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CHAPTER 2 REINSURANCE

Compendium of Insurance Law

2 REINSURANCE OVERVIEW 2.1 Reinsurance is regulated by the UK financial services legislation in much the same way as direct insurance, although there are modifications relating to solvency margins and accounting, and also the Insurance Conduct of Business Rules—which are largely concerned with protecting policyholders—are irrelevant in the reinsurance context and thus do not extend to reinsurance. European Community law, while regulating direct insurance since 1973 (including the reinsurance business carried out by direct insurers), did not until comparatively recently seek to extend single market principles to, or regulate the activities of, pure reinsurers. The only measure in place was Council Directive 64/225/EEC, which was an early attempt to remove national barriers to the creation of branches and to the provision of reinsurance by way of cross-border services. Matters remained in this state until the adoption in November 2005 of the European Parliament and Council Directive 2005/68/EC, the Reinsurance Directive. This measure brings the regulation of pure reinsurers, including captive insurers, into line with the regulation of direct insurers, by imposing a harmonised regulatory regime for reinsurance across the EU based on the usual principles of authorisation, control of transfer of business, solvency requirements and home state control for all EU activities. The Directive also lays down minimum requirements of home state control for two particular forms of alternative risk transfer used as an alternative to traditional reinsurance, namely finite reinsurance and the use of special purpose vehicles: as yet there is no harmonised regulatory system for ART, but this may be expected to develop along with the European Commission’s expertise of the entire ART concept. The Reinsurance Directive 2005 had to be implemented by member states by 10 December 2007. The UK has implemented the Directive by modifications to the Financial Services Authority’s Handbook.

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