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Dave Matcham, chief executive of the International Underwriting Association, and chairman of the reinsurance working party for the international committee at the Comite Europeen des Assurances.
Q: Why should state regulators in the United States change their collateral requirements for non-U.S. reinsurers?
A: Gross funding of U.S. liabilities for foreign reinsurers is in the billions of dollars and this is unsustainable. There is a real need for efficient and effective regulation of reinsurance. The current U.S. system is too skewed toward consumer protection and does not allow reinsurers to be cost-effective and competitive enough in the marketplace.
The regulation is also costly and the regulatory burden of compliance in the United States is more than any other jurisdiction that I have come across. Intellectually, you would think that with the elimination of inherent cost, the product would become cheaper. If the regulatory burden is costing money, and those costs reduce, the product should be cheaper.
Also current collateral rules do tie up capital. If that capital were available, then reinsurers would be able to offer more capacity to U.S. cedents. There is a capacity crunch in Florida at the moment and the Florida supervisor is considering a rating proposal to attract more capacity for cedents in the state.
Q: What would European reinsurers like to see U.S. state insurance supervisors change?
A: Assuming there will continue to be a collateral system, we would like to see that collateral required on an as-needed basis. Collateral should be based on risk assessment and not the mailing address of the reinsurer. We would like to avoid one-size-fits-all.
Q: What outcome does the European reinsurance sector expect and what does it think about the ratings solution favored by the National Association of Insurance Commissioners?
A: The rating approach appears to be the focus of U.S. regulators at the moment and that is the outcome that we are expecting. However, we would prefer in the long run that the U.S. cedent [rather than the regulator as proposed by the NAIC in its rating-based approach] takes responsibility for the evaluation of the credit risk of their reinsurer, as is the case with European regulation. But we will go with what we get."
Q: Is the rating approach an amicable compromise for all sides?
A: There has been plenty of opportunity for everyone to make their views [known] as this has been going on for six years. Some proposals have been amended to address the concerns of U.S. insurers and regulators. For example, the rating-based approach calls for a prospective [and not retrospective] change, only affecting the collateral requirements for new policies and not historical policies, that was a concessionas was the introduction of a sliding scale for reducing collateral requirements gradually, rather than straight down to 50% of liabilities as originally hoped for by European reinsurers."
Q: Why is now the right time to seek these changes?
A: The European [Union's] Reinsurance Directive has helped address U.S. concerns over varying levels of regulation in Europe by establishing a single standard of reinsurance regulation in the E.U. More importantly there is a greater awareness and understanding of regulatory regimes and much greater dialog between U.S. and European regulators. And that has built trust. Also in that time we have seen large catastrophes such as 9/11 and Hurricane Katrina: These have shown the value of the non-U.S. reinsurance market.
Q: If collateral requirements are changed, do you see this as the start of more cooperation and ultimately mutual recognition between the U.S. and European regulators in the long term?
A: I do believe that is the case, but not at this stage. The European Commission has commented that this is a priority. And a step by step approach should lead to mutual recognition, and we support that. Cooperation between the U.S. and E.U. regulators is already streets ahead of where it was years ago and at the International Association of Insurance Supervisors; they are working together on standards and guidance. Mutual recognition is the ultimate goal.