What are
US credit for insurance laws?
Forty year old regulations, requiring non-US reinsurers to post collateral equivalent to the full liability of every claim they receive, as well as to maintain a provision for future claims, regardless of what reinsurance they have in place to meet valid claims.
Why were the laws enacted?
Presumably because of an outdated perception of the greater risk posed by non-US reinsurers and need for the US to regulate them. Today, in addition to reinsurers meeting their own prudential supervision standards there are tried and tested cross-border methods (including rating agencies) to assess the financial strength of global reinsurers.
What is the effect of the laws on international insurers?
The requirements of the laws tie up large amounts of capital, making it expensive to do business in the US.
And on the US market?
The credit for reinsurance laws artificially restrict capacity, pushing up the cost of reinsurance and so, indirectly, driving up the cost of insurance premiums for businesses and consumers in the US.
Which other major insurance markets operate such rules?
Neither the markets in London, Zurich, Bermuda, Munich or Tokyo require such collateral. The vast majority of the international insurance industry is operated without collateral requirements.
What’s the UK government’s view?
According to Tony Blair, the treatment of international reinsurers in the US “is manifestly unfair and increasingly anomalous in the light of the strength of our bilateral (US/UK) relationship.”
Who thinks the credit for reinsurance laws should change?
A large body of opinion made up of industry players, regulators and lawmakers in the US and around the world as well as prominent independent voices such as Standard & Poor’s.
Who is in favour of retaining these laws?
Certain US reinsurers and certain cedants but by no means all.
What’s the latest news?
Following the positive vote at the December NAIC meeting, the Reinsurance Task Force (E Committee) adopted two new Charges. Firstly, to develop a risk based evaluation process for purposes of collateral recalibration as part of implementation of the Risk Evaluation Office (REO) Proposal. The second Charge is considerably broader, requesting the RITF to “consider the design of a revised U.S. reinsurance regulatory framework".
What is the REO and how will it work?
The REO will be an organization, facilitated by state insurance regulators that will execute procedures for rating the financial strength and operating integrity of reinsurers and based on the outcome of the evaluation, assign a rating to each reinsurer.
Ratings will be affirmed/modified through periodic reviews by the REO. Analysis will incorporate the reinsurer’s financial strength ratings assigned by nationally recognized statistical rating organizations, operating integrity, business operations, claims paying history, management expertise and overall performance of reinsurers in assigning ratings. The ratings are split into six bands ranging from zero (rating: REO 1) to 100% (rating: REO 6), in 20% increments and any collateral requirements will then be based on the rating determined by the REO.
What does this mean for Lloyd’s?
Under the proposal Lloyd’s be rated REO 3 and collateral reduced to 40% from the current 100%.
What is Lloyd’s view on the REO?
Although, Lloyd’s welcomes the formal recognition of the need to reform the credit for reinsurance law, the REO proposal is not geographically agnostic. It discriminates against foreign reinsurers in favour of strong US reinsurers. Any US reinsurer rated REO 1, REO 2 or REO 3, will not have to post any collateral. Lloyd’s feel that the REO proposal should be amended to treat strong foreign reinsurers and US reinsurers equally.
I’d like to find out more.
Email: reinsurancecollateral@lloyds.com.
