23 January 2006

Group of Thirty proposes steps to enhance transparency of reinsurance industry

The Group of Thirty released a report titled “Reinsurance and International Financial Markets,” which addresses the role of reinsurance in the international capital markets and highlights a number of major issues which arise as newer players enter the international markets on a substantial scale.

The report examines four major concerns and challenges within the industry along with specific recommendations for action.

The first is whether reinsurance adds substantially to the systemic risk in the international financial system as a whole. The conclusion is that this is not the case today, but the importance of the industry in international capital markets is likely to grow as a result of more securitization of insurance products.

The second issue is that of the securitization of insurance risk and the need to reduce barriers to the growth of this business.

Thirdly, the report looks at ways of increasing transparency in the industry with specific recommendations of how this may be achieved.

Finally, the report looks at the existing regulatory framework and recommends that supervisors worldwide adopt a regulatory approach that reviews the condition and activities of reinsurance groups on a consolidated basis, utilizing risk based framework.

The Study Group identified a number of principles for delivering enhanced disclosure of risks by individual reinsurance companies. Based on these principles the Group developed a proposed framework for risk disclosure by reinsurers. This is intended as an important complement to existing initiatives in the disclosure area, notably that by the International Association of Insurance Supervisors (IAIS). It extends the approach of the IAIS, based on legal-entity disclosure, by focusing on consolidated, group-level disclosure.

Turning to the regulatory environment, the Study Group believes that the growing role of the major reinsurance companies in the insurance sector and in financial markets more widely indicates the need for a better articulated and more consistent approach to the regulation of reinsurance business.

The Study Group recommends that supervisors should review the condition and activities of reinsurance companies on a consolidated basis. Also, regulators worldwide should pursue a more harmonized and standardized oversight framework, based on mutual recognition, an enhanced role for the IAIS, and a supervisory code of conduct for o.shore locations of insurance and reinsurance business. Also, supervisors need to encourage continued improvements in reinsurers’ risk management practices. Finally, regulatory capital requirements need to be risk-based and calculated on a consolidated basis.

Press release
Executive Summary

© G30