Newsletter Sign-up

By STEVE TUCKEY, who has written on insurance issues for a decade for several national media outlets

The reinsurance industry has long bristled at the yoke of state insurance regulation with its emphasis on consumer protection considered irrelevant to business conducted between sophisticated parties. Yet, now the industry looks to Washington in the aftermath of the near collapse of the financial system to enact the changes needed in today's global economy.

Efforts to enact optional federal charter legislation in Congress have met fierce resistance from state-by-state loyalists over the years, as not only the reinsurance sector but other segments of the property/casualty sector sought just one overseer.

Then came the Great Financial Meltdown of '08, which has now led to an entire rethinking of the financial services regulatory landscape. With reinsurance a tiny piece of the puzzle, industry leaders in reinsurance fear their concerns could be lost in the shuffle.

In mid-June, the Obama administration entered the fray, at least indirectly in terms of reinsurance. It outlined a new regulatory system aimed at keeping better oversight of systemic risk, the failure of which led to last year's traumatic events and this year's continued recession

As a small part of the sweeping plan, the administration proposed a U.S. Office of National Insurance within the Department of the Treasury to monitor all aspects of the insurance industry.

Frank Nutter, president of the Reinsurance Association of America, praised the move, asserting that "it is essential that we have resident expertise about the industry at the federal level, and further, the authority to effectively negotiate international agreements."

The administration did not provide any specific legislative proposals, which are expected to come about piecemeal over the next several months. The proposal also urged either creation of an optional federal charter or more streamlining of state regulation, along the lines of efforts the National Association of Insurance Commissioners have conducted over the past few years.

An analysis in the Reinsurance Focus blog sponsored by the Washington, D.C.-based law firm Jorden Burt said that while the Treasury Department's proposal does not contain any specifics aimed at the reinsurance industry, "some of the recommendations which will have an effect upon the insurance industry may indirectly affect the reinsurance industry."

Reinsurance leaders hope that some stripped-down form of optional federal charter regulation could emerge from the flurry of legislative enabling proposals expected this summer. Last year, a key lawmaker for the industry, Rep. Paul Kanjorski, D-Pa., said the lines suitable for federal oversight might include reinsurance, bond and mortgage insurance.

Meanwhile, Congress is currently considering a bill (H.R. 2571) to prohibit any state from denying credit for reinsurance if the state of domicile of the ceding insurer recognizes such credit and if that state is either an NAIC-accredited state or has financial solvency requirements similar to that of the NAIC. The bill would also make any reinsurer's state of domicile the sole regulatory authority for that carrier.

The NAIC has also gotten into the act with its continuing efforts to streamline and hopefully keep relevant the state regulation of insurance.

In April, the body approved a detailed Regulatory Reinsurance Modernization Act aimed at ensuring that reinsurers answer to just one state rather than all the jurisdictions in which they do business.

In addition, it attempts, once and for all, to resolve the collateral requirements question for nonadmitted players with an elaborate series of reviews and approvals for non-U.S. regulatory regimes whose approval would either lessen or remove the burden of collateral entirely.

The NAIC efforts have stalled, and questions remain as to whether Congress by itself can approve such sweeping change or whether it must act in conjunction with the states.

If all the states get a say in the matter, then the RAA, the industry's main lobbying group, feels the process will become too cumbersome to effect the kind of immediate change that some feel is needed.

So the question is still up in the air as to whether or not the NAIC will meet the industry goal of a swift overhaul of reinsurance regulation and whether it will find sponsorship in Congress either in a stand-alone form or in addition HR 2571.

As for Bermuda, Standard & Poor's analyst Laline Carvalho, noted the importance of the island that saw a 4 percent growth in net premiums written in 2008, compared with a similar decline for stateside reinsurers.

The prospect of new taxation could result in an increased attractiveness of countries such as Ireland and Switzerland for new company formation.

"It is not out of the question that potential investors might consider the United States as a potential domicile for new formations, if taxation is not much of a differentiation point," she said.

August 1, 2009

Copyright 2009© LRP Publications