Leading from the front
The need to modernise reinsurance regulation around the world is more important than ever, and as the world’s largest insurance market, the US should be a leader in this effort.
In November 2011, the National Association of Insurance Commissioners (NAIC) took an important step when it approved changes to its credit for reinsurance models. When adopted by a state, these changes grant the insurance commissioner discretion to allow an insurer to take 100 percent financial statement credit for reinsurance purchased from eligible reinsurers from qualified jurisdictions, but requiring the reinsurer to post less than the 100 percent collateral required under the old models. However, to realise the true benefits of reinsurance modernisation, including collateral reduction, these revisions must be uniformly adopted in all states.
Since 2011, 25 states have passed some version of the revised credit for reinsurance models: Alabama, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Indiana, Iowa, Louisiana, Maine, Maryland, Massachusetts, Missouri, New Hampshire, New Jersey, New Mexico, New York, Ohio, Pennsylvania, Rhode Island, Vermont and Virginia.
The state-based system of insurance regulation is a tested and effective one. Yet, the time and resources to achieve modernisation across the state spectrum is challenging. One way to accomplish universal modernisation in the states is to utilise federal authority, with implementation left to the state-based system.
One such tool, Covered Agreements, offers a solution for several issues. The Federal Insurance Office, which was created by the Dodd-Frank Act, is empowered—in conjunction with the US Trade Representative—to enter into Covered Agreements. They are bilateral/multilateral agreements on prudential measures with respect to the business of re/insurance between the US and one or more foreign governments, authorities or regulatory entities. The European Union (EU) is one of the US’s largest re/insurance trading partners.
Once Solvency II goes into effect on January 1, 2016, however, US-based companies doing business in the EU will be at a competitive disadvantage to EU-based companies if these two jurisdictions cannot reach an agreement to avoid this. A Covered Agreement could address regulatory issues such as group supervision, reinsurance and collateral, thereby establishing the terms under which EU re/insurers can participate in the US market and the terms under which US re/insurers can participate in the EU.
The federal government has indicated its intention to move forward on a Covered Agreement with the EU this year. Although state regulators have reservations with this approach, they should consider the possible win for state regulation: in exchange for a commitment the NAIC has already made to lower collateral, the strength of the US state regulatory system would be formally acknowledged and US-based companies would be on stronger competitive footing doing business in the EU.
A Covered Agreement could accomplish a uniform result where the state-based system sometimes struggles with the need to pass the same law in 50+ legislatures. This should be viewed as a tool to preserve the strength of the state-based regulatory system rather than a chink in the armour.
Tracey Laws is senior vice president and general counsel with responsibility for developing RAA policy, filing amicus curiae briefs, and assisting the RAA’s lobbyists in implementing RAA policy at state, federal and international levels.
