track approach for a directive based
  primarily on current direct supervision rules.
• A mandatory licensing system.
• A system that would abolish collateralisation
  requirements in the EU.
• Solvency requirements in line with those of
  direct insurance, but adjusted to suit
  reinsurance

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Major issues discussed (1)

• Non-life reinsurance solvency requirements
• Life reinsurance solvency requirements
• Investment rules
• Transitory period for abolishing collaterals

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Major issues discussed (2)

• Application to the reinsurance portfolio of
  direct insurance undertakings
• Finite reinsurance, use of SPVs
• Inclusion of insurance captives

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Non-life solvency requirements

• Based on current direct non-life rules (16/18
  of premiums or 24/26 of claims)
• Possibility for class enhancement of 50 for
  certain lines of business or types of contracts

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Life solvency requirements

• Non-life solvency rules should be used
• Member States can provide for use of direct life
  rules for investment linked business
• No class enhancement

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Investment rules

• Prudent man principle with certain specified
  qualitative criteria
• Member States may use certain specified
  quantitative limits
• currency matching, non-listed securities and
  maximum investment relating to one undertaking

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Abolishing reinsurance collaterals

• Collateral requirements for commitments from
  licensed EU reinsurers will disappear
• Phasing-out period 24 12 months
• Member States lay down rules for the treatment of
  third country reinsurers (no EU competence)

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Application to the reinsurance portfolio of
direct undertakings

• The Directive is basically aimed at professsional
  reinsurers, or direct insurers with a substantial
  inwards reinsurance portfolio
• One of three thresholds must be fulfilled
• More than 10 reinsurance premium of total
• More than 50m EUR reinsurance premium
• Technical provisions from reinsurance more than
  10 of total

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Finite reinsurance (1)

• Definition
• finite reinsurance means reinsurance under which
  the explicit maximum loss potential, expressed as
  the maximum risk transferred, arising both from a
  significant underwriting risk and timing risk
  transfer, exceeds the premium over the lifetime
  of the contract, for a limited but significant
  amount, together with at least one of the
  follwoing two features
• Explicit and material consideration of the time
  value of money
• Contractual provisions to moderate the balance of
  exonomic experience between the parties over time
  to achieve the target risk transfer

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Finite reinsurance (2)

• Member States may lay down specific rules
  realting to
• Contract conditions
• Sond administrative procedures, internal control,
  risk management
• Accounting, statistical information
• Establishment of technical provisions
• Normal rules on the acceptance of finite
  reinsurance for solvency calculation purposes

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Claim Securitisation/Use of SPVs (1)

• Definition
• SPV means an any undertaking whether
  incorporated or not, other than an existing
  insurance or reinsurance undertaking and which
  fully funds its exposures to such risks through
  the proceeds of debt issuance or some other
  financing mechanism where the repayment rights of
  the providers of such debt or other finanacing
  mechanismare subordinated to the reinsurance
  obligation of such an undertaking

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Claim Securitisation/Use of SPVs (2)

• Establishment of an SPV requires prior
  authorisation
• Member States lay down rules for
• Scope pf authorisation, contract conditions
• Governance rules
• Sound administrative procedures, internal
  control, risk management
• Accounting, information requirements
• Solvency requirements
• Proceeds can be used for the solvency calculation
  after decision by supervisor

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Reinsurance captives

• Included in the scope of the Directive
• Normal rules apply, but a lower Minumum Guarantee
  Fund requirement applies (1m EUR in stead of 3m
  EUR).

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Contacts

• Ulf Linder, Principal Administrator
• Insurance Unit
• Internal Market DG
• European Commission
• 200 rue de la Loi, B-1049 Brussels, Belgium
• ? 32-2-299.22.76
• Fax [phone]
• E-mail ulf.linder_at_cec.eu.int
• Internal Market DG sitehttp//europa.eu.int/com
  m/internal_market/en/finances/insur/index.htm