Citing Inconsistent Implementation, Federal Insurance Office Contemplates Pre-Emption of State Reinsurance Collateral Requirements

Lloyd’s, the Association of Bermuda Insurers and Reinsurers, and the Property Casualty Insurers Association of America were among 30 domestic and international respondents to a Federal Insurance Office (FIO) 2014 request for comment on the scope of the global reinsurance market.  The feedback received was used to create a statutory report released on December 31, 2014 pursuant to the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 entitled the“Breadth and Scope of the Global Reinsurance Market and the Critical Role Such Market Plays in Supporting Insurance in the United States” (“Report”). 

Citing pressure from overseas insurers and the importance of international reinsurers to the U.S. insurance industry, particularly in the wake of catastrophes, the FIO indicated in its Report that it may consider pre-empting state reinsurance collateral requirements, which it described as inconsistent to date.  The move would come by means of including the requirements in covered agreements negotiated by the U.S. Trade Representative.

In their comments, U.S. reinsurers argued that collateral requirements restrict the ability to manage risk globally, restrict reinsurance capacity in the United States, and thus increase costs for U.S. consumers.  The FIO noted that non-U.S. reinsurers account for 62 percent or more of reinsurance premiums ceded by U.S.-based insurers.

The FIO’s benchmark December 2013 report on “How to Modernize and Improve the System of Insurance Regulation in the United States” called for such reform to afford ” . . . nationally uniform treatment of reinsurers with respect to collateral requirements.”  That report explained the FIO’s concerns with implementation of the amended National Association of Insurance Commissioners (“NAIC”) Reinsurance Collateral Model Law.  Specifically:

• A determination by one state within the United States of the adequacy or the equivalence of regulation by another nation would not bind other states, possibly resulting in frustration of broader U.S. economic or regulatory policy.
• The amended NAIC Model Law depends too heavily upon assessments of a reinsurer’s creditworthiness by credit rating agencies. A preferable approach would be for other risk-based, empirical factors to be the basis upon which to determine the creditworthiness of the reinsurer.
• Nineteen additional states have now adopted some form of collateral reform based on the amended Model Law; among those states, however, authorization to accept less than 100 percent collateral has not been uniform in the structure or implementation of the state law requirements.

Efforts to reform reinsurance collateral have been under consideration by the NAIC since 2001, the FIO reminded.

Along with describing the global reinsurance market, the Report also recounts the history of reinsurance as an industry.

To read the complete 47-page Report, click here.

To access the comments submitted in response to the FIO’s June 2014 request, click here.

Should you have any comments or questions, please contact Colodny Fass.

Click here to follow Colodny Fass on Twitter (@ColodnyFassLaw)

To unsubscribe from this newsletter, please send an email to Brooke Ellis at bellis@colodnyfass.com.