Regulator Calls Domestic Reins. Capital Requirements Draconian

NU Online News Service, Aug. 16, 1:11 p.m. EDT

SEATTLE–A regulator called the risk-based capital requirements for domestic reinsurers "draconian" after representatives from the Reinsurance Association of America said their obligations outweigh the rest of the industry's commitments.

Steve Johnson, a regulator from Pennsylvania, said that "something needs to be done and done soon," and the Property Risk-based Capital Working Group of the National Association of Insurance Commissioners (NAIC) needs to uncover why that segment of the industry has had to put up significantly more capital than others.

His comments came during the NAIC's Capital Adequacy Task Force meeting here on Sunday at the association's summer meeting.

Lou Felice, insurance regulator from New York, acting for the task force chairman, New York Insurance Superintendent James J. Wrynn, said the task of the group over the next year is to examine how risk-based capital needs to be recalibrated generally. However, the task force agreed that action does need to be taken on reinsurance quickly, preferably before 2011.

The move came after Joseph B. Sieverling and W. Scott Williamson from the Reinsurance Association of America made a presentation to the task force that they said illustrates that the methodology used by the American Academy of Actuaries (AAA) is fundamentally flawed and needs to be reassessed.

In their presentation, they contended that currently their RBC requirements are too high, requiring $3.68 in RBC capital for every $1 in net premium liability.

An AAA-proposed recalibration would prove to be excessive, they continued, raising the RBC requirement to $7.73 for every $1 in net premium liability.

The representatives also contend that in making the calculations, the AAA failed to include the major reinsurance carriers, instead relying on Farm bureaus and small reinsurance entities for its analysis.

Craig Hanna, a representative with AAA, disagreed with RAA's analysis, noting that the AAA's conclusion was arrived at after much work and research. He also took issue with comments that the AAA's work lacked transparency and did not include commentary from interested parties, saying the AAA invited the views of many experts and made their work publicly available as it progressed.