At risk: the global nature of reinsurance

03-11-2016

Frank W. Nutter

At risk: the global nature of reinsurance

Frank W. Nutter

Local rules plus the effects of Solvency II may be limiting access of countries to the benefits of reinsurance, and this is a problem that needs fixing, says Frank Nutter of the Reinsurance Association of America.

Restricting access to reinsurance can have serious consequences for society. Take, for example, a big earthquake in Chile or in New Zealand of the recent past, where the influx of reinsurance after the event allowed for a remarkable restoration of the economy. 

If you localise reinsurance and don’t place the risk to global markets, as it is happening particularly in certain parts of Asia, you effectively exacerbate the problem. In addition to having to cope with the destruction of infrastructure, those countries may end up with a debilitated local re/insurance industry. By restricting access to foreign reinsurers, regulators are reducing the benefits of an open reinsurance market.

The value of reinsurance is largely to bring in the capital and capacity from global companies that can help in the rebuilding process, unaffected by the problems that the economy experiences after such events. Chile and New Zealand are good examples of why reinsurance is very valuable in creating a positive effect after natural catastrophes.

Rising protectionism in the re/insurance industry in Asia is therefore a major concern. Particularly in China, but also in Indonesia, regulations are being proposed and put in place that have the effect of either requiring mandatory cessions to local entities—in other words, an entity that has a presence in that country—or requiring that a local entity be established in order to do business there.

China is imposing collateral requirements and capital charges for any business that is being placed outside China, making it very difficult to underwrite business in the country unless you establish a local entity there. India has for a long time had some investment restrictions so that foreign companies cannot invest more than a certain percentage in local entities. Indonesia has mandatory cessions to local entities and established a national reinsurance company.

These countries may be hoping to develop their local re/insurance markets by restricting access to capital and capacity from the global reinsurance market, but this is a risky strategy. The concern is that in countries that keep reinsurance within their boundaries, they are not diversifying in a way that would be helpful after a catastrophic event.

The introduction of Solvency II in Europe has, in some countries, also restricted the access to the global reinsurance capacity. While Solvency II rules aim to harmonise the regulatory regime in the EU, some countries made it harder for reinsurers of other jurisdictions to underwrite risk after translating EU legislation into local law. Among these countries are Germany, Poland and the Netherlands.  

German law now requires a US re/insurer to have a local presence to underwrite business there. An alternative would be to have a subsidiary in a Solvency II-equivalent jurisdiction. But companies that have existing relationships and don’t have a branch or a legal entity in Germany or in a Solvency II-equivalent jurisdiction have to rely on the ceding company in Germany to initiate the renewal of a relationship and can’t do it through a broker.

That’s almost prohibitive for those companies. It looks as though US reinsurers could actually lose clients and business in the upcoming renewals season because they cannot legally underwrite in some European countries after the implementation of Solvency II. The effect is that it is prohibiting some current business relationships to continue on the basis that these companies have to place capital and have a legal presence in those countries.

It is hoped that negotiations for a covered agreement between the EU and the US regarding trans-border reinsurance will address the issue, but it will definitely not be in place for the January renewals, not least because such an agreement has to be presented to the US Congress and cannot go into effect for 90 days, according to US law.

The agreement should seek some form of mutual recognition of the regulatory regimes so that companies doing cross-border business can do it based on the regulation in their home jurisdiction. That would be true for both US and EU companies.  

Frank W Nutter is the president of the Reinsurance Association of America. He can be contacted at: nutter@reinsurance.org

Frank Nutter, Reinsurance, Asia, Europe, North America, Regulation, Protectionism

Intelligent Insurer