A US regulatory task force has approved measures that would significantly reduce the amount of collateral that foreign reinsurers must provide in order to do business in the US, according to the International Underwriting Association (IUA).
Current rules require non-US reinsurers to post collateral equivalent to 100% of their potential liabilities arising from any business they write in America. The IUA estimates that, as a result, $50 billion is tied up in letters of credit, trust funds and other financial instruments.
European industry bodies such as the IUA and Lloyd's of London have been campaigning for years for the requirement to be reviewed, arguing that the 100% rule is based on geography not solvency and is hindering competition in the US market.
In December 2006, the US National Association of Insurance Commissioners (NAIC), which represents insurance regulators from the 50 states, the District of Columbia and the five US territories, announced a review of the regulation of reinsurance risk.
This week, the NAIC's Reinsurance Task Force is believed to have approved a framework that bases collateral requirements on the ratings given to individual companies according to their financial strength. Foreign reinsurers given the highest ratings would only have to provide collateral equal to 10% of gross liabilities.
The framework would also modernise the regulatory regime for US insurers and includes provisions for a single licence that would be recognised across all US states.
Dave Matcham, Chief Executive of the IUA, commented: “This agreement is a first, important step towards the introduction of a modern, more efficient and fairer system of reinsurance regulation. It will eliminate unnecessary costs and allow a better deal for US cedents buying reinsurance cover."
“It is entirely correct that any collateral requirement must be based on a firm’s financial solvency, and not merely its geographical location," he said. "The NAIC’s Reinsurance Task Force has demonstrated outstanding leadership in adopting a more forward-looking approach to reinsurance regulation. Its plan for change is in tune both with the global character of our industry and the methods adopted by other progressive regulators around the world.”
A final decision has not yet been made. The NAIC will vote on the proposed framework in December.