London Insurer Urges Regulation Change

By E.E. Mazier

NU Online News Service, June 17, 11:01 a.m.EST?A prominent London insurance professional suspectsthat the fear of competition is behind industry opposition to aproposal that would make it easier for non-U.S. reinsurers to dobusiness here.

His comments were brought on by discussions at the SummerNational Meeting of the National Association of InsuranceCommissioners, held in Philadelphia.

The NAIC Reinsurance Task Force debated a proposal to reduce the100 percent collateralization requirements for the U.S. liabilitiesof alien reinsurers.

Under the proposal, an NAIC white list would be created ofapproved reinsurers who would have to fund only 50 percent of theirliabilities for unaffiliated risks and 30 percent foraffiliates.

The proposal is the brainchild of the International UnderwritingAssociation of London and the Comit? Europ?en des Assurances, basedin Paris.

The Task Force agreed to create a new working group to reviewthe proposal, and its members acknowledged that they need to learnmore about alien reinsurers.

IUA chairman Stephen Cane, who is also the chief executiveofficer of Alea London, told National Underwriter he would"love to think" the collateralization issue is purely a securityand solvency issue that opponents of liberalization are concernedabout, but "I suspect there's an element of competition fear."

Mr. Crane said the Philadelphia hearings were the regulators'first public acknowledgement that trade, including in the area ofreinsurance, is headed toward liberalization and globalization.

It also indicated an awareness this is an issue they should takemore seriously, he said.

As explained by Mr. Cane, currently a non-U.S. reinsurer mustestablish a trust fund in the U.S. that is funded at 100 percent ofits gross reinsurance liabilities, "plus an extra buffer" of $20million.

Alternatively, the alien reinsurer must collateralize theliability by a letter of credit for each individual cedant, Mr.Cane continued. By and large, there are no similar barriers forU.S. companies in the United Kingdom or in European Unioncountries, he said.

He said that the problem with setting up 100 percent trust fundsis that "a significant amount of money" that cannot be touched istied up and removed from a reinsurer's "everyday operations."

At the same time, "reinsurance relies on spread, with thepremiums collected from one company used to pay claims to anothercompany, Mr. Cane said.

He noted that the IUA and CEA have long argued that competitionis not an issue. This is because U.S. ceding companies tend topurposely devise reinsurance programs that place part of thereinsurance in domestic markets and the rest in foreignmarkets.

Because the risk is "fairly evenly spread" between the U.S. andthe global markets, Mr. Cane does not think that alien reinsurerswill stampede to the United States just because of a concession inthe collateralization requirements.

"Frankly, if everyone operated on the U.S. system it would gumup the works eventually in that no one would get reinsurance," Mr.Cane said.