The basis for answering this question is the factual and the norm:
Reinsurers have always offered services of various kinds, often within the framework of reinsurance treaties, but also independently vis-à-vis cedants, based on their comprehensive know-how and in-depth market knowledge.
Legal scholars often do not go beyond paraphrasing § 15 para. 2 p. 1 VAG, combined with the statement in the explanatory memorandum to the 2006 amendment to the Insurance Supervision Act, that reinsurers need the leeway made possible by the international nature of their business.
This question is becoming more explosive because the field of consultancy is gaining in importance:
- Instead of risk management through (re) insurance, attempts at risk prevention are increasingly taking place upstream.
- The know-how that reinsurers have acquired is increasingly needed as a ‘production factor’ by all kinds of industries.
- Advancing global digitalization and networking are leading to an exponential growth of risks, and hardly any industry lends itself to the analysis and management of this multitude of new types of risks as much as the (re) insurance industry.
Another driver for the expansion of the range of activities of reinsurers is that their core business remains commercially demanding:
- The tendency to reduce reinsurance cessions is increasing.
- A recovery of reinsurance premiums is still not taking place.
- In times of low interest rates, income from the management of investments hardly compensates for underwriting results that remain below expectations.
- With regard to certain risks - such as the danger of pandemics - (insurers and) reinsurers even appear to be overstretched.
The provision of European law is found in Art. 18 (1) b of the Solvency II Directive: A reinsurance company is allowed to carry out activities such as statistical or actuarial consulting as well as risk analysis or risk research for its clients.
Which transactions and services are “connected” with the (permitted) reinsurance business?
First: The term “reinsurance business” is used in the law to refer to the core business of the reinsurer. With the term “related transactions and services”, the law describes the expansion of this field of business, whereby the attribute “related” marks the content-related limitation of the expanded field of business. Therefore, such other transactions and services can also be provided to clients with whom the reinsurer has not concluded a reinsurance contract.
It could at most be objected that the protective purpose of the norm prohibits the reinsurer from providing other services ‘solo’:
The starting point is the protective purpose of the - stricter - prohibition of non-
insurance business for primary insurers which is intended to ensure the solvency of the insurance company and thus the ability to meet its obligations to policyholders and insureds; no financial risks should be taken that would endanger them.
Several follow-up questions are raised:
- What risks at the expense of the reinsurer are created by other business and services? How can they be limited?
- Can other transactions and services also limit the reinsurer’s risks?
- What conclusions can be drawn regarding the conditions for maintaining the (financial) stability of the reinsurer?
The services of reinsurers are mainly advisory services. The risk from advisory services, apart from the fact that the operation required for the provision of these services causes expense, consists in being claimed against by the client for incorrect advice. How can the reinsurer limit its additional risks? It can agree on liability limits, buy insurance cover itself or, alternatively, keep income generated that does not have to be retained for other (company law and/or regulatory) reasons as a potential ‘retention’.
Second: The other transactions and services mentioned are capable of limiting the risks of the reinsurer. They are regularly provided on the basis of the comprehensive know-how and the deep market knowledge of the reinsurers. Consequently, they are at the same time suitable to support the risk strategy of the reinsurer with regard to the risks it underwrites.
Third: From the finding that risk-reducing options are available and these transactions per se even have a risk-reducing effect, it can be seen: The general requirements for reinsurers and their business managers also apply to the operation of these transactions.
So: Which transactions fall within the scope of transactions and services connected with the reinsurance business, and where does the limit currently lie?
Reinsurance-related business undoubtedly includes business that deals with the evaluation of risks, their quantification, their observation, and also with the possibilities of avoiding them. In my opinion, this also includes the development of suitable instruments, such as in the field of so-called ‘artificial intelligence’. Finally, this ‘new normal’ may include the mediation and incentivisation of risk reduction and risk-sharing as well as the provision of capital for risk-avoiding processes.
The demands on supervision will inevitably be as fluid as the development and, if necessary, expansion of these businesses. In any case, requirements and framework conditions can be refined with the further development of the business field accessible to reinsurers under supervisory law.
Authored by Dr. Christoph Küppers.