Non-US reinsurers have to establish collateral for all US claims the moment they arise, as well as maintaining reserves for all future claims; this in addition to paying current claims and purchasing their own reinsurance protection from other sources.
In effect non-US reinsurers maintaining the collateral in a trust fund may initially have to fund the same risk twice, until the trust fund is reassessed at the end of the next quarter. This is inefficient and capital-intensive. US reinsurers suffer no such strictures – they can reinsure in the US, or in any other major international reinsurance market, without posting collateral against their liabilities. The US is the only major market that demands collateral – and then only effectively from non-US insurers.
A level playing field?
These US credit for reinsurance laws treat all non-US reinsurers as unacceptable credit risks, regardless of their financial strength and track record. At the same time they regard all US reinsurers as good credit risks, regardless of their financial strength and track record.
The effect of these rules is that Lloyd’s, rated A (Excellent) by AM Best is perceived a worse risk than any and every US reinsurer, whatever their credit rating.
The vast majority of the international insurance industry believes that these laws are outdated and anti-competitive. The world has changed: reinsurance is now a global industry with global standards and intense cross-border scrutiny of financial strength.
It’s time to replace these antiquated laws with regulation that reflects the realities of today’s global insurance industry. After more than six years of debate, US insurance regulators are nearer than ever to reaching a decision on how to modernize the rules governing reinsurance in the United States.
