While the United States imposes a highly structured level of regulation upon licensed reinsurers, the degree of reinsurance regulation varies substantially in countries throughout the world.
According to a study submitted by the European Commission to member countries and published in 1999, some countries impose what has been characterized as “equal or nearly equal treatment” of “professional” reinsurers1 and direct insurers,2 others employ a “reduced regime” of direct supervision,3 and still others combine some elements of direct supervision with indirect supervision.4 In some countries reinsurers are subject to no direct supervision (Belgium and Greece).
One must conclude there is no globally recognized method of conducting reinsurance regulation.
Regulation of US licensed reinsurers
Other than rates and forms, reinsurers licensed in at least one US jurisdiction are subject to the full spectrum of laws and regulations to which a primary insurer is subject.
As a result, reinsurers are subjected to regulation requirements that include, among others, the following:
• minimum capital and surplus requirements;
• risk-based capital requirements;
• investment restrictions;
• disclosure of material transactions;
• disclosures/prohibitions on certain fronting transactions;
• obligations/prohibitions with respect
to reinsurance intermediaries;
• asset valuation and requirements;
• holding company requirements
• annual statement mandated; disclosures, accounting and filings
• credit for reinsurance;
• unfair trade practices;
• independent auditor's reports;
• actuarial-certified loss reserve opinions;
• restrictions on assumption reinsurance transactions.
Recognizing the US needs substantial reinsurance capacity, US regulators do not prohibit non-US reinsurers from assuming reinsurance business in the US, nor do they pretend that they have the regulatory capability or resources to assess the financial strength or claims-paying ability of non-US reinsurers.
Instead, the reinsurance transaction is regulated through the mechanism of credit for reinsurance, the financial statement accounting effect given to a ceding insurer if cessions are ceded in accordance with prescribed criteria. If the criteria are met, the ceding insurer may record a reduction in insurance liabilities for the effect of the reinsurance transactions. A reinsurer must either be licensed and subject to the full spectrum of reinsurance regulation or provide collateral to ensure the payment of the reinsurer's obligations to US ceding insurers. Collateralization eliminates the regulator's need to assess the level of regulation in the non-US reinsurer's domiciliary jurisdiction or the financial strength of the particular reinsurer.
With this approach, the US has created an open but secure marketplace. The most recent study of alien reinsurance in the US market indicates reinsurance was ceded to, or reinsurance recoverables were due from, more than 2500 reinsurers in over 95 foreign jurisdictions.
Options for non-US reinsurers
US credit for reinsurance laws provide a number of options for non-US reinsurers that assume reinsurance risk from US ceding insurers. A reinsurer not based in the US may:
a. obtain a licence by establishing a separate affiliate entity or by establishing a branch in the US;
b. establish a multiple beneficiary trust which secures its obligations to all US cedants plus a surplus amount; or
c. provide individual collateral (through a trust, letter of credit or other acceptable security).
It has been suggested that the ideal to work towards is a harmonized, single licensing system for reinsurance activities. That is, regulators should encourage mutual recognition of supervisory principles and practices among reinsurance supervisors.
To the Reinsurance Association of America (RAA), the suggestion that mutual recognition can be accomplished on a worldwide, or even a regional basis raises concerns about the soundness and security of the industry going forward.
While the efficiencies that might be gained from mutual recognition may be substantial, there is valid concern from the US perspective that a system of mutual recognition will reduce the level of regulation that the US system currently affords. Many in the US fear mutual recognition may result in regulation at the level of the lowest common denominator of countries where reinsurers are domiciled.
Among the suggestions is that mutual recognition be accomplished on a regional basis. The US has a very strong system of reinsurance regulation, yet several countries in the Americas are, from a relative perspective, in the early stages only of reinsurance regulatory development. In lieu of a strong reinsurance regulatory infrastructure, substantial dependence is placed by some regulatory authorities on analysis by rating agencies. It will likely be many years before US regulators will consider mutual recognition of reinsurers domiciled in such countries.
An interesting option to regional mutual recognition, however, might be recognition based on similarity of markets. Some jurisdictions maintain a sufficiently high level of reinsurance regulation that US regulators might have confidence in the financial strength of reinsurers domiciled in those jurisdictions.
The US reinsurance industry cannot support any proposal that will permit non-US reinsurers to assume reinsurance risks from US cedants on the basis of a single licence through mutual recognition while US reinsurers continue to be constrained by a 50-state regulatory system. Mutual recognition is not feasible until US reinsurers are permitted to do business in the US in a manner that will maintain a level playing field with non-US reinsurers. A single licence to do business in the US through mutual recognition must be preceded by a single licence and regulatory authority within the US for any individual US reinsurer.
Trust fund requirements
Some have criticized the option available to non-US reinsurers of using trust funds to secure obligations rather than obtaining a US licence. US trust fund requirements are not imposed on non-US reinsurers on a “compulsory” basis, as has been suggested. Indeed, if a non-US reinsurer wants to do business in the US on an level playing field with US reinsurers, it is free to do so through the creation of a licensed affiliate or licensing a branch through one state.
If, on the other hand, the non-US reinsurer chooses to do business in the US in a different manner, without subjecting itself to the full scope of US regulatory laws imposed upon US reinsurers, the non-US reinsurer may secure its obligations so that US regulators need not be concerned with its financial status or the level of regulation of its place of domicile - but remain confident that it will meet its US obligations while it is solvent or in the event that it becomes insolvent.
It is difficult to argue persuasively that “major obstacles” to reinsurance trade exist in a marketplace where more than 2,000 reinsurers from over 95 foreign jurisdictions participate, where annual property/casualty premium ceded to non-US reinsurers exceeds $16 billion and where non-US reinsurers account for over 40% of ceded unaffiliated property/casualty premium.5
The US has a distinctly open reinsurance marketplace that places solvency first and foremost, including the collectability of reinsurance recoverables.
In an effort to move toward a more efficient, global regulatory environment while maintaining sufficient financial security, the following advances should be made:
a. develop basic, fundamental regulatory standards for jurisdictions that have little or no reinsurance regulation;
b. change the US regulatory environment to offer a more uniform, efficient system for the regulation of US reinsurers;
c. develop international accounting standards to provide transparency to regulators on a worldwide basis and the adoption and implementation of those standards by key financial centers; and
d. identify critical elements in reinsurance regulation so that mutual recognition can be considered on the basis of the existence of a specified level of regulation.
The RAA will continue to seek improved efficiencies and greater harmonization in reinsurance regulation and the above would go a long way to achieving this goal.
Franklin W. Nutter is president, and Debra J. Hall is senior vice president and general counsel of the Reinsurance Association of America.
1 The term “professional reinsurers” is not typically used in the US.
2 Denmark, United Kingdom, Finland and Portugal.
3 Austria, Italy, Spain and Sweden.
4 Germany, France and the Netherlands.
5 Reinsurance Association of America, Alien Reinsurance in the US Market 1996 Data (1996).