20 October 2016 Insurance

Regulatory advances will be undone if Europe-US fail to reach new agreement

Improvement in the efficiency of reinsurance regulation, which in recent years has made it easier for international firms to reinsure US risks, is at risk of being undone if Europe and the US do not reach a covered agreement, warned the International Underwriting Association (IUA).

The collateral requirement for international firms to reinsure have been reduced in recent years, allowing capital to be deployed more effectively and reducing cost unnecessary pressures.

However, the introduction of Solvency II has created difficulties with US firms that are not deemed to be subject to an equivalent regulatory regime.

The IUA suggests that this could bring a halt to further progress in reducing US collateral barriers, and has pushed for a biletaeral trade deal covering reinsurance, known as a covered agreement.

A covered agreement could solve the problem and result in zero collateral on both sides, IUA said.

Dave Matcham, chief executive of the IUA, said: “Covered agreement negotiations have started, albeit slowly, and there is a lot of support for them across the reinsurance industry in both Europe and the US.

“A lack of mutual recognition between regulatory regimes on each side of the Atlantic is causing problems and this could be an ideal way of solving them. It could potentially allow the US to be recognised as Solvency II equivalent and speed up the process of reducing US collateral requirements for international companies.

“US business is incredibly important to the London Market and more efficient cross-border trading is certainly in the best interests of clients. If the negotiations are successful it could send a powerful message against protectionist regulation.”

Up until 2012, non-US reinsurance businesses were forced to post collateral equal to 100 percent of the gross reported loss when writing US risks.

However, state insurance departments coordinated through the National Association of Insurance Commissioners (NAIC) eventually allowed states to enact changes to this rule, reducing the collateral requirement to 10-20 percent.

The Dodd-Frank Act also created the Federal Insurance Office which could represent the US industry to negotiate a bilateral trade deal on reinsurance.

Matcham added: “To date 31 US states have enacted collateral requirement changes, affecting around 75 percent of ceded premium. But with each state having to pass legislation individually the process is time consuming. Some big states have not yet made any changes and the picture is not uniform across the country.

“A covered agreement deal, therefore, has a great deal of appeal. It is vitally important that industry representatives, regulators and federal negotiators in the US and Europe all work together to ensure that global regulation can work as effectively as possible.”

Already registered?

Login to your account

To request a FREE 2-week trial subscription, please signup.
NOTE - this can take up to 48hrs to be approved.

Two Weeks Free Trial

For multi-user price options, or to check if your company has an existing subscription that we can add you to for FREE, please email Elliot Field at efield@newtonmedia.co.uk or Adrian Tapping at atapping@newtonmedia.co.uk