Challenges Facing the Regulation of Reinsurance Companies

The reinsurance industry is considered to be very important in most parts of the world. This is the reason that it is also one of the most heavily regulated industries across the world. However, it needs to be understood that the degree of regulation of reinsurance is not the same across the entire world.

The rules and laws pertaining to reinsurance regulation can be very different depending upon the country in which these laws are implemented.

However, regardless of the approach which is chosen to create the regulatory framework for reinsurance companies, all reinsurance companies face certain regulatory challenges. In this article, we will have a closer look at some of these challenges as well as how they impact the operations of reinsurance companies.

1. Degree of Reinsurance Regulation: The first and foremost challenge facing reinsurance companies is the degree of reinsurance regulation that should be brought in. There are some critics who claim that reinsurance is being regulated too much. There is no need for such extensive regulation since reinsurance companies do not deal with the general public.

   Instead, reinsurance companies deal with other insurance corporations. These corporations have the means as well as the knowledge to make good financial decisions that affect them. Hence, excessive regulation is not only necessary but also counterproductive.

   There is another group of critics who claims that reinsurance regulations need to be kept in place or even increased. This is because even though reinsurance companies do not directly deal with the common man, they indirectly do so.

   The reinsurance companies deal with insurance companies that ultimately issue policies to individuals and corporations. Hence, the failure of a reinsurance company can indirectly affect these same individuals and corporations. Hence, making a decision about the degree of regulation which needs to be present in the reinsurance industry is one of the foremost challenges facing global regulatory bodies.

2. Too Big to Fail: In many parts of the world, reinsurance companies have been considered to be too big to fail. This means that the government as well as the regulators in general feel that the failure of a reinsurance company can have a massive impact on the overall economic state of the country. On the one hand, this means that the reinsurance companies become more secure since they may be eligible to receive bailout funds in the event of financial distress.

   However, it also means that the regulatory agencies have to intervene periodically to ensure that no financial distress arises in the first place. This creates a scenario wherein reinsurance regulators are expected to micromanage the operations of reinsurance companies.

3. Dealing With Economic Sanctions: We live in an extremely polarized world today. There are many countries that have been sanctioned by others.

   For example countries like Russia, North Korea, Iran, Venezuela, and even China have been sanctioned by most other countries in the world. Reinsurance contracts do fall within the purview of such sanctions.

   Hence, it is the responsibility of regulatory agencies across the globe to ensure that their reinsurers are not dealing with the parties from these sanctioned nations. Given the fact that reinsurance deals can have multiple layers and can be quite complex, this turns out to be a challenging activity.

4. Increasing Taxation: The reinsurance industry has been bearing the brunt of taxation in many parts of the world. In the recent past, taxation has drastically increased in this sector.

   For example, the European Union countries have stated that the reinsurance sector is undertaxed because of the non-applicability of the value-added tax to the reinsurance sector. As a result, they have increased the rate at which reinsurance is taxed. These increasing taxes have an effect on the cash flow.

   Hence, it becomes a challenge for the regulatory agencies who have to come up with revised estimates of the amount of money that needs to be set aside as reserves for different purposes.

5. Providing a Level Playing Field: Reinsurance companies across the world have now evolved into global organizations.

   It is common for companies to have business in all major economic nations such as China, India, the United States, and the European Union. The problem is that the regulations related to reinsurance are very different in each of these nations.

   Some nations have a liberal policy wherein they allow and welcome all reinsurance companies to participate. On the other hand, other nations have a restrictive policy wherein they restrict the reinsurance companies which can participate. The end result is that some reinsurance companies can do business in more countries than others. One of the key challenges facing regulatory agencies is to ensure that all reinsurance companies get a level playing field.

6. Co-operation Between Regulatory Agencies: The reinsurance business is spread across the globe.

   Each country has its own regulatory agency. Many of these countries have ideological and political differences from each other which cause the relationships to be strained. However, it needs to be understood that regulatory agencies of different countries across the globe must cooperate with each other. This is because, at a fundamental level, the global reinsurance industry operates as one, and non-co-operation between different agencies is likely to impact the industry as a whole.

The bottom line is that even though reinsurance companies face a lot less regulation as compared to insurance companies, they still face a lot of challenges.

There is an urgent need for the global reinsurance community to acknowledge and address these challenges as a single community. Individual responses may not be as effective as a unified response.