UK Regulator Criticizes US Reinsurance Collateralization Rules and Slow Reform

At the Financial Services Authority’s (FSA) annual Insurance Sector Conference in London, Hector Sants, the United Kingdom's top regulator, along with the chairman of Lloyd's and others, criticized current U.S. rules on reinsurance collateralization as well as the slow pace of regulatory reform in the United States. 
 
“I am disappointed that progress has been so slow with the reform of the current U.S. system, whereby so-called alien reinsurers are required to post 100% collateral to cover their liabilities to U.S. cedants,” Hector Sants said at the conference. 
 
In the FSA’s view, Sants said, the rules “do not make good rating sense.” 
 
The FSA will continue to push for change, Sants said. He noted that the National Association of Insurance Commissioners is looking at the issue, with the idea of considering factors other than the reinsurer’s domicile. 
 
“There are strong arguments for allowing the market to decide when additional security is needed,” Sants said. 
 
“The competition arguments in this area are well rehearsed,” Sants said of collateralization. “And they are, in any case, for others to make.” 
 
European insurance people sometimes bristle at the word “alien,” as it is applied to collateralization. And Britons, with their history of a highly centralized political environment, frequently show frustration at the state-based nature of U.S. insurance regulation. 
 
On both issues, the NAIC is often painted as the villain, intent on invoking parochial interests to block sensible change. 
 
Lloyd’s Chairman Peter Levene quoted a derisory suggestion that NAIC stands for “No action is contemplated.” 
 
“It is quite extraordinary that in the biggest economy in the world, such an important industry has totally fragmented regulation,” Levene told the audience. 
 
Levene praised the U.S. Treasury’s sympathy for federal insurance regulation. And he pointed to favorable views on the European position on collateralization in New York, Florida and Texas. 
 
There will be change, Levene said of regulation in the United States. “It’s going to happen.” 
 
Sants welcomed new thinking on collateralization from individual U.S. states. But, with restrictions remaining in place in other states, he said, any such changes are likely to be largely symbolic, he said. 
 
The collateralization rules have negative effects on both competition and capital allocation, Sants said. 
 
“I hope the U.S. will recognize that the present arrangements are likely to create unnecessary costs for the insurance sector and ultimately for the consumer,” Sants said. 
 
Charlie McCreevy, the European Union's commissioner for internal market and services, pointed to the Treasury’s positive attitude toward federal regulation. 
 
But any attempt to change the structure, McCreevy warned, can be expected to encounter “ferocious lobbying.” 
 
Sants stressed the FSA’s reluctance to criticize the regulatory structures in other jurisdictions. But he said: “It would greatly simplify our lives if we could deal with one coordinating authority on insurance matters in the U.S rather than 50.”