Dave Matcham

NAIC progress but the real action is in Washington

Last weekend’s Spring NAIC meeting heard the first public progress report of the implementation of the US reinsurance regulatory framework. Whilst there were no papers available, they are promised within 10 days, Commissioner Goldman (NJ) detailed the “roadmap” for this year.

It appears that Congress is exerting pressure, meaning that the draft language to implement the framework via federal enabling legislation, has to be ready in a matter of weeks. This timetable gives industry very little time to comment and regulators little time to respond before the final language is delivered to Congress.

The roadmap confirmed that the vehicle in the House of Representatives will be the existing and resubmitted Surplus Lines Bill although the actual implementation will be first seen via a Senate Version of this Bill. This is a necessary process, indeed both House & Senate will confer down the line, but the Senate first needs to find a sponsor and introduce a Bill.

However, not surprisingly the priority of Congress is whether there will be a systemic risk regulator. Specific reinsurance reform is not on the radar and yet the opportunity to do both remains viable. As I sit writing this blog in an airport lounge the TV screens are dominated by commentary on how to respond to the financial crisis. Whilst this is mainly banking focused, insurance gets regular mentions normally with AIG in the same sentence.

In summary, there appears to be progress in drafting a Bill to implement the new reinsurance framework but this is only an introductory step with much work ahead of us. Congress is clearly interested in systematic risk but are they willing to enact other specific reform? I think this is less clear for 2009 at the moment.

The First Signs of US Regulatory Reform this Year

The first signs of Congressional activity affecting business in London appears to be the re-introduction of legislation which would standardise the regulation of surplus lines business and even reinsurance.

Given the speculation of what we might expect, this development, which emanates from the House Financial Services Committee, is welcome. Earlier versions of this Bill received broad support from both industry and Congress but failed to reach the President’s desk for signature for various reasons. Other Bills seeking to introduce Federal options to regulate insurance and, of course, overall financial turmoil, served to push the surplus lines bill onto the back-burner.

The London market writes substantial amounts of surplus lines business which by its very nature is often hard to place within the local US market. To write this business London insurers have to currently comply with individual regulatory requirements on a State by State basis. The new Bill would provide a uniform and consistent framework of surplus lines regulation at a State level. It could even, for example, create regulatory harmonisation which would allow 50-State surplus lines eligibility to be obtained by IUA member companies by merely being approved in a single State.

Interestingly, the Bill also has a reinsurance section. This does not on the face of it seem a natural fit and is currently drafted to introduce certain regulatory consistency for US reinsurers. This section however could provide a medium for the Reinsurance Task Force’s new reinsurance framework to be implemented. This would however require substantial re-drafting of the current re-introduced Bill’s language to cater for non-US reinsurers’ interests.

Many were predicting that this Bill would be re-introduced given its previous wide-spread support. It will be interesting to see how much reliance the NAIC will be placing on it at their forthcoming Spring meeting.

Success in Texas But Just the End of the Beginning

After more than 10 years of lobbying, in a host of US cities from East to West Coast, one could have not predicted that it would all come down to a vote in Grapevine, Texas. Grapevine is a suburb of Dallas (I think!) closer to the airport than the City but was chosen to host the winter NAIC meeting last weekend. In the Gaylord Texan Hotel, bedecked in Christmas decorations, close to Santa’s grotto, the highest level of the NAIC voted overwhelmingly for a new reinsurance regulatory framework.

This landmark event comprises a set of reform proposals which now need to be implemented across the States. The reforms introduce concepts never before seen in the US, concepts which have been constantly challenged by certain parties who have resisted necessary regulatory reform including any reduction in the current 100% gross collateral rules, which is clearly detrimental to clients and reinsurers alike.

Once enacted this framework will allow US reinsurers to obtain a single state license covering all 50 States, overseas jurisdictions to be recognised by a new Reinsurance Supervisory Review Department and reinsurers in such jurisdictions to apply for a Port of Entry License and collateral levels based on their strength and security. Some reinsurers have already analysed the effect of these reforms and estimated that collateral reductions of tens of millions of dollars could be achieved on a prospective basis.

The NAIC should be applauded for their leadership in striking a balance between political and commercial sensitivities. It has however taken too long to get to this point but at least we have got there. Implementation is now the main focus, it seems like we are at least at the end of the beginning.

The incoming NAIC President’s remarks are somewhat sobering. He comments that “actual implementation is years away”. To take effect, the framework requires federal enabling legislation to allow individual states to act as port-of-entry reinsurance jurisdictions. At least the NAIC has confirmed that winning federal approval will be a top priority on the NAIC’s legislative agenda for 2009. IUA sincerely hopes that this new framework can be implemented during 2009.

Reinsurance Regulatory Reform - A Cause for Optimism

The next few weeks could see both positive and negative developments for the reinsurance industry. On the positive side, the NAIC’s Reinsurance Task Force is now in drafting mode following the recent hearing in New York at which further substantive industry evidence was presented on their reinsurance collateral reform initiative. Conversely, we are in the midst of the US hurricane season and whilst neither Hurricane Dolly or Edouard seemed to have caused major damage or disruption, they are clear warning signs of the potential losses which could fall to the reinsurance industry. Some commentators have remarked that the mid-size catastrophes are barely denting catastrophe reinsurers and that there are various reasons for this, not least improved practices by primary carriers. This still leaves no room for complacency and anything which can place reinsurers in a better preparatory position such as an improved regulatory framework would be welcomed.

Having attended the recent Hearing, the London market should be pleased that signs of collateral reform are becoming crystal clear. The final version of the new credit for reinsurance law should see considerably reduced collateral requirements and a more streamlined regulatory environment. US regulators must however strike a clear balance between political sensitivities and regulatory policy decisions. This could mean that the new law which is enacted is treated as a transitional version before the optimal system of mutual recognition is apparent.

Such comments could only be dreamed of a few years ago. The regulators’ resolve is clear and we should see a much-improved system within a short space of time. Implementation will be key and talk of federal assistance to this end, whilst a little surprising, is probably wholly realistic.

"Interesting Mr Bond"

Two important events occur in the next few days. Tonight IUA hosts its summer party for members, press and other contacts. Next week the NAIC’s Reinsurance Task Force holds an interim meeting to substantially finalise the drafting and comment period on their amended credit for reinsurance requirements. Both events will be exciting – our party has a James Bond theme with our very own Bond villain lookalike; the NAIC meeting should hopefully result in final language which substantially removes existing villainous collateral requirements and also creates a better regulatory framework for reinsurance.

So, how many Bond references can I get into the summary of next week’s meeting content. The current proposal has much to commend it but we can’t yet say that “nobody does it better”! It still has elements of dual regulation and unnecessary inefficiency. The non US reinsurance market has been “shaken” by the rising collateral levels but the state regulations have now been “stirred” into action. Reform is now a question of when not if – hopefully early 2009 once the NAIC has completed its governance process during 2008. Unlike diamonds, 100% collateral is not forever and despite persistent cedent opposition, we were right to “never say never” that change would occur.

Reinsurance is a global business; one might say a “universal export”. The current proposal allows for a non US jurisdiction to be recognised as equivalent but still insists on a second pair of eyes via a port of entry state application. We would argue that this creates inefficiency and if it prevails it should be a point of registration not regulation. Port of entry states must be satisfied about the effectiveness of a foreign regulator. However, primary regulatory oversight by the foreign jurisdiction must be “for their eyes only”.

Also the new regime currently only applies to pure reinsurers, whereas much US business is written by companies who write insurance and reinsurance. We will be arguing for a widening of this provision to cover all reinsurers of US business.

Lastly, the collateral levels are still different for US and non US reinsurers, albeit the gap has closed. If a jurisdiction is duly recognised, its reinsurers should be treated equally.

This is a very short summary of our submission to the Task Force. Next week’s meeting will be critical to the long term policy thinking of NAIC. Luckily the drafting is complete and will not be an issue tomorrow morning – post Bond evening.

Help From the Big Guns

I believe there was a film released a few years ago called Collateral Damage starring Arnold Schwarzenegger, so how fitting that the Chairman of Lloyd’s should look to Arnie for assistance in our continued pursuit of reduced collateral requirements in the US reinsurance regulatory arena.  Arnie is currently Governor of California and if his State were to follow the lead of New York and Florida in proposing their own modernised credit for reinsurance rules, it would send another clear signal to the NAIC that change was both necessary and urgent.

Rather than Arnie’s stock phrase of “I’ll be back”, over the last few years it was essential that representatives of the non-US reinsurers were always “back” at NAIC meetings as the collateral debate heated up for fear that the issue would be dropped by Regulators or drowned out by dissenting voices from the US insurance community. 

Fortunately our tenacity and intellectual arguments prevailed such that not only were proposals introduced to reduce collateral levels for IUA members and Lloyd’s but the policy discussion actually expanded for the benefit of US reinsurers as well through wide-ranging concepts to create a single State regime with mutual recognition powers to other jurisdictions.  These are certainly the key provisions of the current NAIC thinking and indeed the recently US Treasury blueprint. 

Arnie certainly gave the impression that he wishes to work with the London Market and hopefully this message will be conveyed to California’s Commissioner of Insurance.  The influence of the larger States within the NAIC is not to be underestimated which should cause us to be optimistic that the NAIC can finish its work this year. 

US Treasury - Federal Intervention Needed on Collateral

Last week’s NAIC meeting was more lively than most.  First, we heard of the latest, albeit slow, progress to advance necessary reforms to the onerous credit for reinsurance regulations.  However the next day most eyes and ears were focused on blackberries and televisions as the content of the US Treasury’s blueprint to address a modern financial regulatory structure was released.

The US Treasury has been an interested observer in the long-running attempt by IUA and others to reduce collateral barriers.  The US Treasury has now published a 218 page blueprint which contains 10 pages on the present state of the US regulatory system – and it doesn’t make good reading for the current regime.  It alleges failings in the State system, eg. a lack of uniformity across State insurance regulation leading to inefficiencies, undue burdens and competitive issues.

From our international perspective the blueprint laments that no regulatory official at the Federal level can speak for the interests of US regulation of insurers and reinsurers.  It specifically cites reinsurance collateral as an issue where Federal intervention is imperative because of the trans-national nature of reinsurance.

The issue of an Optional Federal Charter (OFC) also gets much coverage.  Not surprisingly the NAIC has been quick to defend its progress in State regulation – however on our specific issue of modernising the collateral system, we have been debating this with NAIC for 10 years and still, it is set at 100% gross liabilities.

IUA has long believed that a single regulator within the US (at State or Federal level) is essential.  In addition this entity must have the power to recognise the regulatory practices of non-US jurisdictions.

The US Treasury blueprint is a significant development.  Both OFC and international reinsurance reforms are now being discussed in a new context.  The NAIC still has the opportunity to eliminate collateral barriers but time seems to be running short. 

Collateral Damage

The London market writes a considerable amount of US reinsurance business despite onerous long-standing and unsustainable 100% gross funding reinsurance rules.  The market’s claims response to man-made or natural catastrophes in the US has been superb and, thankfully, at last, after many years of lobbying by IUA and other interested parties, US regulators have turned the corner and look like modernising their reinsurance regulations to reflect the global nature of these protections.

US regulators both at NAIC and big State level (New York/Florida) will this year be drafting and hopefully introducing reinsurance regulations which include significant reductions in collateral levels for new claims on reinsurance business.  The current “protectionist, jingoistic, archaic” (not my words) rules would be changed to impose collateral only where such additional provision is thought appropriate.

All of this is being considered in the context of wider-reaching regulatory proposals in the US.  A shared sense of urgency about regulatory modernisation is now apparent amongst US regulators.  The current regulation on a State-by-State basis is hugely inefficient and expensive.  Proposals made by US trade associations to introduce a home State regulator for US reinsurers must make sense.

Coupled with equivalence standards for overseas regulators, single State options should validate mutual recognition and trust between regulators.  And, in our increasingly global regulatory climate this is both necessary and real progress.