Main Issue Areas | Additional Articles | Amicus Briefs | Book Excerpts

- Read the industry response to media reports and investigations into Finite/Financial Reinsurance. Just added: See Dan Malloy's powerpoint presentation.

Issue Areas

Asbestos

- Joint Insurance industry trade association letter and statement of principles of asbestos reform to Majority Leader Bill Frist. (posted 9-18-03)

- Click to read RAA's opposition letter sent to Majority Leader Frist on July 17th.

- Testimony: Solving the Asbestos Litigation Crisis, S. 1125, the Fairness in Asbestos Injury Resolution Act of 2003: Statement to the Senate Judiciary Committee by RAA President Franklin W. Nutter (June 4, 2003)

Finite Re

Read the industry response to media reports and investigations into Finite/Financial Reinsurance. Just added: See Dan Malloy's powerpoint presentation.

Medical Malpractice

RAA speaks against activation of government run reinsurance facility for medical malpractice in New Jersey.

Terrorism Risk Reinsurance Capacity

April 2006

Insurers seek reinsurance coverage to assist in the management of their exposures under the Terrorism Risk Insurance Act. These exposures result from the significant retentions required of them under the Act and the capital management scrutiny of rating agencies and regulators. By establishing definitive loss parameters for insurers, TRIA has facilitated the establishment of a limited reinsurance market for terrorism risk.

Based on a survey of reinsurance brokers and underwriters, the Reinsurance Association estimates that the global reinsurance capacity available in the United States for terrorism risk to be $6 to 8 billion for TRIA stand-alone and treaty reinsurance. Typically, reinsurers prefer to underwrite this risk in stand alone contracts to facilitate exposure management. Some regional insurers with exposures limited to rural or suburban areas far from target risk cities and business centers have secured coverage in their standard reinsurance programs, usually with some limitations on the subject event or risk. With respect to workers compensation portfolios, some insurers have been able to add terrorism to their reinsurance programs excluding nuclear, biological, chemical or radiological events(NBCR).

With regard to certain insurance coverages not covered by TRIA, such as personal lines and domestic acts of terrorism, reinsurance coverage is available, excluding coverage for NBCR.

NBCR reinsurance capacity exists on a very limited basis and at a significant premium. Market participants believe NBCR capacity to be only 15 to 20% of total market capacity at best.

It has been suggested that capital markets may have an interest in providing terrorism reinsurance. Some interest has been expressed by hedge funds in providing reinsurance-like capacity for terrorism risk. This capacity, if it should develop, is expected to be no more than $3-4 billion. While catastrophe bonds are a known mechanism for transferring natural catastrophe risk (69 such transactions have occurred since 1997 totaling $10.65 billion in capacity), there is no reason to expect a significant terrorism catastrophe bond market to develop. Bond underwriters face the same uncertainty about frequency and lack of predictive experience as insurance underwriters. Rating agencies have to date been unwilling to rate such bonds- further limiting the liklihood of a developing market.

TRIA has been an effective program in facilitating a private reinsurance market to assist insurers in managing their retained risk under TRIA. No viable reinsurance market exists to replace the capacity provided by TRIA above the industry's retentions.

Credit for Reinsurance
To help states standardize accounting for reinsurance credits, the National Association of Insurance Commissioners (NAIC) adopted a model law in 1984 and a model regulation in 1991. The models provide cedents with the ability to take financial statement credit if the reinsurer is subject to U.S. regulatory laws or the reinsurer has collateralized its obligations.

Fronting
Insurance regulators and industry officials both acknowledge that some abuses have occurred in the practice of fronting - an arrangement by which an authorized insurer issues policies to cover risks underwritten by unauthorized insurers and then transfers its own liability to the unauthorized insurer by means of reinsurance. While fronting can serve useful purposes, abuses can occur if the fronting company fails to exercise control with respect to underwriting, claims, or the risk to which it exposes its assets. But finding a common approach that will address the abuses without over-regulating the practice has proven difficult.

Insurance Fraud
The high cost of insurance claims fraud and recent successes in combating fraud have spurred a renewed commitment to improve state anti-fraud statutes. Two model bills completed in 1995 are now being widely considered by state legislators and regulators.

Insurance Securitization
The NAIC's Insurance Securitization Working Group is considering proposals to revise accounting rules to allow reinsurance - like accounting treatment for derivatives; and is considering proposals to create on-shore, tax exempt Special Purpose Reinsurance Vehicles (SPRV's). The RAA is working with the interested parties to assist regulators with these projects.

Interstate Compacts
To date, no state has adopted the Uniform Receivership Law (URL), though the compact states have tried. The RAA has worked with several states to encourage adoption of the URL, regardless of whether or not the state is a member of the compact.

McCarran-Ferguson
Although the McCarran-Ferguson issue has not surfaced in the three subsequent Congresses, it remains on the RAA policy agenda because of its importance to the industry.

Natural Disasters: Federal Solutions
High financial losses from a few large-scale natural disasters have prompted concern about the availability and affordability of property insurance in high-risk areas, and raised questions about the ability of the insurance industry to withstand the economic effects of a truly catastrophic disaster. To deal with these concerns, the insurance industry has called for various forms of federal legislation.

- US GAO review of European and US natural disaster and terrorism funding mechanisms (added 8/23/05)

Natural Disasters: State Solutions
States prone to natural disasters have developed legislation to promote a healthy private sector insurance market and to provide or supplement homeowner’s insurance coverage. Measures to promote private sector options include: flexibility in rate filings; flexibility in coverage provisions, including higher deductibles; and consumer insurance information programs. Government programs to supplement private market activities include mandatory insurance pools for windstorm risks and state catastrophe funds to provide direct insurance or reinsurance for hurricane and/or earthquake losses. Read about the pros and cons associated with the 2004 Florida Cat Fund expansion in this news article.

Receiverships
The current state-by-state system of handling insurer insolvencies suffers from many weaknesses, including lack of uniformity, failure to keep abreast of changing needs and lack of accountability. Variations exist between statutes, procedures and interpretation of identical statutes. These inconsistencies result in inefficiencies, duplication of cost and effort, delays and inequitable treatment of creditors. Numerous proposals have been put on the table, either to create a national system for handling receiverships, or to develop more consistency among state approaches.

Receiverships: Cut-Throughs
Cut-through clauses or endorsements are included in reinsurance contracts (or, in some cases, an underlying insurance policy) to entitle the policyholder to proceed directly against the reinsurer for payment of a claim against an insolvent ceding insurer. Enforcement of cut-through clauses, however, limits assets available to a liquidator for disbursement to the full range of policyholders and creditors, and gives an advantage to the entity with the bargaining power to negotiate such an agreement. 

Receiverships: Insolvency Clause
State laws and regulations require reinsurance contracts to contain an insolvency clause as a condition of the insurer obtaining credit for reinsurance. The accounting treatment recognizes that risk has been transferred to a third party, thus allowing the insurer to write additional business. An insolvency clause provides that reinsurers will pay their contractual obligations to their reinsured even if the reinsured becomes insolvent and cannot pay off obligations to its own policyholders. In the event of an insolvency, the appointed receiver would collect from reinsurers the amounts due to the insolvent insurer with certain limited exceptions. 

Receiverships: Jurisdiction (including arbitration)
Among the many controversial issues surrounding receiverships is the question of which courts have jurisdiction over legal disputes arising from the insolvency, as well as the issue of the enforceability of contractual arbitration clauses.

Setoffs
In the late 1980s the degree of setoff allowed to creditors of insolvent insurers was a matter of much debate and was widely litigated by reinsurers and receivers. By the early 1990s reinsurers and other creditors had won important legal victories as courts upheld the right of setoff. By 1998, the actions of legislatures and courts had resolved this matter in favor of creditors with broad setoff rights applicable in receiverships in all 50 states and the District of Columbia. Reinsurers support the right of setoff, which allows them to setoff the obligations owed to them by the insolvent against obligations they owe to the insolvent. 

Terrorism
A review of public policy materials regarding terrorism and insurance risk. Materials have been compiled by the RAA and been presented in numerous US Congressional, state legislative and regulatory, and industry forums.

Additional Articles

- California proposed reinsurance accounting regulations would disrupt the marketplace and are inconsistent with statutes. The RAA encourages California to conform to national regulatory norms. Read more in statements presented by Brad Kading and Debra Hall.
[ statement 1 | statement 2 ]

- Improving Competition in the Home Insurance Market - Louisiana Cat Fund. (pdf) (Kading - January 2003)

- Financing Catastrophe Risk And The Role Of Government (pdf) (Nutter - June 2002)

- Chinese insurance regulators are looking to create a system for regulation of reinsurance in that emerging market. The following presentations on regulation and loss reserving discipline (pdf) and US reinsurance regulation (pdf) were presented at an OECD sponsored conference relating to the development of reinsurance regulation in China. (Kading and Hall - June 2002)

- NAIC Insurance Securitization Working Group, Accounting for Index-Based Derivatives (pdf) (RAA Staff - August 2000)

Amicus Briefs

Brief Filed (6/24/04): The RAA filed a brief of amicus curiae in the New Hampshire Supreme Court to support reinsurers' rights to appeal orders issued in liquidation and oppose a proposed agreement by the Liquidator which is contrary to New Hampshire law.

RAA Files Amicus Brief in Legion Matter

On Thursday, October 15th, 2003, the RAA filed a brief of Amicus Curiae with the Supreme Court of Pennsylvania. The brief was filed in support of the insurance commissioner in her capacity as rehabilitator of Legion Insurance Company. Certain large corporate policyholders, including American Airlines, Pulte Homes and the Psychiatrists Purchasing Group, are asking the rehabilitator to reform reinsurance contracts to allow direct recovery from reinsurers. The brief was filed pursuant to the appeal by the insurance department and parallels the RAA brief filed in the commonwealth court.

RAA Files Amicus Brief in Support of Arbitration

On December 31, 2003 the RAA filed a brief of amicus curiae in the United States Supreme Court. The brief was filed in support of a petition for a writ of certiorari by certain health care providers seeking the court's intervention in the question of whether a state law severely restricting the use of arbitration in agreements between patients and health care providers, and which would be preempted under the Federal Arbitration Act (FAA), is saved from preemption by the McCarran-Ferguson Act. The RAA filed the brief because of the importance the question of "reverse preemption" has in the insurance arbitration arena. Further, because the application of the FAA to reinsurers will often turn on the interplay of state statutes and the McCarran-Ferguson Act, the Supreme Court's interpretation of, and standards for applying these acts may very significantly define the scope of reinsurers' permissible use of arbitration as a dispute resolution mechanism.

Book Excerpts

From the Insurance Institute's Book on Reinsurance: RAA Staff has contributed an overview the the U.S. market including current market dynamics, regulatory background, historical underwriting results and trends as well as market share statistics.