Reinsurance is critical to risk management in the property and casualty insurance industry. To provide consumers and businesses with more insurance at lower prices, ABIR advocates for a robust insurance market open to as many competitors as possible.
Global reinsurers are financially strong and have substantial capacity to support insurance companies in the wake of disaster. The ability to pool US hurricane and earthquake risks with the risks for typhoons in Japan or earthquakes in Latin America means coverage costs less than it would without reinsurance.
For example, in 2011, the largest ever catastrophic losses occurred outside the US. In a dramatic test of market performance, more than 60 percent of the losses in Australia, Japan and Thailand were largely paid for by reinsurers. Even with record-setting losses, large amounts of reinsurance were available in 2012 because the market is so resilient and because the business model calls for global pooling of losses to achieve diversification. In fact, the market attracted more capital which generated more capacity in spite of the losses.
US Regulatory Issues (Local & National)
Insurance works best in providing value to consumers when markets are competitive. Some times poorly designed regulation impedes market competition. Regulatory barriers can discourage cross-border trade. Furthermore, government run insurance programs can lead to subsidized insurance prices which freeze out insurers. When prices are subsidized consumers miss price signals about hazards in construction, location or peril.
Regulatory barriers to private sector risk bearing can be removed, be they poor residual market design, mandated cross subsidies or barriers to entry. Reinsurance regulation in the US is now evolving to recognize expert regulation enforced by non-US regulators; the new measures also call for an independent assessment of the financial strength of non-US reinsurers. These changes including the removal of reinsurance collateral requirements are expected to help identify financially strong reinsurers, create incentives for reinsurance buyers to conduct additional due diligence on selection of counter parties and move the US insurance regulatory system closer to international norms in open markets and supervisory risk assessment. Regulatory modernization is being led by the National Association of Insurance Commissioners and is being analyzed by the US Treasury’s Federal Insurance Office.
International Regulatory Issues
The Global Recession of 2008 has led G-20 policymakers to redesign regulation of banks, securities and insurers. International standard setters are focused on a common regulatory framework and a broader set of guidelines and standards that would be applied to insurers. Risk management, corporate governance, capital requirements, financial reporting, use of debt, use of reinsurance and other elements of risk management and operational structure will be subject to new advisory regulatory standards which will be recommended to jurisdictions for adoption. The end result is intended to be a harmonized level of regulation applied to global insurance and reinsurance firms.
The Obama administration’s budgets have proposed a tax on certain reinsurance income resulting from transactions between domestic insurers and foreign-based affiliates. The president’s proposed tax on foreign affiliate reinsurance would only serve to limit US insurance capacity and drive up the cost of insurance – a major threat to homeowners and small businesses, particularly those in disaster-prone states. The president’s budget proposal closely resembles legislation (H.R. 2054 and S. 991) introduced by Reps. Richard Neal (D-MA) and Bill Pascrell (D-NJ) and Sen. Robert Menendez (D-NJ) that would similarly result in a drastic rise in insurance rates across the country. In an economic impact study of similar, previously proposed legislation, the Brattle group, a leading economic consulting firm, found that if enacted it would have reduced the net supply of reinsurance in the US by 20 percent, forcing American consumers to have paid a total of $11–to-$13 billion a year more for their same coverage.
The administration’s budget proposal violates longstanding US tax policy that calls for the application of an ‘arm’s-length’ standard for related-party, cross-border dealings. In the insurance business, related party transactions are well documented; they are subject to mandatory approvals by state insurance regulators. Abundant comparative market regulatory information is available to enforce the so-called transfer pricing rules. The IRS has broad authority to enforce these laws as they relate to reinsurance transactions. The changes proposed run contrary to decades of US tax and trade policy and conflict with existing US tax treaty obligations. They could spur retaliatory actions from other countries and possibly damage relationships with important US trading partners.
Additionally, this tariff would violate World Trade Organization (WTO) commitments. One of the basic principles of the WTO is that a country cannot treat a foreign company worse than it treats its own companies; these proposals clearly single out foreign reinsurers for worse treatment than US reinsurers. Specifically, they subject foreign reinsurers – but not US reinsurers – to an arbitrary test to limit the tax deductibility of certain reinsurance premiums paid to them by their US-based affiliates. Just as foreign countries cannot protect their insurance markets for their domestic insurance companies and treat US companies unfairly, the US cannot protect the US market for domestic insurance companies and treat foreign companies unfairly. The European Union and individual countries like the United Kingdom, Switzerland and Germany have asserted that this tax would violate WTO commitments and tax treaties.
In 2009, ABIR members publically endorsed a climate change policy statement and backed scientific research on climate change through the Risk Prediction Initiative work of the Bermuda Institute for Ocean Sciences (BIOS) – a leading Bermuda-based climate science research facility. ABIR members updated their climate change policy statement in 2015. ABIR members support climate science research through their contributions to the BIOS’ Risk Prediction Initiative, through their work with the Geneva Association and through individual climate research projects – some public and some proprietary – that enhance business and public policy knowledge.
Our ability to better understand climate change risks will help to promote better public policy decisions that will encourage the insurability of homes and businesses. Heightened focus on hazard mitigation, building resilience, land use planning and safer, stronger communities enhances the opportunity for private capital to insure and reinsure catastrophe exposed risk, thus reducing further exposure to taxpayers in subsidizing those insurance claims. Importantly, it protects people and property from damage and injury with stronger and safer communities.