Connecticut Gov. Dannel P. Malloy, a vocal proponent of state-based insurance regulation in the U.S., sent a letter to U.S. Treasury Secretary Jack Lew and U.S. Trade Representative Michael Froman, urging them not to preempt states’ regulations in reducing collateral requirements on foreign reinsurers.
In his Feb. 9 letter, Malloy expressed his concern over the news that the Department of the Treasury’s Federal Insurance Office and the Office of the United States Trade Representative are considering preempting state insurance regulations by negotiating a “covered agreement” with foreign authorities to reduce collateral requirements on foreign reinsurers.
‘Unnecessary and Inappropriate’
Malloy wrote that to preempt states to achieve such a reduction when states are actively doing so already would be “unnecessary and inappropriate.” He wrote to Lew and Froman that “before you embark on any negotiation, I urge you to engage directly with governors and state insurance regulators to fully understand what we’re already doing and to understand our grave concerns with a federal preemption.”
Malloy said the national state-based system has worked remarkably well for nearly 150 years, seeing U.S. consumers and industry through recessions, financial crises, terrorist attacks, and natural catastrophes like Superstorm Sandy, and continues to evolve to keep pace with the global insurance marketplace.
A robust and competitive reinsurance market is critically important to U.S. insurers and policyholders, Malloy noted, adding that it is a testament to the openness and stability of U.S. insurance markets and the effectiveness of the state regulatory system that a majority of that reinsurance capacity comes from non-U.S. companies.
Historically, Malloy noted, state laws required those non-U.S. reinsurers to post 100 percent collateral for the risks they assumed. And recently, Connecticut and 24 other states — representing over 60 percent of ceded premium volume — have taken action to reduce collateral requirements consistent with a model law promulgated by state insurance commissioners through the National Association of Insurance Commissioners (NAIC).
NAIC Model Law
“This updated model law prudently reduces collateral requirements commensurate with the financial strength of the non-U.S. reinsurer and the effectiveness of the regulatory regime that oversees the reinsurer,” Malloy wrote. Further, 12 additional states expect to consider that legislation in 2015, which would bring 95 percent of the market under reduced collateral, he said.
“We are moving quickly, but cautiously, as states leverage their 150-year experience and regulatory judgment to assess both the reinsurer and its primary regulator as a precondition for reducing collateral. This approach has been met with praise by both the non-U.S. reinsurers and their home regulators, and balances foreign concerns with those of U.S. insurers and policyholders,” Malloy wrote in the letter.
Malloy argued that for the Department of the Treasury and the United States Trade Representative to now contemplate preempting the states through a covered agreement to achieve what states are already achieving is “entirely unnecessary.”
“This is not a case of an entrenched state system opposed to change, but rather a regulatory system that is working quickly and thoughtfully to balance competing needs,” Malloy said of the states’ approach.
Malloy said states fully understand the global nature of insurance and the importance of working collaboratively across borders to improve regulatory effectiveness and cooperation.
“Indeed, we work across borders on a daily basis as part of our national state-based system,” Malloy wrote. “Therefore, before you embark on any negotiation, I urge you to engage directly with governors and state insurance regulators to fully understand what we’re already doing and to understand our grave concerns with a federal preemption.”
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