FIO Focus, Issue No. 21
Global Reinsurance Report Interested Party Comments
Devoted to exploring the progress of the modernization of the insurance industry, FIO Focus provides information and insights about the organizations and issues that are driving change and influencing the future of the industry.
On June 27, 2012, the Federal Insurance Office (FIO) requested comments regarding the anticipated report on the U.S. and global reinsurance market. The comment period closed on August 27, 2012.
The comments received provide a comprehensive overview of the purpose and mechanics of reinsurance. Several commenters explained that global reinsurance allows for risk diversification which decreases the cost of both reinsurance and insurance. There was considerable discussion regarding the importance of reinsurance in providing financial support following catastrophes. Several commenters noted that reinsurers paid 60% of damages related to the September 11th terrorist attacks and 61% of the losses resulting from Hurricanes Katrina, Rita and Wilma.
Issue 20 of “FIO Focus” provided an overview of the comments submitted to the FIO prior to August 21, 2012. The summary below provides an overview of comments submitted from August 21 through the end of the comment period.
- Role of the Global Reinsurance Market in Supporting the U.S. Insurance Industry
- Non-U.S. reinsurance capacity reduces the risk of economic contagion as foreign reinsurers are less likely to be impacted by a loss event in the U.S.
- Non-U.S. reinsurers allow for the diversification of risk as they are unlikely to be exposed to the same underlying insurance losses as U.S. insurers.
- Captive insurance companies are often times formed specifically for the purpose of gaining access to global reinsurance markets. The diverse global reinsurance market allows captives to reduce the cost of insurance and obtain coverage for risks that are difficult to place.
- Global distribution of premium and risk means that reinsurers can provide more capacity than they could if their capital base and risks were concentrated in only a few jurisdictions.
Effect of Domestic and International Regulation on Reinsurance in the U.S.
- Support for a single national regulator with the power to preempt state laws.
- State-based regulation creates a patchwork of inconsistent requirements for reinsurers.
- Reinsurers are often formed outside of the U.S. because of the lengthy and costly process of achieving multi-state licenses, prescriptive accounting requirements and Sarbanes-Oxley audit requirements.
- Support for the elimination of collateral requirements.
- U.S. regulations on risk transfer limitations are outdated and do not align with international standards. Modernizing risk transfer limitations would assist U.S. life insurers in managing their risks more effectively and efficiently.
- Support for universal adoption of the revised Holding Company System Model Law.
- Discussion regarding the potential impact of a Solvency II reinsurance equivalency assessment, including that a positive equivalence finding will allow U.S. reinsurers to be treated the same as EU reinsurers when U.S. reinsurers are doing business in Europe.
- Support for the reduction of collateral requirements and universal adoption of the Credit for Reinsurance Model Law and Regulation.
Role and Impact of Government Reinsurance Programs
- Opposition to government catastrophe programs.
- Support for “de-populating” state wind programs and residual market mechanisms.
- Government-run reinsurance is detrimental to the global reinsurance market because reinsurance distributes risk internationally while government run reinsurers consolidate risk within one country.
- The availability of affordable and competitive insurance can be supported through prudential regulation and disaster mitigation that includes land use policies, loss reduction initiatives, building codes and accurate mapping data.
- Support for legislation to create a federal reinsurance program which would charge actuarially justified rates to reinsurer state catastrophe funds.
- Public-private partnerships are necessary when the potential cost of private coverage results in insufficient participation to properly spread risk.
- Resistance to creating a federal backstop or federal reinsurance for state catastrophe funds.
- Opposition to programs that rely on assessments or bonding to pay claims.
- The FIO should review existing government reinsurance programs to determine whether those programs are actuarially sound and promote loss prevention. It should also evaluate the impact of existing government reinsurance programs on government budgets and private insurers.
Terrorism Risk Insurance Program
- Support for the Terrorism Risk Insurance Program and its renewal.
- If the program is not reauthorized, an alternative government-supported plan must replace it as the private market is not able to provide adequate coverage for terrorism risk.
- The program differs from other government insurance programs because the private market cannot price such risks since sensitive information regarding potential terrorist events is exclusively held by the government.
National Flood Insurance Program
- Concerns regarding the impact of the National Flood Insurance Program (NFIP) on coastal and flood plan development as well as land use.
- The FIO should recommend that the NFIP purchase reinsurance, underwrite risk on a property-by-property basis and improve flood mapping.
Coordination of Reinsurance Supervision Nationally and Internationally
- U.S. regulators should rely on solvency determinations of regulators outside of the U.S. for reinsurers domiciled in foreign regulators’ respective jurisdictions.
- The FIO should develop a supervisory recognition system providing U.S. and non-U.S. regulators a platform to recognize the strength and solvency determinations of the other’s regulatory system. Under this mutual system, reinsurers would be able to operate in countries other than where domiciled without a license or posting collateral.
- Support for the coordination of reinsurance supervision by the International Association of Insurance Supervisors (IAIS) and similar organizations at the international level and by the National Association of Insurance Commissioners and state insurance regulators at the state level.
- Concerns regarding multiple and possibly conflicting reporting requirements from credit rating agencies and regulators, including state insurance departments, the U.S. Securities and Exchange Commission, the Financial Stability Oversight Council, the Federal Reserve Board of Governors and U.S. Department of the Treasury.
- Discussion regarding the need for coordinating group supervision activities, including holding company analysis and examinations of Own Risk Solvency Assessment (ORSA) summary reports, Enterprise Risk Management reports and corporate governance.
- Support for the FIO’s involvement in the IAIS and the EU-U.S. insurance dialogue.
- Concerns regarding the confidentiality of information shared among regulators during the regulatory process.
Other Topics Relevant to the Global Reinsurance Market Report
- Discussion of international trade barriers for reinsurance, including reinsurance regulations in Brazil and Argentina that unfairly restrict the placement of coverage with foreign reinsurers.
- Concerns regarding European laws that limit the ability of a ceding insurer to obtain coverage when the reinsurer is in runoff or has transferred its book of business to another entity.
- Regulatory restrictions including the imposition of local capital requirements, collateral requirements, seasoning requirements and a requirement that international reinsurers form local companies to operate in jurisdictions, impede the flow of capital into reinsurers, and prevent the expansion of reinsurance and insurance capacity.
Insurance Linked Securities
- The FIO should consider the size and potential growth of the insurance linked securities market, including the impact of the market on pricing and overall capacity in the reinsurance market.
- Regulations strengthening the conflict of interest restrictions for asset backed securities may restrict the use of catastrophe bonds.
- Support for lower corporate tax rates.