Reinsurance Focus

The International Association of Insurance Supervisors recently published its
2011 report on Insurance and Financial Stability. The paper presented a supervisory perspective on the insurance and reinsurance industry focusing on financial stability issues. Concerning reinsurance, the paper analyzed the nature of the industry itself, its connection to the insurance industry more generally, and the level of inter- and intra-connectedness among companies. Notably, the IAIS concludes that (1) evidence for global systemic risk to arise from reinsurance failures is small to non-existent; (2) the record and stress scenarios tested correspond to the results of a study commissioned by the Group of Thirty; and (3) reinsurers have reduced their exposure to non-insurance credit default swaps. The IAIS stated it will continue to monitor the industry in the future.

This post written by John Black.

The NAIC’s Financial Condition (E) Committee has adopted revisions to the NAIC Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model Regulation (#786). In this edition of Special Focus, Tony Cicchetti discusses the revisions’ ramifications for reinsurance regulation.

This post written by Anthony Cicchetti.

The full Senate has confirmed former Kentucky regulator S. Roy Woodall for a voting position on the Financial Stability Oversight Council. The FSOC is tasked with monitoring the country’s financial system to protect against the failure of large bank holding companies and financial institutions. The Dodd-Frank Act requires that the FSOC have one voting member with insurance background among its ten voting members, which includes the Treasury Secretary and the Federal Reserve Chairman. The Council also includes five non-voting members, two of whom are insurance representatives. Mr. Woodall gave testimony to the Senate Banking Committee on July 26, 2011.

This post written by John Black.

The Financial Stability Oversight Council (“FSOC”) has issued its first annual report. Established by the Dodd-Frank Act, the purposes of the FSOC are: (1) to identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace; (2) to promote market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the U.S. government will shield them from losses in the event of failure; and (3) to respond to emerging threats to the stability of the U.S. financial system. The initial annual report focuses on the establishment of the FSOC and its initial activities to restore stability and strength of the U.S. financial markets, especially in the areas of capital levels, leverage, liquidity, resolution plans, volatility, swaps, the mortgage market and systemic risk. The Report also identifies the increased role of foreign banks in the U.S. marketplace as a risk point, since such institutions are not subject to the same regulation as are U.S.-based institutions. There is concern that foreign banks are subject to less strict capital and other financial standards than are U.S. banks, but that the pending Basel III reforms will help to address such issues.

The Report does not mention reinsurance, and contains only passing references to the insurance market, stating that “[t]he traditional U.S. insurance market largely functioned without disruption in payments to consumers throughout the financial crisis and the recovery.” The Report does note the role of financial guaranty and mortgage insurance in markets and products which experienced stress in recent times. The insurance industry is discussed at pages 61-62, 73 and 140-41 of the Report, which notes that insurance companies generally have strengthened their balance sheets and improved their investment portfolios.

On July 26, 2011, the Senate Committee on Banking, Housing & Urban Affairs held a nomination hearing which included Roy Woodall, the President’s insurance appointee to the FSOC, as well as nominees for the chair of the FDIC and the Comptroller of the Currency. The vast majority of the questions during the hearing were directed to the FDIC and OCC nominees, with no critical questioning of Mr. Woodall. As of the writing of this post, the Committee has not voted on those nominations.

This post written by Rollie Goss.

On July 11, 2011, the NAIC Reinsurance Task Force held an interim meeting in New York City. The meeting addressed issues raised by comments to the task force’s two exposure drafts of the Credit for Reinsurance Model Law and Credit for Reinsurance Model Regulation, which were initially posted in February 2011. The Task Force discussed whether mandatory contract clauses should be included in the models; what requirements an assuming insurer must meet in order to be approved as a certified reinsurer; what specific information certified reinsurers should be required to file; issues regarding multiple beneficiary trusts; issues relating to reporting requirements for ceding insurers; proposed changes to the ratings/collateral matrix; issues regarding the revocation of certification; issues regarding restrictions to limit so-called “concentration risk;” special issues concerning life reinsurance contracts; clarification with respect to the application process; and whether the model language should be clarified to refer to “substantially similar financial solvency regulation” as opposed to “substantially similar credit for reinsurance standards.”

The Task Force posted two revised exposure drafts on its website on July 26, 2011 (see links above), which are open for comment through the close of business on August 24, 2011.

This post written by John Pitblado.

The Nonadmitted and Reinsurance Reform Act, a piece of the Dodd-Frank Wall Street Reform and Consumer Protection Act, contemplates tax sharing agreements among the states to facilitate the equitable distribution of surplus lines premium tax revenues. In this Special Focus article, Karen Benson discusses how those agreements have largely failed to manifest.

This post written by Karen Benson.

Michael McRaith, Director of the Illinois Division of Insurance, has been named by Treasury Secretary Geithner to be the initial Director of the new Federal Insurance Office, which was created last year by the Dodd-Frank Act. Director McRaith spent 15 years in private practice in Chicago prior to being appointed as Director of the Illinois Division of Insurance in 2005. Among his clients while in private practice were financial institutions, including insurance companies. He has been active in the NAIC, presently serving as secretary-treasurer. He has served as chair and vice-chair of the NAIC’s Property and Casualty Insurance (C) Committee. Director McRaith will serve as a non-voting member of the Financial Stability Oversight Council. Significantly for our readers, both Director McRaith and Missouri Insurance Director John Huff (a non-voting member of the FSOC appointed by the NAIC) have been members of the NAIC’s Reinsurance Task Force. The “insurance expert” voting member of the FSOC remains to be appointed by President Obama.

This post written by Rollie Goss.

While the human toll of the still unfolding catastrophe in Japan rightfully is on the minds of many, there undoubtedly also will be an insurance toll as a result of this disaster. Those who have a professional interest in these events may find the Bermuda-based ARTEMIS alternative risk transfer/cat bond blog to be of interest. ARTEMIS has been posting daily updates on the potential insurance impact of this disaster.

This post written by Rollie Goss.

An interesting story appeared in the press recently about London broker JLT developing the Convoy Escort Program, what amounts to a private navy that will provide armed escort services to subscribing vessels through pirate waters off the African coast. Although details have not been made public, it appears that shipping companies who have insurance for piracy-related losses are being asked to fund a non-profit corporation that will hire ex-military personnel to provide escorts to several vessels in small convoys. It is thought that if the cost of such services is less than the amounts being paid in ransom that it would be an economically viable option, and will permit the professional military vessels to patrol further from the coast, where pirate activity has been increasing.

This post written by Rollie Goss.

Willis Re has reported that the reinsurance market is overcapitalized, resulting in reductions in reinsurance rates for January 1, 2011 renewals of from 5% to 10%. Visit Willis Re’s web site for a summary of the report and the full report.

This post written by Rollie Goss.