State regulation of the U.S. insurance industry is "inefficient and costly," the American Insurance Association says in a new comment letter.

The AIA comments were contained in an answer to the Federal Insurance Office's request for industry input on a forthcoming study of the breadth and scope of the global-reinsurance market and the critical role such markets play in supporting insurance in the United States.

The letter was signed by Steven A. Bennett, AIA associate general counsel, and J. Stephen ("Stef") Zielezienski, senior vice president & general counsel.

The AIA letter lauds the states for not imposing pricing and other contractual terms and conditions on the U.S. insurance market, other than certain minimum standards such as a required transfer of risk and standard insolvency clause.

But it adds, "The nature of the state-based regulatory system results in a patchwork of standards."

The letter says that even when the states signal their intent to adopt a single standard (via an National Association of Insurance Commissioners' or National Conference of Insurance Legislators' model), the standard "is prone to inconsistent implementation and enforcement across the states."

The letter says the lack of efficiency and added costs in complying with the state-based regulatory system is demonstrated by the fact that not one U.S.-domiciled reinsurer has been formed during the last two decades, except for captives.

"New reinsurers are typically formed outside of the U.S. in jurisdictions such as Bermuda, Switzerland or Ireland, where the reinsurer need not be subject to potentially inconsistent state-by-state regulation and licensing," the letter said.

AIA officials say they are vigorously supporting efforts to get as many states as possible to enact a model law reducing and making uniform collateral requirements for foreign reinsurers doing business in the U.S.

AIA discusses in detail the importance of the Model Credit for Reinsurance Law and a companion model regulation adopted by the NAIC late last year.

The letter says 10 states have so far adopted the model law: Florida, New York, New Jersey, Pennsylvania, Indiana, Georgia, Virginia, Connecticut, Louisiana and Delaware.

The letter notes that, prior to adoption of the NAIC models, reinsurers essentially would receive credit for reinsurance if either the reinsurance was obtained from a U.S. reinsurer or if the foreign reinsurer posted 100 percent collateral to cover expected losses under the reinsurance agreement.

"It is critical that the collateral reform laws and regulations be enacted and adopted consistent with the models so as not to undermine the years of negotiation and compromise that created an acceptable balance among all the different parties and interests, promoting free competition and open markets and furthering the solvency of U.S. insurers," the letter states.

TRIA AND STATE CATASTROPHE FUNDS

In the letter, AIA officials also support the Terrorist Risk Insurance Act, which expires in 2015.

A hearing on the future of TRIA is tentatively scheduled to be held by the House Financial Services Committee's Insurance Subcommittee Sept. 11.

But the letter opposes creation of state catastrophe risk reinsurance programs and federal backing for those facilities.

"While some insurance regulators and insurance companies promote adoption and growth of state catastrophe reinsurance funds and enactment of a federal program to reinsure those state programs, AIA believes that new government programs are no panacea for natural catastrophe risk," AIA officials say.

Moreover, the letter says, "Despite recent large catastrophe losses, private sector capacity for dealing with natural disasters has grown and is sufficient to spread and manage the risk."

It adds that, "There is no scarcity of capacity. Even state catastrophe funds have secured significant amounts of private reinsurance coverage.

Special Reports /

AIA Blasts State Regulation as 'Inefficient and Costly' in Letter to FIO

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