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A.M. Best: Reinsurance Panel Says Industry Being Reshaped by Regulatory Pressures

Source: A.M. Best

Posted on 03 Sep 2010

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A panel of reinsurance experts during a webinar sponsored by A.M. Best said three regulatory developments are either poised to or already are influencing how reinsurers practice, along with where primary insurers seek for reinsurance production and to what levels. The webinar titled "State of the Global Reinsurance Markets" is available at

The panel said that two of the more pronounced impacts could come from Solvency II regulations in Europe and proposed legislation in the United States known as the "Neal Bill" (HR 3424) that would affect U.S. companies' use of affiliated offshore reinsurers.

"Solvency II has been going for a long while now, although one can argue that QIS [Quantitative Impact Study] 5 and the new proposed capital charges in that, are in some way a response to the general financial crisis," Guy Carpenter Managing Director Chris Klein, its director of reinsurance market management, said. "For nonproportional underwriters, the charges under QIS 5 really are very heavy indeed. We would certainly be looking at or asking questions about reinsurance operations, which are relatively small and, perhaps, which are not a core part of a larger insurance or general financial services group. So we might possibly see some divestment activity there simply because of high capital charges."

What's driving the Neal Bill is all governments' desire for tax review, Klein said. "With the crisis, treasuries all around the world are going to be looking at ways of maximizing their revenue. So the motivation there is different."

"Someone senior in the FDIC had said that insurers and brokers should now be subject to the same kind of capital requirements as banks. I thought we’d gotten away from that as a result of the FinReg [the Dodd-Frank financial reform bill] law, but it seems it’s re-emerging," Willis Re Executive Vice President Brian Ingle said. "Next year, the House is going to take up the discussion of the optional federal charter, which could also have an impact on our industry. It remains to be seen but there still seems to be waves of discussion taking place that I’d thought we’d settled in the past year."

London-based Stephen Hitchcock, managing director of Lockton Re, said more regulatory attention is being focused on treatment of loss reserves. "We see over here, people are looking at the capital draining effect of high loss reserves. I see much more activity in the loss portfolio, adverse loss development space as people attempt to use capital for go-forward business rather than back business."

"Solvency II does begin discussion about how much capital is needed to actually run individual enterprises in the business," said Bryon Ehrhart, chairman of Aon Benfield's analytics and investment banking teams. "I hope insurance regulators globally learn from what was Basel II, which was allowing banks to use their own assumptions about how to run their companies and their capital and how much risk capital is necessary to run those. You run into such a variety of opinions about what levels of stress an organization may need to be able to endure and generally those were short-sighted discussions and views."