U.S. Looks At Pre-Empting State Reinsurance Rules
By Arthur D. Postal
InsuranceNewsNet
WASHINGTON - The federal government is considering pre-empting inconsistent state laws regarding reinsurance collateral because the inability of states to adopt a uniform approach is increasing the costs of insurance for U.S. consumers.
Reinsurance collateral is the amount of money needed to be held by the reinsurer against premium risk taken in the U.S.
That the Treasury Department and the Office of the U.S. Trade Representative (USTR) are considering this was disclosed in a report on reinsurance released Friday by the Federal Insurance Office, which was created under the Dodd-Frank Financial Services Reform Law of 2010. Under the law, the FIO and USTR share joint authority to negotiate insurance trade agreements on behalf of the U.S.
If so, it would mark the first time that the federal government has moved to pre-empt state laws governing the regulation of insurance.
It would do so through treaties, so-called “covered agreements,” that are currently being negotiated with other countries.
An industry official who follows the issue closely, citing statistics on reinsurance premiums written by leading jurisdictions, said such pacts are likely to be negotiated with Germany and the United Kingdom, or perhaps the European Union as a whole, in an initial agreement, with Switzerland, Bermuda, Canada and Japan possibly following.
The report cited pressure from foreign insurers, who account for 62 percent or more of reinsurance premiums ceded by U.S.- based insurers.
Moreover, measured by total ceded premium, the U.S. is the largest single-country reinsurance market in the world, with roughly half of all reinsurance business originating from North America, the report said.
The report indicated that the federal government is moving to establish uniform collateral rules under pressure from these non-U.S. insurers.
“Non-U.S. reinsurers argue that collateral requirements restrict the ability to manage risk globally, restrict reinsurance capacity in the United States, and thus increase costs for U.S. consumers,” the report said.
The report also says that European Union officials have recently adopted “Solvency II,” which the report describes as a “modernized insurance regulatory regime.” It goes into effect in January 2016 and calls for evaluation of regulatory treatment of reinsurers in non-EU jurisdictions, the report said.
“Risk-based regulation of reinsurance collateral requirements will improve opportunities for U.S. reinsurers operating in the EU,” the FIO report said.
FIO further justified potentially pre-empting state laws on the issue because, “In formulating federal policy on prudential aspects of international insurance matters, federal officials are well-positioned to make determinations regarding whether a foreign jurisdiction has sufficiently effective regulation and, in doing so, consider other prudential issues pending in the United States and between the United States and affected foreign jurisdictions.”
Currently, most states require reinsurers to provide up to 100 percent collateral on reinsurance agreements. Efforts to deal with the issue have been underway since 1984, when the National Association of Insurance Commissioners (NAIC) adopted The Credit for Reinsurance Model Act and Regulation. Efforts to create a uniform standard reducing collateral requirements have been underway since 2001. In 2011, the NAIC adopted amendments to the model law allowing states some flexibility. However, the report noted, each state has the authority to adopt all or parts of the model law, as it sees fit.
The report said that in 2008, Florida became the first state to introduce reduced collateral requirements for some unauthorized reinsurance, followed in 2011 by New York, Indiana and New Jersey, with collateral reform adopted in those states by April 2011.
NAIC adopted a model law in November 2011 that would permit state regulators discretion to designate “certified reinsurers” domiciled in countries determined by the NAIC to be “qualifying jurisdictions.”
The FIO report said that 19 additional states have now adopted some form of collateral reform based on the amended model law. “Among those states, however, authorization to accept less than 100 percent collateral has not been uniform in the structure or implementation of the state law requirements,” the report said.
Moreover, the report said, the FIO and USTR have concerns about the model law because it “depends too heavily upon assessments of a reinsurer’s creditworthiness by credit rating agencies.” A preferable approach would be for other risk-based, empirical factors to be the basis upon which to determine the creditworthiness of the reinsurer, the FIO said.
The report, citing A.M. Best, lists Munich Re as the world's largest reinsurer, followed by Swiss Re, Hanover, Lloyd’s and SCOR S.E. The largest U.S reinsurer is Berkshire Hathaway, which is listed as sixth, followed by Reinsurance Group of America, China Reinsurance Corp., Korean Reinsurance Corp. and Partner Re Ltd.
The report estimates that property reinsurance constitutes 44 percent of the total reinsurance market; liability reinsurance premiums 22 percent of the market; life reinsurance premiums 31 percent of the market; and financial premiums 3 percent of the total market.
The report said that German companies constituted 27.3 percent of the global reinsurance market as of 2013; with Switzerland and the Americas each with 15.6 percent. Asia-Pacific companies held 11.1 percent of the 2013 reinsurance market, with other European countries constituting 10.2 percent of the market.
Firms based in Bermuda held 11.3 percent of the market and London 8.6 percent of the market. The Americas include the U.S., Canada and Latin America, the report said.
The reinsurance industry supporting the U.S. direct insurance market is global in scope, and primarily consists of approximately 50 large, professional reinsurers and reinsurance groups, as well as many smaller reinsurers, the FIO report said.
It cites an analysis by the Reinsurance Association of America, which said that, in 2013, approximately $46 billion in total P/C reinsurance premiums were ceded by U.S.-based insurers to unaffiliated reinsurers. Of this amount, approximately $28.4 billion of premiums were ceded to non-U.S. reinsurers and approximately $17.6 billion of premiums were ceded to U.S. professional reinsurers.
The report also said that, “If the domiciles of ultimate parent companies are taken into account, the figures show that an even greater portion of U.S. reinsurance premiums are ceded to non-U.S. reinsurance groups.”
Arthur D. Postal has covered regulatory and legislative issues for more than 30 years in Washington, D.C. He can be reached at [email protected].
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