Why does the US push for the removal of trade barriers not apply to US credit for reinsurance rules? asks William Marcoux.
It is time to update US credit for reinsurance laws. The current rules were established decades ago when the regulation and structure of the reinsurance industry was profoundly different. Revising these rules will benefit the US insurance market and would be consistent with US policies which strongly support free trade.Current US credit for reinsurance rules essentially divide the world's reinsurers into two groups:
Collateral expenseThe current collateral rules are expensive. They cost non-US reinsurers more than $500m per year. These costs are passed on, in whole or in part, to US ceding insurers. Collateral requirements also restrict capacity, as prudent reinsurers must manage their aggregate exposures not only in terms of ultimate loss, but in light of their ability to fund their liabilities in the US on a gross basis. As demonstrated after the horrific losses of September 11, these funding requirements create needless cashflow and liquidity burdens. It is also true that US regulators currently accept billions of dollars of uncollateralised debt obligations (including non-US issuer obligations) as admitted assets. Remarkably, US regulators will accept an uncollateralised debt obligation from an (A-) rated non-US reinsurer but not uncollateralised reinsurance recoverables from that same reinsurer. It is difficult to justify such disparate treatment on the basis of solvency regulation.Although the elimination of all collateral requirements might be the best step to take, a more modest proposal has been put forward by a coalition of reinsurers represented by the International Underwriting Association in London, Lloyd's and the Comité Européen des Assurances. This proposal calls for the creation of an approved list of reinsurers. To be on this list reinsurers would have to have a minimum rating of A-, meet other financial requirements and make significant financial filings with the US regulators. Reinsurers on this approved list would be permitted to post collateral in an amount less than 100% of gross liabilities, with the minimum collateral requirement at 50% of gross liabilities (30% for affiliate reinsurance). The new variable collateral requirements would only be applied prospectively and ceding insurers would be free to negotiate higher collateral requirements on a commercial basis.This proposal deserves careful consideration. It is a modest step down a road towards a more rational regulatory standard. Fortunately, US regulators and legislators have committed themselves to working on this proposal. US regulators and legislators have also acknowledged the critical role non-US reinsurers play in the US insurance market, providing essential capacity, underwriting expertise and beneficial competition to the domestic reinsurance market. They also recognise that reinsurance helps spread US losses - particularly catastrophic losses - throughout the capital markets of the world, a benefit that is severely undermined by the current collateral requirements. To date, two key issues have arisen in connection with the variable collateral proposal: