Financial Products and Services Industry: The Reinsurance Collateral Debate and 2008 Proposed Regulatory Reform Efforts

Gregory S. Arnold, University of Connecticut School of Law

Article comments

Accepted for publication and actually published as a 2009 Year-In-Review article in The International Lawyer.

Abstract

The 2008 efforts to modernize reinsurance regulation have encountered a snag with respect to international law. The critics claim that the U.S. system of requiring collateral security from non-U.S., unlicensed reinsurers is anti-competitive and discriminatory. Those with a vested interest in maintenance of the status quo argue that the reinsurance collateral requirements are prudential measures that are in place for the protection of policy holders and the solvency of the ceding, primary insurance companies.

The European Union’s Reinsurance Directive still has not been implemented into national law in each of the EU Member States, but that regulatory measure has nonetheless emboldened financial regulators in Europe to push for federal regulation of insurance in the U.S. This is under the misguided assumption that federal regulation of insurance in the U.S., by way of an optional federal charter ("OFC") or otherwise, would somehow lead to the scrapping of the reinsurance collateral requirements.

At the same time, larger insurance companies and some trade groups in the U.S. are interested in an OFC, because of the heavy administrative burden and expense of complying with insurance regulation in fifty-one jurisdictions. However, neither the impetus from the U.S. insurance companies and trade groups, nor the added push from European regulators, have lead to a reintroduction of the National Insurance Act, the SMART Act, or similar such legislation. Such proposals themselves included the framework for the imposition of reinsurance collateral requirements, without telegraphing such prospects. There is symmetry to such safe harbors in those proposed pieces of legislation and the EU’s Reinsurance Directive, which allows EU Member States to impose “pledging of assets” requirements upon reinsurers from third countries.

The year 2008 did not see the same gusto from European regulators for an OFC. Rather, the U.S., guided by the NAIC and the frontrunner states of New York and then Florida, has embarked upon another means to achieve the goal of relaxation of reinsurance collateral requirements. This article is a brief overview of reinsurance collateral requirements in the context of the World Trade Organization ("WTO") General Agreement on Trade in Services ("GATS") treaty.