12 February 2002

Commission Services publish Study on Reinsurance Supervision

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The reinsurance sector has seen important changes during the last few years. The concentration to a few large players has continued through mergers and acquisition, new financial products have been developed and new information technology tools have emerged. In a changing market it is important that supervisory practices keep pace with developments. In the EU there is currently no harmonised framework for reinsurance supervision. In January 2000, the Commission Services and Member States therefore decided to initiate a project on reinsurance supervision to investigate the possible establishment of a harmonised EU system.

This report outlines the findings on the “Study into the methodologies for prudential supervision of reinsurance with a view to the possible establishment of an EU framework”. The study also examines approaches adopted by reinsurance companies and other interested parties (such as rating agencies) to assess and monitor reinsurance risks. It considers the ways in which supervisory approaches may benefit from existing market practices.

Chapter 2 of this report gives an overview of similarities and differences between insurance, reinsurance and other risk transfer methods. The section focuses on those similarities and differences which are relevant to the prudential supervision of insurance and reinsurance. The major methods of risk transfer in reinsurance business are described. The concept of alternative risk transfer solutions is also considered, by reference to different types of contracts.

Chapter 3 identifies the main risks that reinsurance companies are exposed to. The section differentiates between different kinds of products, different lines of business and other activities performed by reinsurance companies. This section summarises the most relevant risks in a risk matrix and gives preliminary views of mitigating strategies. The section includes a discussion of specific risks relating to different reinsurance activities.

Chapter 4 provides an overview of the global reinsurance market. It discusses the main market players, different jurisdictions, the role of offshore locations, the major reinsurance products and the likely evolution of the market and product developments.

Chapter 5 provides a description of the different approaches to supervision adopted in the EU and in major non-EU countries. It includes a comparison of the principal characteristics and differences of major or leading jurisdictions, with the aim of clarifying the rationale underlying the adopted supervisory approach. This section is based on discussions with industry specialists within the relevant jurisdictions (both within and outside KPMG).

Chapter 6 analyses the rationale underlying various supervisory parameters and the relative importance and feasibility of supervising the parameters in question. Based on key risks, the analysis prioritises the products / activities of reinsurance companies by their relative need for supervision.

Chapter 7 analyses the arguments for and against reinsurance supervision. Based on the goals of supervision, the risk analysis, and current practices, this section includes a broad cost-benefit analysis of supervisory approaches.

Chapter 8 provides a summary of techniques currently employed for monitoring key risks. It analyses the impact of securitisation and how reinsurers measure or take into account portfolio diversification in assessing their own capital requirements.

See full report

© European Commission