Reinsurance Regulation: should there be a difference between regulation of insurance and reinsurance? Dr Özlem Gürses

Objectives of regulation  Safety and soundness of the companies  Protecting consumers  Banks and insurance companies are big concerns. The banks and insurance companies are different: they fail for different reasons and with different impacts on the stability of the system.  Are insurance and reinsurance companies different? 2

Similarities between insurance and reinsurance  Risk transfer  Security of reinsurers (and retrocessionaires)  Investment of assets to support insurance and reinsurance liabilities  Solvency II: increased capital, heavy burden on shareholders 3

Differences between insurance and reinsurance  Types of contract and complexity (It is said:) – Insurance: standard – Reinsurance: it is common to find more customised policies  Reinsurance contracts may include limitations and exceptions that are not common or permitted for direct insurance contracts 4

Volatility  It is said:  Reinsurance business tends to be more volatile than primary insurance  Reinsurers tend to write business on a treaty basis, and are exposed to the accumulation of losses and greater likelihood of significant losses  Volatility, whilst still present, will be lesser for a reinsurer which allows for better diversification and pooling of individual risks within a larger or well structured portfolio. Also, volatility will be mitigated to some extent by retrocession arrangements 5

Differences between insurance and reinsurance It is said:  Reinsurance: a global business, reinsurers usually have a broad range of geographical exposures.  This has a significant influence on the calculation of underwriting risk.  The insurance industry, on the other hand, tends to be more local in nature. ??? 6

Differences between insurance and reinsurance  Reinsurers receive their premiums later than ceding companies, (due to procedures for settlement of accounts), but may on the other hand be required to make immediate cash payments when large losses occur - Thus fewer opportunities to compensate underwriting losses by investment income than for direct insurers.  It is more difficult to detect potential problems which may impact upon a reinsurer’s financial position. 7

Are insurers and reinsurers different?  Insurance companies are business professionals  The inter-professional market place is to some extent self-regulating  The models for supervision which are appropriate for insurance companies do not fit the special character of reinsurance business.  Reinsurance losses may be calculated later than the insurers but  These particular features do not require a separate regulation but while supervising these features to be taken account 8

The same regulatory regime  Supporting the fraud prevention  When reinsurers are subjected to direct supervision the same fit and proper requirements would apply. 9

Policyholders (consumers)  Solvency problems in a reinsurer affect the ultimate consumers of insurance indirectly 10

Glasgow Assurance Corp v Welsh Insurance Corp 1914 S.C. 320  A separate assurance fund for each class of insurance- security of the policy-holders of that class  Reinsurance between a Scots insurance company and a Welsh insurance company  The Scots company went into liquidation  The issue: ranking of the Welsh company in respect of the sums owed by the Scots Co 11

Glasgow Assurance Corp v Welsh Insurance  Two methods of carrying on the same class of insurance business rather than two separate classes of such business.  Their liability arises on the occurrence of the same event, death of a policy-holder in the case of life insurance, and injury or death of a workman in the case of employers' liability insurance. 12

Forsikringsaktieselskabet National (of Copenhagen) v Attorney-General [1925] A.C. 639  Is a Danish company, which carried on in the United Kingdom the business of reinsurance, and no other business, within the operation of the Assurance Companies Act,  Reinsurance is in effect a policy of insurance against loss by or incidental to fire. The reinsurer takes over a part of insurer’s liability under those policies. 13

The same regulatory regime  Re Friends Provident Linked Life Assurance Ltd [1999] 2 All E.R. (Comm) 437 (The 1982 Act)  Re N.R.G. Victory Reinsurance Ltd[1995] 1 W.L.R. 239:for the purposes of the Act of 1982 reinsurance business is included within the broader term “insurance business.” 14

The same regulatory regime  Re Sompo Japan Insurance Inc [2011] EWHC 260 (Ch) FSMA 2000  Transfer of reinsurance business from Sompo to Transfercom.  The book written consisted mainly of aviation reinsurance and property catastrophe business, together with some general marine and non-marine reinsurance and retrocessional business. 15

Protecting the weaker party  Agnew v Länsforsäkringsbolagens AB [2001] 1 A.C. 223  Universal General Insurance Co (Ugic) v Group Josi Reinsurance Co SA [2001] Q.B. 68  Brussels and Lugano Conventions: An insurer may bring proceedings only in the courts of the contracting state in which the defendant is domiciled, irrespective of whether he is the policyholder, the insured or a beneficiary 16

Conclusions  Maintaining stability and confidence in in-(re)insurance markets  Cost-effective.  Maintain competitiveness  Consistency  Much focused  Simplicity  Resourcing and staffing  PRA: affordability is concern. Safety and soundness of insurance companies  FCA: fairness, consumer protection is concern  Transparency of the market  Increase in market efficiency 17