by ~ John Love (Email) (Web Site)
Daniel Schelp (Managing Counsel – NAIC Reinsurance Task Force), Chris Finney (Edwards Wildman Palmer – London), and Barry Leigh Weissman (Edwards Wildman Palmer – Los Angeles and New York) compared and contrasted current regulatory efforts in the U.S. and the E.U./U.K., focusing heavily on collateral requirements. Led by moderator John Love (Robins, Kaplan, Miller & Ciresi, L.L.P.), the panel began with a description of the alphabet soup of insurance-related regulatory bodies: the National Association of Insurance Commissioners (“NAIC”), the Federal Insurance Office (“FIO”), the European Insurance and Occupational Pensions Authority (“EIOPA”), the Financial Services Authority (“FSA”), and the International Association of Insurance Supervisors (“IAIS”). In the U.S., insurers and reinsurers are subject to regulation by the Insurance Commissioner/Superintendent in each of the 50 states. The NAIC facilitates coordination of these 50 regulatory authorities and proposes model acts and regulations. The FIO remains in its infancy, having only two or three full time people on its staff. The FIO was established in 2010 to monitor all aspects of the insurance industry and identify issues or gaps in regulations that could contribute to a systemic crisis. It is not a regulator, but was designed to coordinate and develop federal policy.
In the E.U., the goal is a more unified regulation of insurers and reinsurers throughout its 27 member states. The European Parliament, the Council of the European Union, and the European Commission all play a role in the regulation of insurers and reinsurers. EIOPA advises the European Parliament and the Council of the European Union on regulatory efforts such as Solvency II. Supervision, implementation, and enforcement of such regulations are carried out in large part by bodies within each of the member states, such as the FSA in the U.K.
Two of the hottest topics in both the E.U. and the U.S. are determining whether insurers/reinsurers have properly assessed and managed all of the risks to which they are exposed, and the collateral requirements that reinsurers must meet in order for insurers to obtain full credit for reinsurance purchased. These topics are intertwined. The greater confidence a regulator has that a reinsurer properly assesses and manages its risks and is property capitalized for them, the more willing the regulator will be to lower or totally dispense with any collateral requirement. Historically, regulators in the U.S. have been far more insistent that foreign reinsurers post collateral before giving a U.S. insurer credit for that reinsurance. Regulators often require 100% collateral from a foreign reinsurer. Currently, the NAIC is working with regulators in the various states to lower the collateral requirements for reinsurers meeting certain standards. The NAIC adopted the Revised Credit for Reinsurance Model Law and Regulation in November 2011. The Model Law and Regulation allows reinsurers meeting certain standards to be certified, and then rated into one of five categories that allow anywhere from 100% credit to no credit to be given for reinsurance that the reinsurer provides without any collateral. These ratings are affected not only by the reinsurer’s financial strength but also by its business practices and reputation for prompt payment of claims. At the same time, the Nonadmitted and Reinsurance Reform Act is being implemented. This Act was enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act and became effective July 21, 2011. Many states are still in the process of conforming their regulations to this statute, which gives a reinsurer’s state of domicile the power to be solely responsible for regulating that reinsurer’s financial solvency.
In the E.U. these issues are being addressed through Solvency II, which contains three “pillars”:
1. Quantitative requirements such as the amount of the reinsurer’s capital;
2. Governance and risk management requirements; and
3. Transparency and disclosure requirements.
Implementation of Solvency II could dramatically affect the ability of European insurers to take credit for reinsurance purchased from reinsurers in the U.S. and other parts of the world. Under Solvency II, European insurers can take full credit for reinsurance only if the reinsurers qualify under Solvency II or equivalent regulations in the reinsurer’s home country. There are serious questions as to whether current regulations in the U.S. will be deemed “equivalent” to Solvency II. Just when Solvency II and its equivalency standard will be implemented is open to speculation. At the time of the Symposium, the official projected date remained January 1, 2014, but the panelists questioned whether this was realistic. A vote of the European Parliament on the Omnibus II Directive, which must come before the implementation of Solvency II, was scheduled for November 20, 2012. One day after the Symposium, this vote was delayed to March 11, 2013. It now appears that Solvency II may not be implemented until 2015 or 2016. Any delay presents opportunities for U.S. and E.U. regulators to harmonize their systems and minimize disruption in the reinsurance marketplace, but only time will tell how successful those efforts will be.
John Love is a partner in the Boston office of Robins, Kaplan, Miller & Ciresi, L.L.P. He may be reached at firstname.lastname@example.org.
© 2012 Robins, Kaplan, Miller & Ciresi, L.L.P. All rights reserved.
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