Open reinsurance markets at home and abroad
It is only through open markets that the world's reinsurers can absorb risks and support global economic growth
The central objective of insurance is to share risks, so that losses are more easily absorbed. Reinsurance does the same on a global scale; transferring local risks to the global reinsurance market, which diversifies the risks and thereby makes economies more resilient. That is why national protectionist measures that create barriers to global reinsurance harm the very economies they aim to protect.
One of the aims of Insurance Europe's Reinsurance Advisory Board (RAB) is to promote open, well-regulated (re)insurance markets that allow the optimum geographic and economic spread of risk to underpin sustainable, long-term growth.
Open markets are a prerequisite for reinsurance to fulfil its crucial social and economic function of efficiently transferring and globally diversifying risks, promoting the resilience, recovery and continued growth of national and global economies. This will be even more important in the post-pandemic economic environment. Any barriers to trade in reinsurance, anywhere in the world, undermine the efficiency of reinsurance markets and decrease capacity in the long term while increasing reinsurance costs, for example for the placement of large, complex risks.
There have been several positive developments over the last few years that give us cause for optimism. There is the bilateral agreement between the EU and the US, which — subject to certain conditions — prohibits the introduction of any collateral requirements in connection with cessions from ceding companies to reinsurers. In China, proposals that would have required local risk retention through maintaining a proportion of onshore admissible assets on (re)insurers' balance sheets have been dropped, to the benefit of a diversified and efficient reinsurance market. And in Brazil, recent changes largely lifted restrictions on foreign reinsurers. Proposals on a reduction of the regulatory requirements for the licensing of foreign reinsurers also raise the prospect of greater cross-border reinsurance to the benefit of Brazil's local and national economic resilience and its insurers. The fight against trade protectionism received a further welcome boost in a pledge by the G20 finance ministers in April 2021, with the important role of open and fair rules-based trade being acknowledged.
“Any barriers to trade in reinsurance undermine the efficiency of reinsurance markets, decrease capacity and increase reinsurance costs.”
Examples such as those above should be applauded. However, there is more work to be done, as certain barriers still exist and new ones are emerging. These include:
- restrictions on cross-border reinsurance;
- requirements for cross-border reinsurers to collateralise or localise assets;
- restrictions on foreign ownership or requirements to establish a local presence; and,
- anti-competitive mechanisms such as giving rights of preference to domestic reinsurers.
To be clear, not only are these approaches bad for the economies and the people that (re)insurance protects, they are also contrary to the World Trade Organization's GATS (General Agreement on Trade in Services) commitments on market access for reinsurance and retrocession.
Indeed, a report by the Global Reinsurance Forum in April 2021 identified 51 major territories, including regional groups, in which barriers to the transfer of risks to global reinsurance markets exist or are emerging. The RAB has recently shared its concerns and developed advocacy efforts in several markets. We have seen, for instance, Canada's proposed regulatory reforms that would place different requirements on reinsurance written on a cross-border basis to those placed on business written by Canadian entities. This could well increase Canada's protection gap. In addition, there are still orders of preference for reinsurance placements for local players in India and limits on cessions to cross-border reinsurers. And Indonesia also has limits on cessions to the overseas reinsurance market.
“It is not only overseas that challenges to a globally open reinsurance market may arise.”
CHALLENGES AT HOME
However, the work of the European Insurance and Occupational Pensions Authority on supervisory convergence on non-European Economic Area (EEA) reinsurance highlights that it is not only overseas that challenges to a globally open reinsurance market may arise. While most EU jurisdictions allow non-EEA reinsurers to write reinsurance business without local authorisation, some member states still impose additional requirements on non-EEA reinsurers. It is vital that the EU sets an example by not creating or retaining barriers to the transaction of European reinsurance business by non-EEA reinsurers or (if and to the extent this is contemplated) non-EEA branches of EEA reinsurers, consistent with the principles of Solvency II and to the benefit of the European market.
Let me conclude by coming back to the starting point; most countries allow noteworthy freedom for local companies ceding risks to local and foreign reinsurers, but this is not a trend and challenges keep arising. It is only through the elimination of obstacles to cross-border reinsurance that improvements in risk-spreading and access by local insurers to sufficient reinsurance capacity and the knowledge of reinsurers will be achieved. This, in turn, will help close the protection gap. And more benefits will follow beyond the economic ones, such as an increase in local reinsurance expertise. The RAB will always be a firm and forthright advocate of open reinsurance markets at home and abroad.