Reinsurance Regulation: should
there be a difference between
regulation of insurance and
reinsurance?
Dr Özlem Gürses
o.gurses@soton.ac.uk
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
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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. ???
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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
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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
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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, 1909.
 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.”
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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.
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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
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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
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