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

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Reinsurance Regulation: should there be a difference between regulation of insurance and reinsurance? Dr zlem G rses o.gurses_at_soton.ac.uk Objectives of regulation ... – PowerPoint PPT presentation

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Title: Reinsurance Regulation: should there be a difference between regulation of insurance and reinsurance?


1
Reinsurance Regulation should there be a
difference between regulation of insurance and
reinsurance?
  • Dr Özlem Gürses
  • o.gurses_at_soton.ac.uk

2
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?

3
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

4
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

5
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

6
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. ???

7
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 reinsurers financial
    position.

8
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

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

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

11
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

12
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.

13
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 insurers
    liability under those policies.

14
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 Ltd1995 1 W.L.R.
    239for the purposes of the Act of 1982
    reinsurance business is included within the
    broader term insurance business.

15
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.

16
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

17
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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