Disparity between insurance regulatory regimes is a key inhibitor to competition and industry growth, particularly in the reinsurance sector. On 29 September 2007, the Reinsurance Task Force of the National Association of Insurance Commissioners (NAIC), which is comprised of the individual state insurance regulators in the US, will discuss proposals to open up the US reinsurance market to non-US reinsurers. This is to be welcomed.
Currently, a US cedant only receives credit for non-US reinsurance if the reinsurer posts collateral equal to 100 per cent of its US technical reserves and is licensed in the cedant’s state.
Under the new proposal, the NAIC will maintain a list of “functionally equivalent” regulatory regimes. A reinsurer regulated in one of those jurisdictions can apply to a single state as a “port of entry”, allowing it to conduct business throughout the US, similar to the EU’s passporting regime. That state will rate the reinsurer (from Class 1 to 5), effectively setting the required collateral. For AAA-rated companies, this could reduce their collateral obligations by up to 40 per cent.
So far, so good. However, US reinsurers will only need to post collateral if they are Class 5, so a BBB-rated US reinsurer needs no collateral, whereas a AAA-rated European one must post 60 per cent. This still presents a massive disparity in the cost of doing business, albeit one that would at least be an improvement on the current position. Additionally, it will remain open to the cedant’s regulator to require additional collateral from the non-US reinsurer so instead of a single application to the port of entry state, a reinsurer will still need dialogue with the regulator in each state that it does business.
The proposals on mutual recognition of regulatory regimes are more appealing. US regulators will only be able to apply those US laws that are necessary, and the “home state” regulator should be relied upon to the greatest extent possible. This brings the US and European positions much closer. One difference still is that the US proposal emphasises consultation and cooperation on many issues, whereas the European model allows the home state regulator exclusive authority.
A cautious welcome should be offered to the NAIC’s proposals then, representing as they do a small step towards a more harmonised global regulatory regime for reinsurers.
Bob Haken is a senior associate at Norton Rose