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The current reinsurance collateral debate has been characterized as an effort to "level the playing field" for non-U.S. reinsurers.
But a level field already exists. Foreign reinsurers can forgo the 100% collateral rule by becoming admitted reinsurers. They need only submit to tri-annual audits and meet U.S. capital and surplus requirements.
Solvency, not free trade, is the heart of the collateral question. U.S. regulators are nonetheless being pressured to implement measures that could lead to "lawful insolvencies" and an exponential shortfall of funds on the balance sheets of U.S. insurers.
The National Assn. of Insurance Commissioners Reinsurance Task Force's response to this Lloyd's of London-led, pan-European lobbying effort--a plan to establish a new regulatory bureaucracy to rank nonadmitted reinsurers--has fundamental shortcomings. The proposed Reinsurance Evaluation Office:
Lloyd's is the prime mover and the least transparent participant in the effort to emasculate collateral rules. Yet nothing in the proposal requires an accurate portrayal of Lloyd's syndicates' financial condition to U.S. cedents, their policyholders or U.S. regulators.
Perhaps this is the result of Lloyd's seven-plus years lobbying the NAIC to relax U.S. collateral rules, and orchestrating the development of a straw-man U.K. insurance regulator.
Fact or fiction
The following points are offered to help sort out what is truth and what is fiction in the push to weaken trust fund collateral requirements for overseas reinsurers, and especially Lloyd's:
"Effective on an emergency basis since 9/15/01, and adopted on a permanent basis effective 4/9/03, the 8th Amendment to Regulation 20 (11 NYCRR 125)" gives the New York superintendent discretion to grant U.S. cedents full credit for reinsurance from Lloyd's and others, whether or not those entities' U.S. reinsurance trust fund balances meet or exceed their outstanding liabilities.
c A careful reading of the Financial Services and Market Act 2000 and its subsequent modifications, though, shows the FSA's remit is merely to ensure that Lloyd's ruling council has guidelines for overseeing the agents, brokers and underwriters at Lloyd's. Rhetoric aside, the FSA delegates regulation of Lloyd's back to the marketplace itself.
Months after Katrina, Rita and Wilma ravaged the Gulf Coast, Lloyd's took its new U.K. GAAP accounting for its inaugural spin. Despite $15.06 billion in gross losses in 2005, and with $10.1 billion in reinsurance outstanding, Lloyd's declared by April 2006 that it had virtually broken even in 2005 (BI, April 10, "Lloyd's bent, not broken by '05 storms"). According to Lloyd's, its nominal net loss figure--announced prior to paying the bulk of claims or recovering reinsurance--"proved the resilience of the 300-year-old market."
Verifying reinsurers' solvency, not their competitiveness, is what best serves the interests of U.S. ceding insurers and their policyholders, not to mention their shareholders. No alternative to the current U.S. reinsurance regulatory regimen--admitted and audited under U.S. standards, or nonadmitted but fully collateralized--has been proposed that brings more benefit than risk to U.S. cedents and their policyholders.
Jack Shettle Sr. is chairman of the American Names Assn. in Rancho Santa Fe, Calif. He has 43 years' experience as an insurance and reinsurance broker, company executive and has served as an insurance/reinsurance consultant since 1996.
Jeffrey C. Peterson is the executive director of the American Names Assn., a post he has held for the past 12 years.