Comprehensive US reinsurance regulatory reform: An imperative for sustained industry performance

An important contribution from a strong and viable insurance industry is to help foster a sound economy. Insurers and their reinsurers have a shared responsibility to sustained, solid financial performance in order to be able to protect critical assets for years to come.

This is why Swiss Re believes it is in everyone’s best interest to take a comprehensive approach to reinsurance regulation consistent with today’s realities and the global nature of the reinsurance business. The existing U.S. regulatory system has served the industry well in an environment where reinsurance regulation as well as accounting and reporting systems varied widely. Historically, it struck a good balance between competing interests. But the world has changed, as reflected by the global nature of reinsurance capacity and enhancements in regulatory oversight in other parts of the world.

Swiss Re is a global reinsurer and seeks to manage its capital and risk on a global basis. In doing so, we can ensure that the capital we hold is commensurate with our worldwide risks and make sure that the funds we need to support our clients are accessible when and where they are most needed.

To provide this necessary fungibility of capital while at the same time providing strong financial support to our clients so that they can fulfil their obligations to policyholders, we must recognize that:

  • We need to strive for “best practices” in risk management techniques. This includes the use of internal models which enable companies to assess their internal risk landscape in the most accurate manner and, consequently, to determine more accurately company-specific solvency capital requirements.

  • Diversification is a fundamental part of value creation in the insurance sector and ultimately provides efficient and effective policyholder protection. Diversification is achieved by spreading risks across different geographical regions and lines of business in order to increase the number of mutually independent risks. As a result, loss events within product lines or local markets can be absorbed by the return on other policies not affected by those events.

  • Capital requirements should be reduced for risk mitigation techniques, including not only traditional but non-traditional instruments. This is particularly necessary to ensure that sufficient capacity exists for natural catastrophes and other major risks that we face.

  • Reinsurers need to be active globally to be able to balance their portfolio. If this were not the case, reinsurers would not be able to absorb peak risks. A prerequisite for global scope is the ability of reinsurers to operate on a cross-border basis. For international diversification to work, reinsurers need the ability to use their worldwide premium income to pay local claims. Restrictions on the free flow of capital results in reinsurers’ inability to move capital to cover major events, making reinsurance coverage more expensive.

  • A global business must be supported by a strong, centralized regulator. Swiss Re believes that these objectives can best be achieved through an optional federal charter for reinsurers. A move to a more effective and efficient US regulatory system for reinsurers will ultimately make the US a more competitive and more responsive jurisdiction and result in lowering regulatory costs while maintaining, or enhancing, the safety and soundness of the industry.

What lies ahead?

The insurance industry faces tremendous challenges in the years ahead. The ever-changing risk landscape and regulators’ and shareholders’ demands for increasing transparency will require the industry to explain its operations in ever greater detail. Swiss Re supports a regulatory framework that preserves confidence in the financial health of the industry while accommodating the reinsurance industry’s unique characteristics and global needs.

Published 26 March 2010

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