On December 31, 2014, the Federal Insurance Office (FIO) of the US Department of the Treasury issued its report regarding the global reinsurance market and its relationship with the domestic US insurance industry (the Report). FIO was established under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), which also mandated that FIO prepare a report regarding reinsurance. The Report is the culmination of work undertaken by FIO since 2012 including consultations with key stakeholders.
The Report is primarily descriptive. It includes a detailed description of the global reinsurance market and players, the role and importance of reinsurance for the US insurance industry, the regulation of reinsurance in the United States (which is primarily by the states although federal law also addresses certain aspects), and current regulatory proposals and ongoing market changes for reinsurance. The United States remains the largest single- country insurance market in the world, and the Report notes that a majority of unaffiliated reinsurance purchased by US insurers is obtained from non-US reinsurers.
Until recently, all non-US reinsurers that are not licensed in the United States have been required to post 100% collateral for reinsurance assumed from US insurers. As the Report describes, in 2011 the National Association of Insurance Commissioners (NAIC) adopted a revised “model” law and regulation for credit for reinsurance, which allow US insurers to receive statutory accounting credit for reinsurance ceded to highly-rated non-US reinsurers posting less than 100% collateral provided that the reinsurers meet certain criteria and become certified (see the article regarding the NAIC Fall 2014 National Meeting above for additional discussion regarding such changes). However, the Report concludes that that reinsurance collateral reforms have not been adopted yet by most of the states and have not been adopted or implemented uniformly in those states that have adopted the changes. The Report identifies this as a significant issue for the US insurance industry. Non-US reinsurers have long argued that reinsurance collateral requirements imposed by state regulators restrict the ability to manage risk globally, restrict reinsurance capacity in the United States generally, and thus increase insurance costs for US consumers.
On this issue, building on the recommendations and discussions that were included in FIO’s December 2013 report on modernization of insurance regulation in the United States, this Report confirms that the US Treasury, together with the United States Trade Representative (USTR), is considering whether to conclude “covered agreements” with one or more foreign governments, authorities and/or regulatory entities providing for uniform reinsurance collateral standards when US insurers reinsure risks with non-US reinsurers regulated by those foreign signatories to such agreements. If the United States enters into such covered agreements, state laws that are inconsistent with the covered agreements would likely be superseded.
It remains to be seen whether the US Treasury and the USTR will push forward with covered agreements. Such a move is generally opposed by the NAIC and most state insurance regulators in favor of state reinsurance collateral reforms. However, it is an approach that would be favored by many non-US reinsurers and non-US regulators. Insurance regulation in the United States has historically been and continues to be almost exclusively delegated to the states, but covered agreements would represent a further “federalization” of insurance regulation in the United States.