Zurich North America Issues Public Comment on Treasury's Fiscal Service Bureau Notice

WASHINGTON, March 6 -- Mary Jean Pethick, senior vice president and head of surety risk solutions at Zurich North America, Owings Mills, Maryland, has issued a public comment on the U.S. Treasury Department's Bureau of the Fiscal Service notice entitled "Surety Companies Doing Business with the United States; Request for Information". The comment was written on Feb. 13, 2020, and posted on March 5, 2020:

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Zurich Surety ("Zurich") is one of the largest providers of surety bonds in the United States through our underwriting companies, including Zurich American Insurance Company and Fidelity and Deposit Company of Maryland. We appreciate the opportunity to comment on the important issues raised in the RFI, and address each question separately below.

Overall, we find no compelling reason to change the approaches or methodology of the Department of Treasury's Bureau of the Fiscal Service (the "Bureau") with respect to its evaluation of surety companies and reinsurers seeking to be certified to provide federal surety bonds. The Bureau's Treasury list designation has long served as the gold standard to identify highly responsible, well-capitalized sureties and to ensure that only those meeting this rigorous standard are certified to provide surety bonds guaranteeing obligations running to the federal government. The Bureau's robust approach to certifying sureties and reinsurers for federal surety bonds has proved successful in protecting the assets of the government, taxpayers and other beneficiaries of the bonds.

Furthermore, there is ample surety capacity in the marketplace. There is no need to diminish the established standards which provide certainty and stability in the surety market, especially as doing so could result in avoidable loss to the government and taxpayers without achieving any corresponding benefit.

1) Should Fiscal Service consider changing the approach or methodology it uses to value the assets and liabilities of a company applying to be certified as an insurer or reinsurer, or to be recognized as an admitted reinsurer? In particular, please consider commenting on the following items: (a) Admissible versus non-admissible assets; (b) capital requirements; (c) underwriting limitation; and (d) comparison to requirements imposed by relevant regulatory authorities.

Zurich supports the Bureau's current approach and methodology for evaluating the assets and liabilities of a company applying to be certified as a (re)insurer or an admitted reinsurer on federal surety bonds. As the owner of risks running to the federal government, the Bureau plays a critical role in analysing the companies that provide surety protection for federal assets. It is important that the Bureau maintain comprehensive oversight of companies permitted to (re)insure federal assets, including but not limited to maintaining a Treasury list of certified sureties.

Zurich has been and remains supportive of the U.S.-E.U. and U.S.-U.K. Covered Agreements, which, among other things, permit the use of uncollateralized reinsurance from reinsurers that operate in certain approved jurisdictions that have substantially similar regulatory regimes. We consider the Bureau's role in administering our country's surety program to protect federal assets to be distinct from the role as negotiator of the Covered Agreements for the insurance industry as a whole. With respect to surety, the Bureau is not only the administrator but also the customer, as a department of the federal government, of the surety product. As such it has a right, and arguably a duty, to ensure federal entities have robust performance and payment guarantees in place to protect the government from loss, backed by responsible, highly capitalized sureties and reinsurers.

Zurich strongly supports The Bureau's longstanding rules regarding admissible versus non-admissible assets, capital requirements, and underwriting limitations. Furthermore, Zurich strongly supports the Bureau's current rules with respect to its single risk underwriting limitation. These rules have helped to sustain the current and historic stability of the surety industry.

2) What different methodologies, if any, should Fiscal Service consider using when evaluating applications from companies that are part of an insurance group's pooling agreement? Please provide your views on whether Fiscal Service should analyze such applicants' financial condition at the group level rather than, or in conjunction with, analysis at the individual company level. Please address the benefits and risks to the federal government of performing the financial analysis at the group level.

Zurich supports the Bureau's current methodology of evaluating an insurance entity's individual companies rather than engaging in a financial analysis at the corporate group level. Given the focus of domestic U.S. insurance markets on legal entity supervision, we believe the Bureau should maintain its current approach. We acknowledge that the group solvency issue is being considered currently by the International Association of Insurance Supervisors (IAIS) and the National Association of Insurance Commissioners (NAIC), but to the extent there is no consensus on a uniform approach for analysing pooling agreements at an insurance company's group level at either the state or international level, we feel it is premature to comment at this time. We would, however, be interested in commenting on any specific regulatory changes the Bureau is contemplating with respect to consideration of the financial condition of a (re)insurer at the group level.

3) Should Fiscal Service consider changing the approach or methodology it uses to determine the credit allowed for reinsurance and, if so, what changes should it consider? Please address both reinsurance of federal surety bonds and of non-federal risks and provide the rationale for any proposed changes.

Given the impressive history of success that the current approach and methodology have achieved for the federal government, taxpayers and the surety industry, Zurich cautions against reducing the standards regarding credit for surety reinsurance. Changes are taking place throughout many state departments of insurance, as they work to implement the U.S.-E.U. and U.S.-U.K. Covered Agreements, which reflect an approach to solvency regulation that relies less on required levels of localized collateral. We acknowledge that there are regulatory differences between acceptable reinsurance under state insurance laws and regulations and the current Treasury regulations for purposes of suretyship. Such difference, however, is not problematic. Those who argue that consistency is required among all lines of insurance are failing to appreciate the Bureau's unique position as the risk owner for federal assets when it comes to suretyship. Relaxing the rules pertaining to credit for reinsurance could potentially undermine the important role of the Bureau's current underwriting limitation. The current underwriting limitation provides a needed safeguard to ensure approved sureties do not assume risks they are not capable of insuring. Expanding the definition of acceptable reinsurance could unintentionally expand the Bureau's risk profile and diminish the gold standard approach the Bureau has long applied for assessing a surety companies' ability to meet its obligations to the US Government. Given that there is more than enough capacity in the market, increasing access to reinsurance is unnecessary under the current environment.

4) Should Fiscal Service consider changing any aspects of the approach or methodology it uses to determine recognition of a company as an admitted reinsurer? In your response, please address Fiscal Service's treatment of both domestic and alien reinsurers and discuss the benefits and risks to the federal government of any proposed changes.

Zurich supports the Bureau's current methodology for recognition of companies as an admitted reinsurer. At this point in time, Zurich does not have any specific recommendations to change how the Fiscal Service reviews admitted, domestic or alien insurer applications. Zurich would be interested in commenting on any specific regulatory changes the Bureau is contemplating on how it evaluates admitted, domestic and alien reinsurers.

5) Should Fiscal Service consider changing the permissible methods, as described in the program's regulations and annual letters published on its website, for limiting risk in excess of a surety company's underwriting limitation? In your response, please address permissible methods for limiting risk in excess of the underwriting limitation relative to both federal surety bonds and to non-federal risks.

Zurich strongly supports maintaining the Bureau's current approach to limiting risk in excess of a surety company's underwriting limit. The current underwriting limitation provides a needed safeguard to ensure approved sureties do not assume risks they are not capable of insuring. Zurich strongly encourages the Bureau to maintain its current 10% underwriting limitations.

6) Should Fiscal Service consider changing the schedule and the documentation required for issuing and renewing certificates of authority and, if so, what changes should it consider? As an example, but not a limitation on the scope of the foregoing question, should Fiscal Service consider issuing certificates of authority that are valid for more than one year based on a company's financial condition? Please address the benefits and risks to the federal government of implementing such proposed changes, including issuing certificates of authority that are valid for more than one year.

Zurich supports the Bureau's current schedule and the documentation required to renew an insurer's certificate of authority.

7) Please recommend any other revisions to the program regulations as addressed in 31 CFR part 223 or the annual letters published on Fiscal Service's website that are consistent with protecting the federal government and provide the rationale for those revisions.

Zurich does not have any further recommendations to offer the Bureau at this time in relation to 31 CFR part 223 or its annual letters.

To summarize our overall comments, the Bureau's Treasury list designation has long served as the gold standard to identify responsible, well-capitalized sureties and to ensure that only those meeting this rigorous standard are certified to issue surety bonds guaranteeing obligations running to the federal government. This approach has proved successful in protecting the assets of the government, taxpayers and other beneficiaries of the bonds. This proven track record, along with the fact that there is already ample surety capacity in the market, lead us to respectfully recommend that the Bureau maintain the status quo with respect to its program for certifying sureties and reinsurers trusted to provide surety bonds to protect the interests of the government and taxpayers.

We appreciate the important work of the Treasury Department and the Bureau in the surety arena and thank you for your consideration of our comments. We would welcome the opportunity to speak or meet with you to discuss these issues further.

Very truly yours,

Mary Jean Pethick, Esq.

Senior Vice President

Head of Surety Risk Solutions

Zurich North America

Cc: [email protected]

[email protected]

[email protected]

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The notice can be viewed at: https://www.regulations.gov/document?D=FISCAL-2019-0002-0012

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