Directive 2005/68/EC of the European Parliament and of the Council of 16 November 2005 on reinsurance and amending Council Directives 73/239/EEC, 92/49/EEC as well as Directives 98/78/EC and 2002/83/EC (Text with EEA relevance)

DIRECTIVE 2005/68/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

of 16 November 2005

on reinsurance and amending Council Directives 73/239/EEC, 92/49/EEC as well as Directives 98/78/EC and 2002/83/EC

(Text with EEA relevance)

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Articles 47(2) and 55 thereof,

Having regard to the proposal from the Commission,

Having regard to the opinion of the European Economic and Social Committee ([^E0001]),

After consulting the Committee of the Regions,

Acting in accordance with the procedure laid down in Article 251 of the Treaty ([^E0002]),

Whereas:

• (1) Council Directive 73/239/EEC of 24 July 1973 on the coordination of laws, regulations and administrative provisions relating to the taking-up and pursuit of the business of direct insurance other than life assurance ([^E0003]), Council Directive 92/49/EEC of 18 June 1992 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance ([^E0004]) and Directive 2002/83/EC of the European Parliament and of the Council of 5 November 2002 concerning life assurance ([^E0005]) have laid down the provisions relating to the taking-up and pursuit of direct insurance in the Community.

• (2) Those Directives provide for the legal framework for insurance undertakings to conduct insurance business in the internal market, from the point of view both of the right of establishment and of the freedom to provide services, in order to make it easier for insurance undertakings with head offices in the Community to cover commitments situated within the Community and to make it possible for policy holders to have recourse not only to insurers established in their own country, but also to insurers which have their head office in the Community and are established in other Member States.

• (3) The regime laid down by those Directives applies to direct insurance undertakings in respect of their entire business carried on, both direct insurance activities as well as reinsurance activities by way of acceptances; however reinsurance activities conducted by specialised reinsurance undertakings are neither subject to that regime nor any other regime provided for by Community law.

• (4) Reinsurance is a major financial activity as it allows direct insurance undertakings, by facilitating a wider distribution of risks at worldwide level, to have a higher underwriting capacity to engage in insurance business and provide insurance cover and also to reduce their capital costs; furthermore, reinsurance plays a fundamental role in financial stability, since it is an essential element in ensuring the financial soundness and the stability of direct insurance markets as well as the financial system as a whole, because it involves major financial intermediaries and institutional investors.

• (5) Council Directive 64/225/EEC of 25 February 1964 on the abolition of restrictions on freedom of establishment and freedom to provide services in respect of reinsurance and retrocession ([^E0006]) has removed the restrictions on the right of establishment and the freedom to provide services related to the nationality or residence of the provider of reinsurance. It has not however removed restrictions caused by divergences between national provisions as regards prudential regulation of reinsurance. This situation has resulted in significant differences in the level of supervision of reinsurance undertakings in the Community, which create barriers to the pursuit of reinsurance business, such as the obligation for the reinsurance undertaking to pledge assets in order to cover its part of the technical provisions of the direct insurance undertaking, as well as the compliance by reinsurance undertakings with different supervisory rules in the various Member States in which they conduct business or an indirect supervision of the various aspects of a reinsurance undertaking by the competent authorities of direct insurance undertakings.

• (6) The Action Plan for Financial Services has identified reinsurance as a sector which requires action at Community level in order to complete the internal market for financial services. Moreover, major financial fora, such as the International Monetary Fund and the International Association of Insurance Supervisors (IAIS) have highlighted the lack of harmonised reinsurance supervision rules at Community level as an important gap in the financial services regulatory framework that should be filled.

• (7) This Directive aims at establishing a prudential regulatory framework for reinsurance activities in the Community. It forms part of the body of Community legislation in the field of insurance aimed at establishing the Internal Market in the insurance sector.

• (8) This Directive is consistent with major international work carried out on reinsurance prudential rules, in particular the IAIS.

• (9) This Directive follows the approach of Community legislation adopted in respect of direct insurance by carrying out the harmonisation which is essential, necessary and sufficient to ensure the mutual recognition of authorisations and prudential control systems, thereby making it possible to grant a single authorisation valid throughout the Community and apply the principle of supervision by the home Member State.

• (10) As a result, the taking up and the pursuit of the business of reinsurance are subject to the grant of a single official authorisation issued by the competent authorities of the Member State in which a reinsurance undertaking has its head office. Such authorisation enables an undertaking to carry on business throughout the Community, under the right of establishment or the freedom to provide services. The Member State of the branch or of the provision of services may not require a reinsurance undertaking which wishes to carry on reinsurance business in its territory and which has already been authorised in its home Member State to seek fresh authorisation. Furthermore a reinsurance undertaking which has already been authorised in its home Member State should not be subject to additional supervision or checks related to its financial soundness performed by the competent authorities of an insurance undertaking which is reinsured by that reinsurance undertaking. In addition, Member States should not be allowed to require a reinsurance undertaking authorised in the Community to pledge assets in order to cover its part of the cedant's technical provisions. The conditions for the granting or withdrawal of such authorisation should be defined. The competent authorities should not authorise or continue the authorisation of a reinsurance undertaking which does not fulfil the conditions laid down in this Directive.

• (11) This Directive should apply to reinsurance undertakings which conduct exclusively reinsurance business and do not engage in direct insurance business; it should also apply to the so-called ‘captive’ reinsurance undertakings created or owned by either a financial undertaking other than an insurance or reinsurance undertaking or a group of insurance or reinsurance undertakings to which Directive 98/78/EC of the European Parliament and of the Council of 27 October 1998 on the supplementary supervision of insurance undertakings in an insurance group ([^E0007]) applies, or by one or several non-financial undertakings, the purpose of which is to provide reinsurance cover exclusively for the risks of the undertakings to which they belong. When in this Directive reference is made to reinsurance undertakings, it should include captive reinsurance undertakings, except where special provision is made for captive reinsurance undertakings. Captive reinsurance undertakings do not cover risks deriving from the external direct insurance or reinsurance business of an insurance or reinsurance undertaking belonging to the group. Furthermore, insurance or reinsurance undertakings belonging to a financial conglomerate may not own a captive undertaking.

• (12) This Directive should however not apply to insurance undertakings which are already subject to Directives 73/239/EEC or 2002/83/EC; however, in order to ensure the financial soundness of insurance undertakings which also carry on reinsurance business and that the specific characteristics of those activities is duly taken into account by the capital requirements of those insurance undertakings, the provisions relating to the solvency margin of reinsurance undertakings contained in this Directive should apply to reinsurance business of those insurance undertakings, if the volume of their reinsurance activities represents a significant part of their entire business.

• (13) This Directive should not apply to the provision of reinsurance cover carried out or fully guaranteed by a Member State for reasons of substantial public interest, in the capacity of reinsurer of last resort, in particular where because of a specific situation in a market, it is not feasible to obtain adequate commercial cover; in this regard, a lack of ‘adequate commercial cover’ should mainly mean a market failure which is characterised by an evident lack of a sufficient range of insurance offers, although excessive premiums should not per se imply inadequacy of that commercial cover. Article 1(2)(d) of this Directive also applies to arrangements between insurance undertakings to which Directives 73/239/EEC or 2002/83/EC apply and which aim to pool financial claims ensuing from major risks such as terrorism.

• (14) Reinsurance undertakings are to limit their objects to the business of reinsurance and related operations. This requirement may allow a reinsurance undertaking to carry on, for instance, activities, such as provision of statistical or actuarial advice, risk analysis or research for its clients. It may also include a holding company function and activities with respect to financial sector activities within the meaning of Article 2, point 8, of Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate ([^E0008]). In any case, this requirement does not allow the carrying on of unrelated banking and financial activities.

• (15) This Directive should clarify the powers and means of supervision vested in the competent authorities. The competent authorities of the reinsurance undertaking's home Member State should be responsible for monitoring the financial health of reinsurance undertakings, including their state of solvency, the establishment of adequate technical provisions and equalisation reserves and the covering of those provisions and reserves by quality assets.

• (16) The competent authorities of the Member States should have at their disposal such means of supervision as are necessary to ensure the orderly pursuit of business by reinsurance undertakings throughout the Community whether carried on under the right of establishment or the freedom to provide services. In particular, they should be able to introduce appropriate safeguards or impose penalties aimed at preventing irregularities and infringements of the provisions on reinsurance supervision.

• (17) The provisions governing transfers of portfolios should be in line with the single authorisation provided for in this Directive. They should apply to the various kinds of transfers of portfolios between reinsurance undertakings, such as transfers of portfolios resulting from mergers between reinsurance undertakings or other instruments of company law or transfers of portfolios of outstanding losses in run-off to another reinsurance undertaking. Moreover, the provisions governing transfers of portfolios should include provisions specifically concerning the transfer to another reinsurance undertaking of the portfolio of contracts concluded under the right of establishment or the freedom to provide services.

• (18) Provision should be made for the exchange of information between the competent authorities and authorities or bodies which, by virtue of their function, help to strengthen the stability of the financial system. In order to preserve the confidential nature of the information forwarded, the list of addressees should remain within strict limits. It is therefore necessary to specify the conditions under which the abovementioned exchanges of information are authorised; moreover, where it is laid down that information may be disclosed only with the express agreement of the competent authorities, these may, where appropriate, make their agreement subject to compliance with strict conditions. In this regard, and with a view to ensuring the proper supervision of reinsurance undertakings by the competent authorities, this Directive should provide for rules enabling Member States to conclude agreements on exchange of information with third countries provided that the information disclosed is subject to appropriate guarantees of professional secrecy.

• (19) For the purposes of strengthening the prudential supervision of reinsurance undertakings, it should be laid down that an auditor has a duty to report promptly to the competent authorities, wherever, as provided for by this Directive, he/she becomes aware, while carrying out his/her tasks, of certain facts which are liable to have a serious effect on the financial situation or the administrative and accounting organisation of a reinsurance undertaking. Having regard to the aim in view, it is desirable for Member States to provide that such a duty should apply in all circumstances where such facts are discovered by an auditor during the performance of his/her tasks in an undertaking which has close links with a reinsurance undertaking. The duty of auditors to communicate, where appropriate, to the competent authorities certain facts and decisions concerning a reinsurance undertaking which they discover during the performance of their tasks in a non-reinsurance undertaking does not in itself change the nature of their tasks in that undertaking nor the manner in which they must perform those tasks in that undertaking.

• (20) Provision should be made to define the application of this Directive to existing reinsurance undertakings which were already authorised or entitled to conduct reinsurance business in accordance with the provisions of the Member States before the application of this Directive.

• (21) In order to allow a reinsurance undertaking to meet its commitments, the home Member State should require a reinsurance undertaking to establish adequate technical provisions. The amount of such technical provisions should be determined in accordance with Council Directive 91/674/EEC of 19 December 1991 on the annual accounts and consolidated accounts of insurance undertakings ([^E0009]) and, in respect of life reinsurance activities, the home Member State should also be allowed to lay down more specific rules in accordance with Directive 2002/83/EC.

• (22) A reinsurance undertaking conducting reinsurance business in respect of credit insurance, whose credit reinsurance business amounts to more than a small proportion of its total business, should be required to set up an equalisation reserve which does not form part of the solvency margin; that reserve should be calculated according to one of the methods laid down in Directive 73/239/EEC and which are recognised as equivalent; furthermore, this Directive should allow the home Member State also to require reinsurance undertakings whose head office is situated within its territory to set up equalisation reserves for classes of risks other than credit reinsurance, following the rules laid down by that home Member State. Following the introduction of the International Financial Reporting Standards (IFRS 4), this Directive should clarify the prudential treatment of equalisation reserves established in accordance with this Directive. However, since supervision of reinsurance needs to be reassessed under the Solvency II project, this Directive does not pre-empt any future reinsurance supervision under Solvency II.

• (23) A reinsurance undertaking should have assets to cover technical provisions and equalisation reserves which should take account of the type of business that it carries out in particular the nature, amount and duration of the expected claims payments, in such a way as to secure the sufficiency, liquidity, security, quality, profitability and matching of its investments, which the undertaking should ensure are diversified and adequately spread and which gives the undertaking the possibility of responding adequately to changing economic circumstances, in particular developments in the financial markets and real estate markets or major catastrophic events.

• (24) It is necessary that, over and above technical provisions, reinsurance undertakings should possess a supplementary reserve, known as the solvency margin, represented by free assets and, with the agreement of the competent authority, by other implicit assets, which is to act as a buffer against adverse business fluctuations. This requirement is an important element of prudential supervision. Pending the revision of the existing solvency margin regime, which the Commission is carrying on under the so-called ‘Solvency II project’, in order to determine the required solvency margin of reinsurance undertakings, the rules provided for in existing legislation in the field of direct insurance should be applicable.

• (25) In the light of the similarities between life reassurance covering mortality risk and non-life reinsurance, in particular the cover of insurance risks and the duration of the life reassurance contracts, the required solvency margin for life reassurance should be determined in accordance with the provisions laid down in this Directive for the calculation of the required solvency margin for non-life reinsurance; the home Member State should however be allowed to apply the rules provided for in Directive 2002/83/EC for the establishment of the required solvency margin in respect of life reassurance activities which are linked to investment funds or participating contracts.

• (26) In order to take account of the particular nature of some types of reinsurance contracts or specific lines of business, provision should be made to make adjustments to the calculation of the required solvency margin; these adjustments should be made by the Commission, after consulting the European Insurance and Occupational Pensions Committee, set up by Commission Decision 2004/9/EC ([^E0010]) in the exercise of its implementing powers conferred by the Treaty.

• (27) These measures should be adopted by the use of the regulatory procedure provided for in Article 5 of Council Decision 1999/468/EC of 28 June 1999 laying down the procedures for the exercise of implementing powers conferred on the Commission ([^E0011]).

• (28) The list of items eligible to represent the available solvency margin laid down by this Directive should be that provided for in Directives 73/239/EEC and 2002/83/EC.

• (29) Reinsurance undertakings should also possess a guarantee fund in order to ensure that they possess adequate resources when they are set up and that in the subsequent course of business the solvency margin in no event falls below a minimum of security; however, in order to take account of the specificities of captive reinsurance undertakings, provision should be made to allow the home Member State to set the minimum guarantee fund required for captive reinsurance undertakings at a lower amount.

• (30) Certain provisions of this Directive define minimum standards. A home Member State should be able to lay down stricter rules for reinsurance undertakings authorised by its own competent authorities, in particular with respect to solvency margin requirements.

• (31) This Directive should be applicable to finite reinsurance activities; therefore, a definition of finite reinsurance for the purposes of this Directive is necessary; owing to the special nature of this line of reinsurance activity, the home Member State should be given the option of laying down specific provisions for the pursuit of finite reinsurance activities. These provisions could differ from the general regime laid down in this Directive on a number of specific points.

• (32) This Directive should provide for rules concerning those special purpose vehicles that assume risks from insurance and reinsurance undertakings. The special nature of such special purpose vehicles, which are not insurance or reinsurance undertakings, calls for the establishment of specific provisions in Member States. Furthermore, this Directive should provide that the home Member State should lay down more detailed rules in order to set the conditions under which outstanding amounts from a special purpose vehicle can be used as assets covering technical provisions by an insurance or a reinsurance undertaking. This Directive should also provide that recoverable amounts from a special purpose vehicle may be considered as amounts deductible under reinsurance or retrocession contracts within the limits set out in this Directive, subject to an application by the insurance undertaking or reinsurance undertaking to the competent authority and after agreement by that authority.

• (33) It is necessary to provide for measures in cases where the financial position of the reinsurance undertaking becomes such that it is difficult for it to meet its underwriting liabilities. In specific situations, there is also a need for the competent authorities to be empowered to intervene at a sufficiently early stage, but in the exercise of those powers, competent authorities should inform the reinsurance undertakings of the reasons motivating such supervisory action, in accordance with the principles of sound administration and due process. As long as such a situation exists, the competent authorities should be prevented from certifying that the reinsurance undertaking has a sufficient solvency margin.

• (34) It is necessary to make provision for cooperation between the competent authorities of the Member States in order to ensure that a reinsurance undertaking carrying on its activities under the right of establishment and the freedom to provide services complies with the provisions applicable to it in the host Member State.

• (35) Provision should be made for the right to apply to the courts should an authorisation be refused or withdrawn.

• (36) It is important to provide that reinsurance undertakings whose head office is situated outside the Community and which conduct reinsurance business in the Community should not be subject to provisions which result in treatment more favourable than that provided to reinsurance undertakings having their head office in a Member State.

• (37) In order to take account of the international aspects of reinsurance, provision should be made to enable the conclusion of international agreements with a third country aimed at defining the means of supervision over reinsurance entities which conduct business in the territory of each contracting party.

• (38) Provision should be made for a flexible procedure to make it possible to assess prudential equivalence with third countries on a Community basis, so as to improve liberalisation of reinsurance services in third countries, be it through establishment or cross-border provision of services. To that end, this Directive should provide for procedures for negotiating with third countries.

• (39) The Commission should be empowered to adopt implementing measures provided that these do not modify the essential elements of this Directive. These implementing measures should enable the Community to take account of the future development of reinsurance. The measures necessary for implementation of this Directive should be adopted in accordance with Decision 1999/468/EC.

• (40) The existing Community legal framework for insurance should be adapted in order to take account of the new supervisory regime for reinsurance undertakings laid down by this Directive and in order to ensure a consistent regulatory framework for the whole insurance sector. In particular, the existing provisions which permit ‘indirect supervision’ of reinsurance undertakings by the authorities competent for the supervision of direct insurance undertakings should be adapted. Furthermore, it is necessary to abolish the current provisions enabling Member States to require pledging of assets covering the technical provisions of an insurance undertaking, whatever form this requirement might take, when the insurer is reinsured by a reinsurance undertaking authorised pursuant to this Directive or by an insurance undertaking. Finally, provision should be made for the solvency margin required for insurance undertakings conducting reinsurance activities, when such activities represent a significant part of their business, to be subject to the solvency rules provided for reinsurance undertakings in this Directive. Directives 73/239/EEC, 92/49/EEC and 2002/83/EC should therefore be amended accordingly.

• (41) Directive 98/78/EC should be amended in order to guarantee that reinsurance undertakings in an insurance or a reinsurance group are subject to supplementary supervision in the same manner as insurance undertakings which are currently part of an insurance group.

• (42) The Council, in accordance with paragraph 34 of the Interinstitutional agreement on better law-making ([^E0012]), should encourage Member States to draw up, for themselves and in the interest of the Community, their own tables, illustrating, as far as possible, the correlation between this Directive and the transposition measures, and to make them public.

• (43) Since the objective of this Directive, namely the establishment of a legal framework for the taking up and pursuit of reinsurance activities, cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale and effects of the action, be better achieved at Community level, the Community may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty. In accordance with the principle of proportionality, as set out in that Article, this Directive does not go beyond what is necessary in order to achieve this objective.

• (44) Since this Directive defines minimum standards, Member States may lay down stricter rules,

HAVE ADOPTED THIS DIRECTIVE:

TITLE I SCOPE AND DEFINITIONS

Article 1

Scope

• (a)insurance undertakings to which Directives 73/239/EEC or 2002/83/EC apply;

• (b)activities and bodies referred to in Articles 2 and 3 of Directive 73/239/EEC;

• (c)activities and bodies referred to in Article 3 of Directive 2002/83/EC;

• (d)the activity of reinsurance conducted or fully guaranteed by the government of a Member State when this is acting, for reasons of substantial public interest, in the capacity of reinsurer of last resort, including in circumstances where such a role is required by a situation in the market in which it is not feasible to obtain adequate commercial cover.

Article 2

Definitions

• (a)‘reinsurance’ means the activity consisting in accepting risks ceded by an insurance undertaking or by another reinsurance undertaking. In the case of the association of underwriters known as Lloyd's, reinsurance also means the activity consisting in accepting risks, ceded by any member of Lloyd's, by an insurance or reinsurance undertaking other than the association of underwriters known as Lloyd's;

• (b)‘captive reinsurance undertaking’ means a reinsurance undertaking owned either by a financial undertaking other than an insurance or a reinsurance undertaking or a group of insurance or reinsurance undertakings to which Directive 98/78/EC applies, or by a non-financial undertaking, the purpose of which is to provide reinsurance cover exclusively for the risks of the undertaking or undertakings to which it belongs or of an undertaking or undertakings of the group of which the captive reinsurance undertaking is a member;

• (c)‘reinsurance undertaking’ means an undertaking which has received official authorisation in accordance with Article 3;

• (d)‘branch’ means an agency or a branch of a reinsurance undertaking;

• (e)‘establishment’ means the head office or a branch of a reinsurance undertaking, account being taken of point (d);

• (f)‘home Member State’ means the Member State in which the head office of the reinsurance undertaking is situated;

• (g)‘Member State of the branch’ means the Member State in which the branch of a reinsurance undertaking is situated;

• (h)‘host Member State’ means the Member State in which a reinsurance undertaking has a branch or provides services;

• (i)‘control’ means the relationship between a parent undertaking and a subsidiary, as defined in Article 1 of Directive 83/349/EEC ([^E0013]), or a similar relationship between any natural or legal person and an undertaking;

• (j)‘qualifying holding’ means a direct or indirect holding in an undertaking which represents 10 % or more of the capital or of the voting rights or which makes it possible to exercise a significant influence over the management of the undertaking in which a holding subsists;

• (k)‘parent undertaking’ means a parent undertaking as defined in Articles 1 and 2 of Directive 83/349/EEC;

• (l)‘subsidiary’ means a subsidiary undertaking as defined in Articles 1 and 2 of Directive 83/349/EEC;

• (m)‘competent authorities’ means the national authorities which are empowered by law or regulation to supervise reinsurance undertakings;

• (n)‘close links’ means a situation in which two or more natural or legal persons are linked by: (i)participation, which shall mean the ownership, direct or by way of control, of 20 % or more of the voting rights or capital of an undertaking, or (ii)control, in all the cases referred to in Article 1(1) and (2) of Directive 83/349/EEC or a similar relationship between any natural or legal person and an undertaking;

• (o)‘financial undertaking’ means one of the following entities: (i)a credit institution, a financial institution or an ancillary banking services undertaking within the meaning of Article 1(5) and (23) of Directive 2000/12/EC ([^E0014]), (ii)an insurance undertaking, a reinsurance undertaking or an insurance holding company within the meaning of Article 1(i) of Directive 98/78/EC, (iii)an investment firm or a financial institution within the meaning of point 1 of Article 4(1) of Directive 2004/39/EC ([^E0015]), (iv)a mixed financial holding company within the meaning of Article 2(15) of Directive 2002/87/EC;

• (p)‘special purpose vehicle’ means any undertaking, whether incorporated or not, other than an existing insurance or reinsurance undertaking, which assumes risks from insurance or reinsurance undertakings and which fully funds its exposure to such risks through the proceeds of a debt issuance or some other financing mechanism where the repayment rights of the providers of such debt or other financing mechanism are subordinated to the reinsurance obligations of such a vehicle;

• (q)‘finite reinsurance’ means reinsurance under which the explicit maximum loss potential, expressed as the maximum economic risk transferred, arising both from a significant underwriting risk and timing risk transfer, exceeds the premium over the lifetime of the contract by a limited but significant amount, together with at least one of the following two features: (i)explicit and material consideration of the time value of money, (ii)contractual provisions to moderate the balance of economic experience between the parties over time to achieve the target risk transfer.

For the purposes of paragraph 1(d), any permanent presence of a reinsurance undertaking in the territory of a Member State shall be treated in the same way as an agency or branch, even if that presence does not take the form of a branch or agency, but consists merely of an office managed by the undertaking's own staff or by a person who is independent but has permanent authority to act for the undertaking as an agency would.

For the purposes of paragraph 1(j), in the context of Articles 12 and 19 to 23 and of the other levels of holding referred to in Article 19 to 23, the voting rights referred to in Articles 9 and 10 of Directive 2004/109/EC ([^E0017]), as well as the conditions regarding aggregation thereof laid down in Article 12(4) and (5) of that Directive shall be taken into account.

Member States shall not take into account voting rights or shares which investment firms or credit institutions may hold as a result of providing the underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis included under point 6 of Section A of Annex I to Directive 2004/39/EC, provided that those rights are, on the one hand, not exercised or otherwise used to intervene in the management of the issuer and, on the other, disposed of within one year of acquisition.

For the purposes of paragraph 1(l), any subsidiary of a subsidiary undertaking shall also be regarded as a subsidiary of the undertaking which is those undertakings' ultimate parent undertaking.

For the purposes of paragraph 1(n):

• —any subsidiary undertaking of a subsidiary undertaking shall be considered a subsidiary of the parent undertaking which is at the head of those undertakings;

• —a situation in which two or more natural or legal persons are permanently linked to one and the same person by a control relationship shall also be regarded as constituting a close link between such persons.

TITLE II THE TAKING-UP OF THE BUSINESS OF REINSURANCE AND AUTHORISATION OF THE REINSURANCE UNDERTAKING

Article 3

Principle of authorisation

The taking up of the business of reinsurance shall be subject to prior official authorisation.

Such authorisation shall be sought from the competent authorities of the home Member State by:

• (a)any undertaking which establishes its head office in the territory of that State;

• (b)any reinsurance undertaking which, having received the authorisation, extends its business to reinsurance activities other than those already authorised.

Article 4

Scope of authorisation

It shall be considered in the light of the scheme of operations to be submitted pursuant to Articles 6(b) and 11 and the fulfilment of the conditions laid down for authorisation by the Member State from which the authorisation is sought.

Article 5

Form of the reinsurance undertaking

A reinsurance undertaking may also adopt the form of a European Company (SE), as defined in Regulation (EC) No 2157/2001 ([^E0018]).

Article 6

Conditions

The home Member State shall require every reinsurance undertaking for which authorisation is sought to:

• (a)limit its objects to the business of reinsurance and related operations; this requirement may include a holding company function and activities with respect to financial sector activities within the meaning of Article 2, point (8), of Directive 2002/87/EC;

• (b)submit a scheme of operations in accordance with Article 11;

• (c)possess the minimum guarantee fund provided for in Article 40(2);

• (d)be effectively run by persons of good repute with appropriate professional qualifications or experience.

Article 7

Close links

Article 8

Head office of the reinsurance undertaking

Member States shall require that the head offices of reinsurance undertakings be situated in the same Member State as their registered offices.

Article 9

Policy conditions and scales of premiums

Article 10

Economic requirements of the market

Member States may not require that any application for authorisation be considered in the light of the economic requirements of the market.

Article 11

Scheme of operations

• (a)the nature of the risks which the reinsurance undertaking proposes to cover;

• (b)the kinds of reinsurance arrangements which the reinsurance undertaking proposes to make with ceding undertakings;

• (c)the guiding principles as to retrocession;

• (d)the items constituting the minimum guarantee fund;

• (e)estimates of the costs of setting up the administrative services and the organisation for securing business and the financial resources intended to meet those costs.

• (a)estimates of management expenses other than installation costs, in particular current general expenses and commissions;

• (b)estimates of premiums or contributions and claims;

• (c)a forecast balance sheet;

• (d)estimates of the financial resources intended to cover underwriting liabilities and the solvency margin.

Article 12

Shareholders and members with qualifying holdings

The competent authorities of the home Member State shall not grant to an undertaking an authorisation to take up the business of reinsurance before they have been informed of the identities of the shareholders or members, direct or indirect, whether natural or legal persons, who have qualifying holdings in that undertaking and of the amounts of those holdings.

The same authorities shall refuse authorisation if, taking into account the need to ensure the sound and prudent management of a reinsurance undertaking, they are not satisfied as to the qualifications of the shareholders or members.

Article 13

Refusal of authorisation

Any decision to refuse an authorisation shall be accompanied by the precise grounds for doing so and notified to the undertaking in question.

Each Member State shall make provision for a right to apply to the courts, pursuant to Article 53, should there be any refusal.

Such provision shall also be made with regard to cases where the competent authorities have not dealt with an application for an authorisation upon the expiry of a period of six months from the date of its receipt.

Article 14

Prior consultation with the competent authorities of other Member States

• (a)a subsidiary of an insurance or reinsurance undertaking authorised in another Member State; or

• (b)a subsidiary of the parent undertaking of an insurance or reinsurance undertaking authorised in another Member State; or

• (c)controlled by the same person, whether natural or legal, who controls an insurance or reinsurance undertaking authorised in another Member State.

• (a)a subsidiary of a credit institution or investment firm authorised in the Community; or

• (b)a subsidiary of the parent undertaking of a credit institution or investment firm authorised in the Community; or

• (c)controlled by the same person, whether natural or legal, who controls a credit institution or investment firm authorised in the Community.

TITLE III CONDITIONS GOVERNING THE BUSINESS OF REINSURANCE

CHAPTER 1 Principles and methods of financial supervision

Section 1 Competent authorities and general rules

Article 15

Competent authorities and object of supervision

If the competent authorities of the host Member State have reason to consider that the activities of a reinsurance undertaking might affect its financial soundness, they shall inform the competent authorities of the reinsurance undertaking's home Member State. The latter authorities shall determine whether the reinsurance undertaking is complying with the prudential rules laid down in this Directive.

Article 16

Supervision of branches established in another Member State

The Member State of the branch shall provide that, where a reinsurance undertaking authorised in another Member State carries on business through a branch, the competent authorities of the home Member State may, after having first informed the competent authorities of the Member State of the branch, carry out themselves or through the intermediary of persons they appoint for that purpose, on-the-spot verification of the information necessary to ensure the financial supervision of the undertaking. The authorities of the Member State of the branch may participate in that verification.

Article 17

Accounting, prudential and statistical information: supervisory powers

• (a)make detailed enquiries regarding a reinsurance undertaking's situation and the whole of its business, inter alia, by gathering information or requiring the submission of documents concerning its reinsurance and retrocession business, and by carrying out on-the-spot investigations at the reinsurance undertaking's premises;

• (b)take any measures with regard to a reinsurance undertaking, its directors or managers or the persons who control it, that are appropriate and necessary to ensure that that reinsurance undertaking's business continues to comply with the laws, regulations and administrative provisions with which the reinsurance undertaking must comply in each Member State;

• (c)ensure that those measures are carried out, if need be, by enforcement and where appropriate through judicial channels.

Member States may also make provision for the competent authorities to obtain any information regarding contracts which are held by intermediaries.

Article 18

Transfer of portfolio

Under the conditions laid down by national law, each Member State shall authorise reinsurance undertakings with head offices within its territory to transfer all or part of their portfolios of contracts, including those concluded either under the right of establishment or the freedom to provide services, to an accepting office established within the Community, if the competent authorities of the home Member State of the accepting office certify that, after taking the transfer into account, the latter possesses the necessary solvency margin referred to in Chapter 3.

Section 2 Qualifying holdings

Article 19

Acquisitions

The competent authorities shall have a maximum of 60 working days as from the date of the written acknowledgement of receipt of the notification and all documents required by the Member State to be attached to the notification on the basis of the list referred to in Article 19a(4) (hereinafter referred to as the assessment period), to carry out the assessment provided for in Article 19a(1) (hereinafter referred to as the assessment).

The competent authorities shall inform the proposed acquirer of the date of the expiry of the assessment period at the time of acknowledging receipt.

For the period between the date of request for information by the competent authorities and the receipt of a response thereto by the proposed acquirer, the assessment period shall be interrupted. The interruption shall not exceed 20 working days. Any further requests by the competent authorities for completion or clarification of the information shall be at their discretion but may not result in an interruption of the assessment period.

• (a)situated or regulated outside the Community; or

• (b)a natural or legal person not subject to supervision under this Directive or Directives 85/611/EEC ([^E0019]), 92/49/EEC, 2002/83/EC, 2004/39/EC or 2006/48/EC ([^E0020]).

Article 19a

Assessment

• (a)the reputation of the proposed acquirer;

• (b)the reputation and experience of any person who will direct the business of the reinsurance undertaking as a result of the proposed acquisition;

• (c)the financial soundness of the proposed acquirer, in particular in relation to the type of business pursued and envisaged in the reinsurance undertaking in which the acquisition is proposed;

• (d)whether the reinsurance undertaking will be able to comply and continue to comply with the prudential requirements based on this Directive and, where applicable, other Directives, notably, Directives 98/78/EC and 2002/87/EC, in particular, whether the group of which it will become a part has a structure that makes it possible to exercise effective supervision, effectively exchange information among the competent authorities and determine the allocation of responsibilities among the competent authorities;

• (e)whether there are reasonable grounds to suspect that, in connection with the proposed acquisition, money laundering or terrorist financing within the meaning of Article 1 of Directive 2005/60/EC ([^E0021]) is being or has been committed or attempted, or that the proposed acquisition could increase the risk thereof.

Article 20

Acquisitions by regulated financial undertakings

• (a)a credit institution, assurance undertaking, insurance undertaking, reinsurance undertaking, investment firm or management company within the meaning of Article 1a, point 2 of Directive 85/611/EEC (hereinafter referred to as the UCITS management company) authorised in another Member State or in a sector other than that in which the acquisition is proposed;

• (b)the parent undertaking of a credit institution, assurance undertaking, insurance undertaking, reinsurance undertaking, investment firm or UCITS management company authorised in another Member State or in a sector other than that in which the acquisition is proposed; or

• (c)a natural or legal person controlling a credit institution, assurance undertaking, insurance undertaking, reinsurance undertaking, investment firm or UCITS management company authorised in another Member State or in a sector other than that in which the acquisition is proposed.

Article 21

Disposals

Member States shall require any natural or legal person who proposes to dispose, directly or indirectly, of a qualifying holding in a reinsurance undertaking first to inform the competent authorities of the home Member State, indicating the size of his intended holding.

Such a person shall likewise notify the competent authorities if he has taken a decision to reduce his qualifying holding so that the proportion of the voting rights or of the capital held would fall below 20 %, 30 % or 50 % or so that the reinsurance undertaking would cease to be his subsidiary. Member States need not apply the 30 % threshold where, in accordance with Article 9(3)(a) of Directive 2004/109/EC, they apply a threshold of one-third.

Article 22

Information to the competent authority by the reinsurance undertaking

On becoming aware of them, reinsurance undertakings shall inform the competent authorities of their home Member States of any acquisitions or disposals of holdings in their capital that cause holdings to exceed or fall below any of the thresholds referred to in Articles 19 and 21.

They shall also, at least once a year, inform them of the names of shareholders and members possessing qualifying holdings and the sizes of such holdings as shown, for example, by the information received at annual general meetings of shareholders or members or as a result of compliance with the regulations relating to companies listed on stock exchanges.

Article 23

Qualifying holdings: powers of the competent authority

Member States shall require that, where the influence exercised by the persons referred to in Article 19 is likely to operate against the prudent and sound management of a reinsurance undertaking, the competent authorities of the home Member State shall take appropriate measures to put an end to that situation. Such measures may consist, for example, in injunctions, penalties against directors and managers, or suspension of the exercise of the voting rights attaching to the shares held by the shareholders or members in question.

Similar measures shall apply to natural or legal persons failing to comply with the obligation to provide prior information imposed pursuant to Article 19. If a holding is acquired despite the opposition of the competent authorities, the Member States shall, regardless of any other penalties to be adopted, provide either for exercise of the corresponding voting rights to be suspended, or for the nullity of votes cast or for the possibility of their annulment.

Section 3 Professional secrecy and exchanges of information

Article 24

Obligation

Pursuant to that obligation, and without prejudice to cases covered by criminal law, no confidential information which they may receive while performing their duties may be divulged to any person or authority whatsoever, except in summary or aggregate form, such that individual reinsurance undertakings cannot be identified.

Article 25

Exchange of information between competent authorities of Member States

Article 24 shall not prevent the competent authorities of different Member States from exchanging information in accordance with the Directives applicable to reinsurance undertakings. Such information shall be subject to the conditions of professional secrecy laid down in Article 24.

Article 26

Cooperation agreements with third countries

Member States may conclude cooperation agreements providing for exchange of information with the competent authorities of third countries or with authorities or bodies of third countries as defined in Article 28(1) and (2) only if the information disclosed is subject to guarantees of professional secrecy at least equivalent to those referred to in this Section. Such exchange of information shall be intended for the performance of the supervisory task of the authorities or bodies mentioned.

Where the information originates in another Member State, it may not be disclosed without the express agreement of the competent authorities which have disclosed it and, where appropriate, solely for the purposes for which those authorities gave their agreement.

Article 27

Use of confidential information

Competent authorities receiving confidential information under Articles 24 and 25 may use it only in the course of their duties:

• (a)to check that the conditions governing the taking up of the business of reinsurance are met and to facilitate monitoring of the conduct of such business, especially with regard to the monitoring of technical provisions, solvency margins, administrative and accounting procedures and internal control mechanisms,

• (b)to impose penalties,

• (c)in administrative appeals against decisions of the competent authorities, or

• (d)in court proceedings initiated under Article 53 or under special provisions provided for in this Directive and other Directives adopted in the field of insurance and reinsurance undertakings.

Article 28

Exchange of information with other authorities

• (a)authorities responsible for the official supervision of credit institutions and other financial organisations and the authorities responsible for the supervision of financial markets,

• (b)bodies involved in the liquidation and bankruptcy of insurance and reinsurance undertakings and in other similar procedures, and

• (c)persons responsible for carrying out statutory audits of the accounts of insurance undertakings, reinsurance undertakings and other financial institutions,

in the discharge of their supervisory functions, or the disclosure to bodies which administer compulsory winding-up proceedings or guarantee schemes of information necessary to the performance of their duties. The information received by those authorities, bodies and persons shall be subject to the conditions of professional secrecy laid down in Article 24.

• (a)the authorities responsible for overseeing the bodies involved in the liquidation and bankruptcy of insurance or reinsurance undertakings and other similar procedures, or

• (b)the authorities responsible for overseeing the persons charged with carrying out statutory audits of the accounts of insurance or reinsurance undertakings, credit institutions, investment firms and other financial institutions, or

• (c)independent actuaries of insurance or reinsurance undertakings carrying out legal supervision of those undertakings and the bodies responsible for overseeing such actuaries.

Member States which have recourse to the option provided for in the first subparagraph shall require at least that the following conditions are met:

• (a)this exchange of information shall be for the purpose of carrying out the overseeing or legal supervision referred to in the first subparagraph;

• (b)information received in this context shall be subject to the conditions of professional secrecy imposed in Article 24;

• (c)where the information originates in another Member State, it may not be disclosed without the express agreement of the competent authorities which have disclosed it and, where appropriate, may only be disclosed for the purposes for which those authorities gave their agreement.

Member States shall communicate to the Commission and to the other Member States the names of the authorities, persons and bodies which may receive information pursuant to this paragraph.

Member States which have recourse to the option provided for in the first subparagraph shall require at least that the following conditions are met:

• (a)the information shall be for the purpose of performing the task referred to in the first subparagraph;

• (b)information received in this context shall be subject to the conditions of professional secrecy imposed in Article 24;

• (c)where the information originates in another Member State, it may not be disclosed without the express agreement of the competent authorities which have disclosed it and, where appropriate, solely for the purposes for which those authorities gave their agreement.

Where, in a Member State, the authorities or bodies referred to in the first subparagraph perform their task of detection or investigation with the aid, in view of their specific competence, of persons appointed for that purpose and not employed in the public sector, the possibility of exchanging information provided for in the first subparagraph may be extended to such persons under the conditions laid down in the second subparagraph.

In order to implement point (c) of the second subparagraph, the authorities or bodies referred to in the first subparagraph shall communicate to the competent authorities which have disclosed the information the names and precise responsibilities of the persons to whom it is to be sent.

Member States shall communicate to the Commission and to the other Member States the names of the authorities or bodies which may receive information pursuant to this paragraph.

Article 29

Transmission of information to central banks and monetary authorities

This Section shall not prevent a competent authority from transmitting to central banks and other bodies with a similar function in their capacity as monetary authorities, and where appropriate, to other public authorities responsible for overseeing payment systems, information intended for the performance of their task. Nor shall it prevent such authorities or bodies from communicating to the competent authorities such information as they may need for the purposes of Article 27.

Information received in this context shall be subject to the conditions of professional secrecy imposed in this Section.

Article 30

Disclosure of information to government administrations responsible for financial legislation

Notwithstanding Articles 24 and 27, Member States may, under provisions laid down by law, authorise the disclosure of certain information to other departments of their central government administrations responsible for legislation on the supervision of credit institutions, financial institutions, investment services and insurance or reinsurance undertakings and to inspectors acting on behalf of those departments.

However, such disclosures may be made only where necessary for reasons of prudential control.

Member States shall, however, provide that information received under Articles 25 and 28(1) and that obtained by means of the on-the-spot verification referred to in Article 16 may never be disclosed in the cases referred to in this Article except with the express consent of the competent authorities which disclosed the information or of the competent authorities of the Member State in which on-the-spot verification was carried out.

Section 4 Duties of auditors

Article 31

Duties of auditors

• (a)constitute a material breach of the laws, regulations or administrative provisions which lay down the conditions governing authorisation or which specifically govern pursuit of the activities of insurance or reinsurance undertakings, or

• (b)affect the continuous functioning of the reinsurance undertaking, or