In Europe, one-stop supervision is fast becoming a reality in an insurance market much larger than that of the United States.
"Most Continental markets were not regulated or supervised at all until 2005," said Wilhelm Zeller, chief executive officer of Hannover Re, when the EU promulgated its current reinsurance directive, one soon to be supplanted and enhanced by the supervisory scheme known simply as "72."
"The reinsurance directive was a step in the right direction," said Zeller. "It provides a single passport, one-stop supervision. In other words, if you have a license to do business in one of the 27 EU member countries, you can do business without supervision in any of the other 26 countries," he explained. "If this took place in the United States, you would not have to apply in 50-some jurisdictions for a license but just one or two. What is more, the directive prevents any EU member company from requiring collateral. Imagine what that would mean to the United States as well. That to me is a revolutionary development."
Zeller's comments came during a panel session at Standard & Poor's Insurance 2008 conference in New York. The subject was "Operating Within a Global Economy in the Reinsurance Industry." Joining Zeller were Raymond Barrette, chairman and chief executive officer of White Mountain Insurance Group, and Neill A. Currie, president and chief executive officer of RenaissanceRe Holdings Ltd. Rob Jones, a managing director at S&P, moderated the session.
The one-stop supervision Zeller described is taking place "in a market that is substantially larger than the United States," he said, one with a total population of 500 million, as opposed to 300 million, and GDP of $16 trillion compared with $14 trillion in the United States.
S&P's Rob Jones summarized 72 as the modernization of European insurance supervision, a principle-based approach involving a market-consistent balance sheet. It has changed all that has gone on before, he said, taking Europe well beyond the United States, Canada and Australia in regulatory reform.
"It has incentives to conduct good risk management practices including the use of economic capital models, which validate it by the regulator and are used by the regulator in the supervision process," he said.
He added that the principles of 72 are already imbedded in the culture of the International Association of Insurance Supervisors.
"We expect 72 to be a global standard at some point in the future, in a decade or so. So it seems to be in Europe a revolution in terms of regulation," he said.
The 72 directive, in its most salient aspects, will go "a substantial step further" than the current reinsurance directive, in that it will introduce group supervision, said Willy Zeller.
"Not only one single entity doing business throughout the EU, but an entire group would be supervised only once," Zeller explained.
Beyond that, groups from jurisdictions with an equivalent system can agree on "mutual recognition", which, for example, would rescue Bermuda-domiciled companies from the disadvantage they would otherwise have if they wanted to do business in Europe.
"Some people refer to this development as a revolution," said Zeller. "(It's) really a catalyst into globalization," he said, commenting that the United States would be well advised to rethink its patchwork system of state regulation or otherwise risk U.S. companies being heavily disadvantaged when doing work outside the States.
Bermuda's relatively light regulation until recent years vis a vis the United State and the United Kingdom was addressed by Currie.
"I'm impressed with the professionalism of regulators around the world, which is very important and very necessary for us all to compete on a level playing field," Currie said. "In that environment, Bermuda officials 'stack up very nicely.' "
Bermuda has been staffing up, Currie said, not necessarily because it's behind the other regimes, but because the number of companies that are insolvent in Bermuda has gone up substantially and the complexity of these companies has gone up substantially.
"So there is a lot of dialogue between Bermuda and the other regulatory professionals," he said. "I know, for example, that they are making changes constantly and are constantly innovating, and they are looking at risk-based capital standards as well. I think we will see a lot of similarity in terms of where Bermuda evolves. I think it will go hand in glove with what the other regulators are looking forward to. As to the effect on Renaissance Re, there is none. We will continue to operate as we have in the past. Going forward, Bermuda will do quite well."
THE OPTIONAL CHARTER
S&P's Rob Jones then questioned Barrette of White Mountains, which is exposed to a number of different regulators around the world.
"No one accuses the United States of having a light regulatory burden," Jones said. "What are the prospects for change? What form might it take? And how soon might that happen?"
From a reinsurance point of view, answered Barrette, an optional federal charter has been discussed, and there's some possibility that might happen.
"I don't think that will have a dramatic effect on reinsurance," he said. "It's probably not a main event for the reinsurance business."
There are a couple of points that have to be understood, he continued. "One is there's not a lot of reinsurance going the other way. European companies reinsure American companies, but the flow the other way is very, very limited. So the United States has limited incentives from that point of view to change the rules."
The main event, he said, is the fact that, through the collateral rule, the state insurance departments can enforce a judgment through a U.S. court.
"To change that would be extremely difficult," he said. "It's hard for me to see the United States in international courts resolving U.S. disputes. In my view that's the biggest issue standing in the way of major reform."
Barrette wouldn't speculate on a timeframe for an optional charter. "I think there is a possibility we will have what federal regulators have done with the banking industry and the investment banking industry, which is a disaster," he said." It's hard to see how people will be convinced that federal regulation is better. It's more efficient, but is it really better than what we have today?" he asked.
Zeller said the optional federal charter is "of high relevance" to foreign insurers because it would do away with the discrimination that foreign insurers experience in the United States. He said Rep. Paul E. Kanjorski, D-Pa., who introduced the OFC bill in the U.S. House of Representatives, is confident the measure will pass because the state-based patchwork system of insurance regulation is incapable of bringing about change.
"But that will take between seven and eight years until they will agree on something, and then it will take another five years," Zeller said. "So not too many of us will experience that."
THOMAS J. SLATTERY, a veteran insurance editor and writer on industry affairs for more than 40 years, is currently managing director of Slattery-Esterkamp Communications of Baldwin, N.Y.
August 4, 2008
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