Letter to NAIC President Nickel RE NAIC Reinsurance Regulation - From ABIR, GDV, and IUA
March 24, 2017
NAIC President Ted Nickel
Commissioner of Insurance
State of Wisconsin
Subject: NAIC Reinsurance Regulation, Recommendations for an Efficient and Effective Certified Reinsurer Passporting System
Dear President Nickel:
Thanks for your engagement with interested stakeholders in discussing recommendations for improvements in the NAIC’s Certified Reinsurer Program. The following are our thoughts on this issue.
First, we recognize the tremendous progress the NAIC has made in creating standards for and then assessing Qualified Jurisdictions, and in creating a mechanism for evaluating non-US reinsurers and then certifying them for passporting rights across the states. Although there are a great many reinsurers, the number of leading reinsurance domiciles is limited. The NAIC has targeted and approved the leading reinsurer domiciles. We also note that approximately 30 of the world’s leading reinsurers have become certified in at least one state. However, the number of reinsurers and the number of states in which they operate could be increased if certain improvements in the application and approval process were made. Accordingly, and as noted at the Miami NAIC Reinsurance Task Force Meeting, we offer these observations on necessary improvements in the NAIC Model Regulation and the related Uniform Application Checklist for Certified Reinsurer.
Certified Reinsurer and Passporting Processes
- National system, reduced or eliminated collateral: We urge NAIC action on completing the process to get to a national system of uniform reinsurance regulatory requirements. We support continuing implementation of and improvements to the Qualified Jurisdiction and Certified Reinsurer system. At this time 16 states have not passed the required legislation/regulation including large market share states such as Illinois and Texas; this lack of a national system detracts reinsurers from interest in passporting; the approval and passporting process is expensive and until a national system is in place reinsurers will not endure the expense until the benefits are clearer.
- Reduced collateral: The Secure rating levels 1-4 should be recategorized or consolidated. Today no reinsurer qualifies for the Secure 1 collateral exemption, yet the Secure 4 reinsurers are subject to 50% collateral requirements. The Secure schedule should be revised to more realistically align with credit risk and to expand the scope of collateral reduction to certified reinsurers. Over time as a rule, we support moving to a system where regulatory collateral is not required. Collateral should be a function of contractual negotiations between sophisticated parties.
- The passporting process should be streamlined, efficient and completed in a timely manner: Reinsurers have encountered some problems with the passporting process itself:
- Some states require additional information rather than relying on the REFAWG information; we recommend that states should rely on the NAIC’s central web based repository for Certified Reinsurer filings; states should not seek additional paper record filings, rather they should rely on the material deemed relevant to REFAWG in creating the reinsurer’s certification.
- Serious time delays in some lead states have impeded passporting, as other states await approvals from the lead state before finalizing action. Accordingly, lead state delays extend the annual renewal process in other states over multiple quarters, the delays then cause re-fling requests for updated calendar year data. We suggest that all states should agree to a common annual renewal filing date that is after the date that lead states expect to issue their passport approvals.
- Passporting has also been impeded by states adding certification requirements, beyond those in the NAIC framework. Some states have also sought to use the certification process as leverage to impose other regulatory policies on an extraterritorial basis – eg, cyber security issues, terrorist economic sanctions policies. For passporting to meet its goal of being a national system for Certified Reinsurers, states must abide by the NAIC guidelines for certification and not move to “gold plate” the requirements.
- Reduced collateral requirements should be self-executing so that collateral reduction efficiently follows ratings upgrade. Unfortunately, problems have surfaced where a reinsurer had a rating upgrade which instead of resulting in quick implementation of lower collateral requirements, instead resulted in delays and slowed regulatory action and a request for a peer group review.
- Removal of Reconciliation Requirement for Audited Public Accounting Financial Statements to US GAAP: Inherent in the Qualified Jurisdiction assessment is “mutual recognition” of regulatory standards. Similarly, there should be recognition that for purposes of certifying an international reinsurer, that audited financial statements filed in conformity with public or statutory accounting requirements of the reinsurer’s domestic regulator should be viewed as being fully compliant and not in need of reconciliation to US GAAP. If the Certified Reinsurer has complied with a jurisdictional Public Accounting (GAAP or IFRS) or statutory accounting requirements for its financial statements, then these audited financial statements should be accepted in the REFAWG process. The model regulation should be amended to remove any reconciliation requirement.
We are offering these suggestions based on how the certification process has been working over the past few years. We note that if the US/EU Covered Agreement becomes effective, then there are other issues that will need to be addressed. We will address those issues when they become ripe.
We recognize that the NAIC will focus extensively on reinsurance regulatory matters in 2017 with or without the compliance measures necessary under the US/EU Covered Agreement. We look forward to working with the NAIC on measures that mark the US as a jurisdiction that promotes cross border reinsurance trade in recognition of the substantial market benefits resulting from and afforded to US ceding insurers and their US policyholders. The US is entirely unique in the world due to the combination of its large economy driving the need for extensive utilization of capacity building reinsurance; and its exposure to both liability based and natural disaster based infrequent but severe events driving the need for risk transfer capacity. The regulatory system should be designed to maximize capacity, market competition and avoidance of risk concentrations to promote strong and solvent ceding insurers. We look forward to working with you and the NAIC teams as you advance further measures in 2017. Thank you for the opportunity to present these views.
Bradley Kading, President and Executive Director, Association of Bermuda Insurers and Reinsurers
Dave Matcham, Chief Executive, International Underwriting Association
Ralf Guetersloh, Head of Foreign Affairs, German Insurance Association (GDV)
Cc: California Deputy Commissioner John Finston