What The Directive Says About Finite Reinsurance?

The European Directive on Reinsurance (article 44a of theapproved draft):

o Defines "finite reinsurance" on a European-wide basis:

"[F]inite reinsurance means reinsurance under which the explicitmaximum loss potential, expressed as the maximum economic risktransferred, arising both from a significant underwriting risk andtiming risk transfer, exceeds the premium over the lifetime of thecontract, for a limited but significant amount, together with atleast one of the following two features:

(i) explicit and material consideration of the time value ofmoney;

(ii) contractual provisions to moderate the balance of economicexperience between the parties over time to achieve the target risktransfer." (article 2(1)(nnn).

o Identifies six requirements that European Member States couldimplement to regulate this activity (article 44a(1)).

These conditions concern: administrative, accounting prudentialand statistical procedures, adequate internal control mechanismsand risk management requirements, mandatory conditions forinclusion in all policies issued, technical provisions, andsolvency issues.

o Leaves a wide margin of discretion to European Member Statesto regulate finite reinsurance as they see fit (Recital 25(a)).

The Recital of the Directive states that "due to the specialnature of this line of reinsurance activity, the home Member Stateshould be given the option to lay down specific provisions for thepursuit of finite reinsurance activities. These provisions coulddiffer from the general regime laid down in this Directive on anumber of specific points." This reflects a process of optional andnot mandatory harmonization at a European level.