The role of reinsurance in providing a safety net for the insurance industry has never been more important than it is today with the prospect of more frequent and severe hurricanes and other catastrophes. Any discussion of reinsurance should begin with understanding that the global reinsurance industry supports the primary industry with only a small portion of the capital and takes on the most devastating risks without collateral or the assurance of payback à witness the fact that reinsurers bore a major share of the burdens of Katrina, Wilma, and the four hurricanes that slammed Florida in 2004.
With exposures of this magnitude, is it any wonder reinsurers are concerned about a regulatory environment in the United States where different rules can be imposed by 50 state insurance departments? Reinsurance is a global business with an impeccable record of meeting its obligations. Some of the most important players are based in Europe where the European Union is creating a uniform regulatory structure. Why can't this happen in the U.S., they're asking?
After long study, the European Parliament last June approved a reinsurance directive to create uniform reinsurance regulation in all 25 member states within three years. The legislation directs all E.U. countries to adopt standardized regulation for reinsurers and will permit them to operate anywhere in the E.U. while reporting only to their home country supervisor of insurance.
Reinsurers in Europe welcome the transition to ease of doing business across borders. As Nick Lowe, Director of Government Affairs for London's International Underwriting Association, put it, "The reinsurance directive imposes the same essential minimum standards of regulation everywhere in Europe, thereby removing competitive imbalances."
At U.S. RE, we agree with Debra Hall, Senior Vice President and General Counsel at the Reinsurance Association of America, who said, "I think the time is also very ripe for U.S. states to adopt similar or identical standards for reinsurers. Here in the United States, we don't have New York recognizing California or California recognizing Illinois. We ought to be subject to regulation by one regulator, not by 50."
The Group of Thirty, a private organization of senior bankers, central bankers, and academics, at a recent meeting called for an even more venturesome move: global regulation for a global industry. "We would recommend that reinsurance companies are regulated on a global, consolidated basis," said Walter Kielholz, Chairman of Credit Suisse. "The E.U., the U.S., Switzerland, Japan, and Bermuda cover the vast majority of reinsurance firms. If these five jurisdictions would agree on a system of regulating reinsurance, then I think the problem of piecemeal regulation would be solved," he commented.
In my opinion, global regulation as proposed by The Group of Thirty is beyond our reach today. However, we should encourage movement toward that goal. An important first step has been taken with approval of a transition to uniform regulation across the 25 countries of the European Union. Now, it's up to us on this side of the Atlantic.
The American Insurance Association and the Council of Insurance Agents & Brokers, among others, are proposing legislation that would allow commercial, non-life insurers to obtain a federal charter that would relieve them of multi-state regulation. The legislation would create an Office of National Insurers that would charter insurance companies and license national insurance producers to handle federally registered insurance products.
At U.S. RE, we believe there's an even stronger case for legislation to regulate reinsurance at the federal level. Our primary insurance business relies on reinsurance, much of it provided by reinsurance companies based outside the U.S. Given the unprecedented magnitude of hurricane damage in U.S. coastal areas and other natural disasters over the last couple of years, the availability of reinsurance is critical to our economic well being. Reinsurers based abroad are increasingly frustrated with our fragmented regulatory environment. We can't afford to continue a regulatory system that discourages global reinsurers from participating in the U.S. market.
We encourage the Reinsurance Association of America, backed by the principal reinsurance companies operating in the U.S. and our fellow reinsurance brokers, to mount a campaign to do away with State regulation of reinsurance on the same timetable as the transition taking place in the E.U. That would give us two years to get the job done. Let's get started.
Tal P. Piccione Chairman and Chief Executive Officer
U.S. REviews Winter 2006 The Chairman's Corner
