European reinsurers are arguing the case for a less stringent regulatory regime in the US.
The US is the world's largest reinsurance market, but also one of the most complicated and daunting. American insurers have long placed a significant proportion of their reinsurance business with overseas capital providers, primarily in the financial centres of London, Paris, Munich, Hannover and Zurich. Around 42% of reinsurance purchased in the US currently comes from overseas.
The basic US credit for reinsurance rules have not changed significantly in more than 20 years.
During this time, however, the reinsurance market and the regulation of insurance internationally have changed dramatically. Mergers, acquisitions and global expansion have resulted in the emergence of a relatively small number of large, well-capitalised groups, which provide most of the world's reinsurance capacity.
Even though many of these groups are domiciled in other countries, almost all have significant operations in the US are otherwise subject to meaningful US regulatory oversight. At the same time, US regulators have established deeper and broader working relationships with foreign insurance regulators, and now have a much better understanding of the solvency regulation of many foreign countries.
In light of these changes, many international reinsurers believe it is an appropriate time to reassess the US credit for reinsurance rules, particularly as they relate to cessions of reinsurance by US insurers to non-US reinsurers.
Most importantly, they believe that it would be appropriate to reduce the level of funding required for the multi-beneficiary reinsurance trusts maintained by a number of these reinsurers. Currently these trusts must be funded in an amount equal to 100% of the reinsurer's gross liabilities to US ceding companies, plus a surplus amount. As an alternative to deposits, they can post letters of credit which normally require some form of collateralisation. Either way, however, 100% funding is required.
As a result, IUA member companies have $2.5bn tied up in these funds; in the case of Lloyd's, the figure is about $4bn. This situation has obvious implications for cash flow, and the overall effect is to make the US market more difficult for overseas reinsurers with something of value to offer their customers there. The multiple beneficiary trust fund route involves rigorous filing and examination requirements, arguably becoming just as onerous as those imposed on US reinsurers protecting US cedants.
Ever since its formation, the IUA has been working with other interested organisations to create the best possible environment in the US for European reinsurance companies and their North American clients. The current system was born of an entirely reasonable desire to protect American cedants, and ultimately their customers, in the wake of some major insolvencies in the 1980s. Since then, however, our industry has moved on rather faster than the system that regulates it.
Above all, the rules do not reflect the changes in our industry over the past decade.
The nationality of the risk provider and the cedant is increasingly blurred by the globalisation of the insurance and reinsurance industries, thereby reducing its significance. A more important consideration has emerged: the quality of the capital and of the decision-making process. Today's European reinsurers operating in the US are overwhelmingly highly-rated, professional reinsurers dealing with sophisticated buyers.
The IUA and its two predecessor associations, the ILU and LIRMA, have been in touch with regulators and legislators in the US for more than ten years. Over that time we have sought to build up trust. It is our experience that, while those regulators have an overriding duty to protect the insurance-buying public, they are amenable to a reasoned case based on factually sound argument.
In 1999, for example, the National Association of Insurance Commissioners (NAIC) meeting in Atlanta, Georgia enacted a model law that introduced the concept of a liabilities-based trust fund requirement at a level of 30% for overseas insurers writing surplus lines business in the US. We supported this decision, and were able to argue successfully that it should only apply to policies incepting on or after 1
Our ultimate vision is one of mutual recognition, where reinsurers regulated in the US are free to trade within the European Economic Area (comprising all the countries of Western Europe), and vice versa, on the basis of home state supervision. This would facilitate free trade and competition across national boundaries to the benefit of all concerned.
In practice, of course, while a number of US regulators are sympathetic to the principle, this will remain something of a dream for the foreseeable future. In the meantime, we have our sights on more achievable targets. Specifically, we are pressing the case for a reduction in trust fund requirements for overseas reinsurers.
A number of US regulators have acknowledged that the current provision is too onerous, but have been unable to agree on a lower standard. At the June 2000 meeting of the NAIC our proposal to reduce the funding was put to the association's Reinsurance Task Force.
The proposal stated that “regulators be given discretion to reduce the trust fund requirements of multi-beneficiary trust funds by up to 50% of gross liabilities.”
Our proposal gives flexibility to regulators to make this decision based upon the existing regulatory framework in the individual reinsurer's country of domicile, as well as the individual company's financial standing. The regulators were, however, persuaded to hold off any immediate action, in part based on concerns raised by the US reinsurance industry.
This year we made significant progress when the NAIC agreed in March to the concept of irrevocable letters of credit being used as an allowable asset. European reinsurers will now be able to pursue this option at the state level if they so choose. This concession has the potential to inject greater flexibility into the system and to improve reinsurers' cash flow. It could also encourage more reinsurers to adopt the multiple beneficiary route, albeit still with 100% funding.
We have not, however, lost sight of our goal to reduce the funding level. US insurers benefit from the added capacity, diversity and broad capital base provided by the international reinsurance market. We believe that our initiatives are in the interests of US cedants.
These customers would benefit even more if we were to achieve our vision of mutual recognition. This would reduce the bureaucracy involved in trading in the US, and help to create a free and transparent market in reinsurance.