1 August 27, 2012 The Honorable Michael McRaith Director, Federal Insurance Office United States Department of the Treasury 1500 Pennsylvania Avenue, N.W. Washington, D.C RE: Solicitation for Comment on the Report to Congress on the U.S. and Global Reinsurance Market Dear Director McRaith: On behalf of the Risk and Insurance Management Society, Inc. (RIMS), these comments are submitted in response to a request published in the Federal Register June 27, This request was published pursuant to Public Law requiring the Federal Insurance Office to provide a report to Congress on the U.S. and global reinsurance market. The FR Doc presents a series of questions which respondents are invited to address. RIMS comments will be confined to those questions posed in the Federal Register that pertain to its membership, interests and policy positions. RIMS is a not-for-profit organization dedicated to advancing the theory and practice of risk management for the benefit of our member organizations. Our discipline is vital to the creation and protection of physical, financial and human resources. A global organization and the largest organization of risk managers in the United States, RIMS is comprised of over 10,000 individuals from more than 3,500 entities. 81% of our members are Fortune 500 companies with approximately 1,000 members representing small businesses (less than 500 employees). Membership spans the entire economic spectrum from the high-tech sector, real estate, financial, healthcare, energy, transportation and defense. Members also include universities, hospitals and public entities such as the City of San Francisco, Miami-Dade School District, and Orange County. However, as diverse as RIMS member organizations are, they share a common characteristic. That is, they are predominantly large consumers of property and casualty insurance. As commercial consumers of insurance, RIMS members purchase commercial insurance including: excess liability, commercial general liability, multi-peril, automobile liability, Directors and Officers liability, and employment practices liability for their organizations. RIMS members ability to readily and affordably purchase these lines of insurance contributes to their organizations overall financial stability and conomy.
2 well being, thus promoting greater stability for the United States economy. This access to insurance is directly related to the global reinsurance market. This is particularly true for our public institutions and government entities at all levels of government who may self-insure or form cooperative pools. As the budgetary constraints weigh more heavily on these public institutions or entities, the dependence on ready access to affordable insurance complemented by a fully functioning global reinsurance market for their financial stability is only magnified. According to a recent RIMS survey of United States members, these organizations access to insurance, and by extension reinsurance, is through a variety of means, often depending on the organization s size. Public entities and/or larger businesses rely on retaining risk in the form of large deductibles, selfinsurance or captives for predictable, hard-to-place and catastrophic risks (including terrorism). Reinsurance plays a major role in these types of insurance programs. In the RIMS survey, just under half of respondents indicated they used captives as one source of insurance and reinsurance. While just a few respondents (smaller entities) were not aware of the extent of any reinsurance, the vast majority of survey respondents indicated that anywhere from 25% to 100% percent of insurance purchased was reinsured. Generally, RIMS membership survey confirms that reinsurance is one of the key drivers of the availability and affordability of property and liability insurance. Additionally, the accessibility of reinsurance allows insurers to offer increased limits to meet our organizations needs. Particularly with the fragile economic recovery we are experiencing, reinsurance plays a vital role in rebuilding and reinvestment after sizeable losses and avoids imposing additional burdens on United States taxpayers. I. The purpose of Reinsurance From a risk manager s perspective, reinsurance is a sound, time-tested risk management tool to transfer risk from the ceding insurer to the reinsurer. This practice of risk sharing and spreading risk is not a new concept in insurance and permits an insurer to move a liability off its balance sheet and reduce its loss exposure. This procedure allows an insurer to offer coverage at limits desired by consumers (policyholder organizations) regardless of their size. This process also permits the insurer to receive a credit for reinsurance, increases its surplus, and frees up more capital to provide more insurance at a reasonable price. When these markets work on a global scale, our member organizations benefit directly financially which, in turn, promotes economic stability at the micro and macro levels. II. The role that the global reinsurance market plays in supporting insurance in the United States As mentioned above, our members experience with insurance and reinsurance markets is perceived through the lens of a commercial insurance consumer. Viewed in this way, the role of reinsurance and the global nature of reinsurance are indispensable to the health and general well being of our membership.
3 It is also an invaluable component to the overall stability of the United States economy as the global reinsurance market functions to provide a ready source of capital to be deployed to rebuild and for recovery following catastrophic events particularly in the case of a natural disaster or terrorist event. According to the Insurance Information Institute, reinsurers paid 60% of losses related to September 11 th terror attack. The majority of those losses were paid by non-u.s (re)insurers. In 2005, the United States was hit with three major hurricanes, Katrina, Rita and Wilma. This example also provides evidence of the level or extent of reinsurance globalization and the benefits to the United States of global risk sharing. The reinsurers of those losses, incurred as a result of these three events in 2005, were largely not located in the jurisdiction in which they occurred. According to Dowling & Partners, the loss breakdown is as follows: Europe 13%, Lloyd s 9%, US Reinsurance 11%, Bermuda 24%, other 1% with 42% covered by US insurers. Globalization of the reinsurance market such as presented in the aforementioned examples permits the pooling and spreading of risks globally, which in turn permits pooling risks from the entire spectrum of catastrophic losses, and from varying jurisdictions. This allows for reinsurance to be provided on capital bases that allow reinsurance to be priced on a basis lower than it would otherwise be priced if capital had to be held to support a specific risk in a specific geographic area. III. The effect of domestic and international regulation on reinsurance in the United States Domestic Regulation Potential Adverse Affects of Budgetary Proposals/Federal Legislation For several years, the Obama Administration s budget blue prints have contained proposals on affiliate reinsurance that substantially mirror legislation introduced by Rep. Richard Neal (D-MA) and Senator Robert Menendez (D-NJ). All these proposals, if enacted, would impair the insurance market for individual and commercial insurance policy holders. The FY 2011, 2012 and 2013 budgets appear to adopt, in concept, legislation introduced in the House of Representatives and Senate that restricts or penalizes the tax deduction for reinsurance premiums paid to foreign affiliates by domestic insurers. All these proposals would have a chilling effect on these insurers and reinsurers who provide an important safety valve in many areas of the country which are subject to a multitude of risks. These proposals would inhibit domestic companies with foreign affiliates from engaging in a legitimate risk management practice; ceding reinsurance to an affiliate in order to provide for greater capacity and liquidity. Currently, the United States tax code permits domestic insurers to manage their risk, without any penalty, by employing the practice of ceding reinsurance to their foreign affiliates. The current system fosters a healthy and competitive market for reinsurance while at the same time assuring more available and
4 affordable property and casualty insurance. This practice is widely utilized by the industry generally and the property/casualty industry specifically, and considered an efficient mechanism to pool risk and diversify exposure. An insurer can reduce the volatility of its losses by ceding its exposure to particular risks. A reinsurer can bear these risks more efficiently because it assumes them from a variety of sources and many of the risks (e.g., hurricanes in Florida and earthquakes in Japan) are uncorrelated. The global commercial insurance markets, and both individual and commercial consumers, are beneficiaries of this practice as reinsurance allows an insurer to support more insurance, or provide a higher limit of protection, than its capital assets would otherwise allow. This makes insurance more available and affordable for consumers generally. In an economic impact study published in 2009, and updated in 2010, The Brattle Group issued its report prepared on behalf of the Coalition for Competitive Insurance Rates (RIMS is a member). The report is entitled The Impact on the U.S. Insurance Market of a Tax on Offshore Affiliate Reinsurance: An Economic Analysis. The Brattle Group s economic team includes Dr. David Cummins of the Wharton School and Temple University. According to the report, legislative initiatives would all but eliminate offshore affiliate reinsurance. According to the Brattle Report, the elimination of the risk management benefits of affiliated reinsurance will lead to a 20% reduction in the overall supply of reinsurance (affiliated and unaffiliated) available to the US market. This will lead to consumer price increases of between $10 and $12 billion annually. The impact of the average price increases will fall disproportionately on states with large diverse economies and those most exposed to large catastrophic risk. National average increases understate likely insurance price increases for those particular states As the voice for risk managers, and commercial insurance consumers, RIMS must oppose any proposal or legislation that would result in negative implications for the global reinsurance market place and the United States businesses that rely on this market. Should affiliate foreign reinsurers curtail their business, this could radically disrupt the market place and result in less available and affordable insurance, and limit capital available for domestic insurance companies. Foreign reinsurers with domestic subsidiaries fill a need in the United States and global insurance markets and are critical to their continued health and vitality. Over the decades, with the series of natural catastrophic events and the terrorist attack on 9/11, these entities have stepped in to fill the void when domestic insurers either discontinued or severely curtailed coverage or increased rates whenever there was an event which could exceed their capacity.
5 State-Based System of Regulation of (Re)insurance Consistent with RIMS submission and comment letter dated December 14, 2011 re Modernization of Insurance Regulation in the United States, we continue to argue for greater uniformity at the national level as it relates to reinsurance. The state-by-state patchwork of laws related to self-insurer requirements, solvency requirements, collateral requirements, state licensing requirements and reinsurance requirements is cumbersome and more expensive. There is an inherent weakness in the state-based system where states have the ability to legislative variances to national standards put forward by the National Association of Insurance Commissioners (NAIC). While NAIC continues its work on model laws pertaining to credit for reinsurers, state-by-state variations do not provide the consistency desired. RIMS supports uniform collateral requirements for non-u.s. insurers doing business in the United States. As in other areas, including state implementation of the NRRA, while the NAIC has attempted to achieve uniform standards, state requirements for collateral still vary which reduces the amount of capital that could be available for increased capacity. International Concerns Just as barriers to market entry are bad for United States consumers, to the extent they exist in other countries, these barriers are bad for (re)insurers and consumers doing business overseas. Brazil may serve as but one example. In Brazil, the Instituto de Resseguros do Brasil (IRB) had a closed insurance system which required all insurance policies to be purchased through the IRB. A few years ago, they announced an opening of the market to all foreign insurance companies and brokers to become licensed to issue policies in order to meet economic growth and development there. Unfortunately, Brazil reversed itself in regulations and imposed a requirement on commercial insurance purchasers that that 40% of reinsurance must be placed locally. Last year, the government of Brazil loosened up this requirement acknowledging that the additional layers of bureaucracy to the insurance transaction were ultimately borne in the form of higher costs to consumers. However, this amounts to a prohibition on transactions between insurers and their foreign affiliates to whom they cede reinsurance if the companies are related. These regulations raise issues of capacity and affordability in addition to anticompetitive concerns. Despite the apparent loosening of the regulation, the uncertainty and regulatory instability have added direct and indirect costs to United States insurance buyers. RIMS recommends that the FIO work with local regulators there so that they have a clear understanding of the global implications of their actions.
6 IV. The role and impact of government reinsurance programs Federal Role in Terrorism Reinsurance RIMS strongly supported bipartisan efforts to create a Federal Insurance Office (FIO) and worked in coalition to secure its incorporation into the Dodd-Frank Wall Street Reform and Consumer Protection Act. RIMS support was based on the belief in the need for federal coordination on international matters as well as the necessity for a federal expertise on insurance issues, which became apparent in the aftermath of 9/11 terrorist attacks. As part of this growing recognition that the Federal government has an appropriate role in insurance matters, Congress also gave the FIO and Treasury joint authority to administer the Terrorism Insurance Program. In 2002, and in 2007, RIMS took an active role in support of long-term extensions of TRIA, and TRIPRA, the federal financial backstop, enabling commercial insurers to provide affordable terrorism coverage to policyholders when businesses could not obtain terrorism coverage. Prior to passage of TRIPRA, previous extensions were for shorter terms. RIMS also supported TRIPRA s elimination of the distinction between foreign and domestic acts of terrorism. Prior to enactment of TRIA, terrorism insurance was very difficult to buy, and not enough coverage was available to satisfy the needs of property owners. Construction contracts were similarly constrained. Owners of large portfolios of real estate in urban areas had great difficulty in finding coverage, and what was available was priced exorbitantly high. In many instances, the increase in insurance premiums made the property unprofitable to the owner, with expenses exceeding collected rents. Today, capacity is generally not an issue, but continues to be a challenge for risks located in major metropolitan areas, including New York, Chicago, San Francisco, Boston and Washington, D.C. As insurers monitor their aggregate liability in these particular areas, the purchase of adequate insurance can be difficult in very dense, urban areas. RIMS witnessed in 2002, with the passage of TRIA, an increased number of insurers willing to write the coverage and provide higher limits needed for these high-risk areas. However, the amount and cost of coverage available for high-risk locations continues to vary greatly based on the location of the insured and the aggregation of risk in that particular area. And while we always think of property exposures as the primary beneficiary of terrorism coverage, many other businesses and public entities face terror exposures. Public and private transportation, special events and sporting events, and certain manufacturing exposures need terrorism coverage to name a few. Further, as a direct result of the 9/11 losses, employers need terrorism cover for their aggregated workers compensation exposures in large metropolitan areas.
7 Please do not hesitate to contact me, if you have questions or require additional information about the Society s position. Captive insurers have a role by providing terrorism insurance coverage to organizations seeking a means to secure Best some regards, level of risk transfer of chemical, nuclear, biological and radiological ( CNBR ) exposures that are not otherwise available in the commercial marketplace. NCBR was not offered prior to 9/11 so that carriers were not required to offer NCBR as part of the TRIA legislation. Captives also provide risk transfer for other terrorism-related risk that may not be included in, or that may be restricted by property policies. The Deborah past ten M. years Luthi, have ARM, demonstrated CCSA that the private sector alone is not able to sustain a competitive and healthy RIMS market 2012 for President terrorism and risk Director insurance. TRIA and TRIPRA have been essential, and it is our belief that it would be highly unlikely that terrorism risk insurance would continue to be available at coverage levels and prices in effect today if the federal government support was withdrawn altogether. While previous reports from the President s Working Group on Financial Markets found that TRIA legislation has prevented the emergence of new financial capacity for terrorism coverage, RIMS believes the contrary that the capacity that is currently available is a direct result of the support of TRIA (TRIPRA). In the most recent survey of RIMS members (July 2012), nearly 85% of RIMS respondents expressed a belief that Congress needed to reauthorize TRIPRA, and that without another long-term extension, issues regarding affordability and availability would again surface. If Congress and the Administration permit TRIPRA to expire without reauthorization, there must be some alternative government-supported plan in place. The commercial insurance market cannot adequately predict or measure the financial impact of terrorism and it will not be able to provide adequate coverage for this exposure. RIMS appreciates that the Federal Insurance Office has an ongoing interest and involvement in insurance and reinsurance issues and has provided this venue as an opportunity to present our views. Should the Department require additional information or have any questions, please do not hesitate to contact RIMS Government Affairs Director, Kathy Doddridge, at or Sincerely, Deborah M. Luthi RIMS 2012 President