NCPA - National Center for Policy Analysis

HANDCUFFS ON "ALIENS"

February 6, 2006

In order to more effectively meet future catastrophes, we should remove the protectionist constraints that are handcuffing global reinsurance companies, says Peter Levene, chairman of Lloyd's.

Reinsurers provide backup for insurance companies, covering, for example, potential liabilities from enormous natural catastrophes they cannot reasonably afford to cover on their own. The world's top 10 reinsurers -- Lloyd's ranks sixth -- account for about 60 percent of this $200-billion industry.

While reinsurance is global, regulation is local, explains Levene. And, unfortunately, ill-conceived legal regulations in the United States are undermining the ability of Lloyd's and other foreign reinsurers to respond when disaster strikes. The laws, called "credit for reinsurance," are arcane, he says:

  • They require "alien" reinsurers -- those based outside the United States -- to post collateral equal to 100 percent of their gross liabilities.
  • The collateral must be posted regardless of the reinsurer's financial strength.
  • U.S. reinsurers, on the other hand, are not required to secure their liabilities with collateral -- even if they are financially weak.

These regulations help drive up costs and restrict the ability of reinsurers to respond to crisis, exactly at the time when the response is needed most. This is bad public policy, and unnecessary. The blunt fact is that the largest insurance markets, including London, Bermuda, Zurich, Munich and Tokyo, operate smoothly without collateral requirements, explains Levene.

The White House, congressional leaders and state regulators have long recognized the need for a level playing field. State regulators will have an opportunity to embrace reform once and for all in a series of meetings beginning this month. The proposed changes would rate all U.S. and foreign reinsurers by financial solvency. The move would improve creditworthiness, increase underwriting capacity, bring down rates and smooth U.S.-European trade relations, says Levene.

Source: Peter Levene, "Handcuffs on 'Aliens,' " Wall Street Journal, February 6, 2006.

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