Alien forces at work.

Now that the European Union has agreed to a single reinsurance protocol to regulate the industry, some say the United States will face increased pressure to simplify its regulatory structure, including reducing or eliminating its collateral requirements for foreign reinsurers doing business within its borders.

The European Parliament's recent approval of the policy called the European Reinsurance Directive has set the stage for increased pressure on U.S. regulators and lawmakers to modernize, and harmonize, U.S. reinsurance regulation.

"We are now creating a single minimum regulatory structure across the EU's 25 member states," said Dave Matcham, chief executive officer for the International Underwriting Association of London, a trade group that lobbied in support of the reinsurance directive. "If you are licensed in one of those states, you are actually licensed in the other 24. It's what we call a passport system."

The EU encompasses 25 European countries with 457 million people and 21 official languages. Member states have up to two years to implement the directive. Twelve more months may be granted to certain states--particularly those that impose collateral requirements, the European Commission said. The European Council of Ministers still must approve the directive, a step sponsors see as a formality.

The new system will reduce the regulatory costs with which companies have to comply, Matcham said. It also eliminates some countries' requirements that companies based in other countries must put up collateral in order to write business in that country.

Pushing for Change

Peter Skinner, a member of the European Parliament who proposed the EU Reinsurance Directive, said Europe will soon become a level playing field in the reinsurance market. As a result of Europe unifying its market, insurance regulators in the United States will have to reconsider their position on requiring alien reinsurers to post collateral to cover their U.S. obligations, said Skinner.

Collateral requirements amount to a "trade barrier," he said. With more sophisticated, and increasingly integrated, means of regulating international reinsurance business, the reasoning behind collateral requirements no longer exists, said Skinner.

Many are hoping that U.S. regulators will follow their EU counterparts. The two main complaints against the U.S. reinsurance regulatory system are:

* meeting the licensing requirements and regulations of all 50 states is too complicated; and

* without a state license, it's too burdensome to post collateral to cover 100% of U.S. obligations.

The new EU model is a direct comparison to the United States, Matcham said. "I would argue if you are licensed in New York as a reinsurer, shouldn't that be good enough for the other 49?" he said. "'Given the experience of Europe, it can't be beyond the realm of possibility. And you've got a single language, and single legal system."

The EU Reinsurance Directive "will certainly put pressure on U.S. regulators to accelerate their movement toward relaxing the requirements for alien reinsurers," said John Dearie, partner with Edwards & Angell. "However, solvency is still a key concern for U.S. regulators. The bottom line is the [National Association of Insurance Commissioners] will probably take a cautious note. The directive doesn't take effect until 2007, and the U.S. will not change course overnight."

State of the Union

While those outside the United States complain that its state system of regulation is too burdensome, the criticism is unwarranted, said Alessandro Iuppa, NAIC president-elect and superintendent of the Maine Bureau of Insurance.

"U.S. regulation of reinsurance is already harmonized with all states having enacted the NAIC credit for reinsurance model law which is a key component of the NAIC's state accreditation program," Iuppa said in a statement.

Alien, or foreign, reinsurers can enter the U.S. market in a number of ways. First, they can obtain a state license, just like any other insurance company. Or, a state insurance department can accredit a reinsurer to do business there if it agrees to comply with certain state regulations, or if it's already domiciled in another U.S. state that maintains similar laws. Otherwise, an alien reinsurer--which can also mean a U.S. company that's operating in a state where it isn't licensed--must put up collateral to cover 100% of its U.S. obligations by establishing a trust fund or providing a letter of credit, Frank Nutter, president of the Reinsurance Association of America, said during congressional testimony in June.

For 2004, reinsurers had posted about $98 billion in collateral, with about $88 billion coming from reinsurers outside the United States and the remaining $10 billion coming from U.S. reinsurers operating in states where they aren't licensed, according to the RAA.

Eliminating the collateral requirements would level the playing field for international companies, Matcham said. "How would (U.S. insurers) like the idea of collateral proposed on them by other countries?" he said.

Those based outside the United States may argue that the collateral is an impediment to trade, but with non-U.S. reinsurers carrying 80% of the U.S. reinsurance market, "this could not be the case," Nutter said.

The point of requiring collateral is to give primary insurers, and ultimately, their policyholders, security that regulators can compel payment from the reinsurer if necessary, said Mike Koziol, assistant vice president and counsel for the Property Casualty Insurers Association of America.

"U.S. reinsurers have to file statutory accounting statements. We've seen on an accounting basis that some alien reinsurers have had significantly larger hits to their surplus, but they don't show up because of the way they do accounting in their country," Koziol said.

That's where the new EU Reinsurance Directive might help change U.S. regulators' perspectives, Matcham said. "U.S. regulators will be happier to accept less collateral if they understand the home collateral requirements of the reinsurers. We'll have a single system, instead of a multiple system," he said.

It's not just a question of having a sound balance sheet. U.S. regulators fear that legal judgments filed against foreign reinsurers may not be enforceable in other jurisdictions.

"Say a U.S. company pays off on a punitive damage award, and wants their reinsurer to pay part of the cost. The reinsurer refuses, and the primary company files suit. Even if the primary company wins, they'd have to go to a foreign country to enforce the judgment. Other countries may not recognize punitive damages," Koziol said.

The PCI is lobbying to modify a treaty to clarify that U.S. judgments would apply in other countries. "That's what we need before you can consider reducing collateral," Koziol said.

Also, the collateral requirement is just one way of doing business in the United States. Several foreign reinsurers have a domestic subsidiary in the United States and also operate by posting collateral to do business in states where they are not licensed, said Cynthia Lamar, vice president of the Reinsurance Association of America. "Sometimes the collateral option is the better option," she said.

An ad hoc committee of the NAIC is considering two proposals to change collateral requirements. One would rate reinsurers by financial solvency, and then apply a sliding scale of collateral to companies based on their rating. For instance, a company with a top rating may need only to post 50% collateral on its U.S. obligations, while a less financially secure company would still have to post 100%.

Another proposal would allow reinsurers to join an optional guarantee fund, which would pay for reinsurance claims of companies that became insolvent. Who would regulate both options and what criteria they'd base the operations on haven't been ironed out yet, Koziol said.

Michael McRaith, director of the Illinois Department of Insurance and a member of the ad hoc committee, said the committee hopes to release a comprehensive report on the issue and possibly a recommended policy position before year end.

Not So Fast

Don't assume that the passage of the EU Reinsurance Directive equates to a unified reinsurance system in Europe, some said.

"I don't think the EU is that close yet to harmonizing themselves," Koziol said. "France and the Netherlands just voted against the EU Constitution. We applaud them for moving to uniformity, but I don't think they are there yet."

Even if you assume that Europe now has a unified system, it's a big leap to push for the elimination of collateral requirements in the United States, some groups said.

The directive may put pressure on the collateral issue, but "several preliminary steps need to occur before the trade question is legitimate. It's apples to oranges at this point," Lamar said.

The EU provides a single domestic regulator for each reinsurer--the regulator of the reinsurers' home country. "In the U.S., we don't have that. Whether it's a state or federal regulatory, the preliminary step is to get a single regulator for the United States. The EU could be seen as a model to move the U.S. in that direction," Lamar of RAA said.

The RAA would like to see reinsurance companies regulated by a single authority, whether it be the regulator in their home state, or a federal regulator.

That could happen if the federal SMART Act is passed. Congress is considering draft versions of the State Modernization and Regulatory Transparency Act, a sweeping proposal that includes the phasing out of most rate regulation within two years and would require states to enact certain models or updated laws within a certain time frame or risk having those laws pre-empted.

"It would basically change the course of insurance regulation in the United States. It does so less intrusively than an optional federal charter, which would create a federal regulator," Koziol said.

It should come as no surprise that both the National Association of Insurance Commissioners and the National Coalition of Insurance Legislators are opposed to the SMART Act.

"The draft SMART Act incorporates unacceptable levels of federal pre-emption that we believe would create both legal and practical problems for the insurance industry and its customers," Pennsylvania Insurance Commissioner Diane Koken, who is president of the National Association of Insurance Commissioners, testified before a congressional subcommittee in June. She said the act would pre-empt many state consumer protection laws.

The NAIC and NCOIL are currently considering other legislation, such as the Interstate Insurance Product Regulation Compact and the System for Electronic Rate and Form Filings, Koken said. Both show that the NAIC is willing and able to change long-standing procedures. "The states and the NAIC are on time and on target to modernize state regulation where improvements are needed, while preserving the benefits of consumer protection," Koken said.

While some hope to see the states agree on common regulation, and hope that regulation will be less burdensome, at least one state is moving to increase regulation on alien reinsurers.

California is considering a measure that would increase reporting requirements for reinsurers doing business in the state, and change how a primary company can take credit for reinsurance. If a reinsurer falls into a hazardous financial condition, the ceding company won't be allowed to credit the reinsurance on its book, and could be deemed insolvent, Koziol said. Also, California is considering increasing reinsurance collateral requirements.

Baby Steps

RAA said some form of mutual recognition between the United States and European Union might, in time, be appropriate. Nutter, in his testimony before Congress, suggested several conditions must occur before that could happen, including:

* Non-U.S. reinsurers must report their financial statements on a U.S. Generally Accepted Accounting Principles basis, with certain statutory adjustments;

* Non-U.S. reinsurers must meet a high standard of insurance regulation;

* Non-U.S. reinsurers must submit to U.S. jurisdiction:

* The U.S. reinsurer should not be subjected to greater regulation in the United States than the non-U.S. reinsurer is subject to in its home regulation: and * U.S. judgments must be subject to recognition and enforcement in the foreign jurisdiction.

"The reinsurance market is clearly global," Iuppa said. "The market benefits as the diverse business models and cultures within it contribute to the spread of insurance risk. If buyers and sellers of reinsurance are best served by a single market, that is the direction it will move."

Key Points

* Non-U.S. reinsurers posted $88 billion in collateral to do business in the United States in 2004.

* Some non-U.S. reinsurers opt to establish a U.S.-based subsidiary instead of posting collateral.

* Including U.S.-based subsidiaries, non-U.S, reinsurers carry 80% of the U.S. reinsurance market.

Learn More

Lloyd's of London A.M. Best Company # 85202 Distribution: Brokers

Munich Re Group A.M. Best Company # 86577 (Muenchener Rueckversicherungs) Distribution: Direct and reinsurance brokers

Swiss Re Group A.M. Best Company # 85010 Distribution: Reinsurance brokers

For ratings and other financial strength information about these companies, visit www.ambest.com.

Learn More

Lloyd's of London A.M. Best Company # 85202 Distribution: Brokers

Munich Re Group A.M. Best Company # 86577 (Muenchener Rueckversicherungs) Distribution: Direct and reinsurance brokers

Swiss Re Group A.M. Best Company # 85010 Distribution: Reinsurance brokers

For ratings and other financial strength information about these companies, visit www.ambest.com.

RELATED ARTICLE: Reinsurers react.

In response to requests for comment, the following reinsurers offered these written responses to the European Union Reinsurance Directive:

LLOYD'S:

We support the proposed directive for the following reasons:

* it will help to create a more level regulatory playing field between reinsurers in the EU;

* it will enable the EU to speak with a single voice on reinsurance in regulatory and trade debates with other countries and trading blocs and in organizations like the WTO;

* it will create a model of an intergovernmental mutual recognition agreement that may be followed on a broader geographical basis; and

* it firmly establishes the principle that gross reserving and collateral requirements should be abolished, throughout the EU, for EU reinsurers, and thereby strengthens the international case for abolition of such collateral systems in third countries such as the United States.

MUNICH RE:

As far as reinsurance is concerned, the EU is on the right track. Once the Council of Ministers has adopted the directive, there will be a real EU-wide market for reinsurance.

The reinsurance directive will shift the financial supervision of our EU branches to our home country supervisory authority. Another benefit is the abolition of collateral required by some member states.

SWISS RE:

Swiss Re believes that a harmonized, prudential framework for reinsurance in the EU as stipulated in the new Reinsurance Directive will boost confidence in the industry. Furthermore, the new directive essentially covers the same areas as the regulatory framework for reinsurance soon to be introduced in Switzerland.

RELATED ARTICLE: Non-U.S reinsurers by the numbers--2003.

2,344 Number of non-U.S. reinsurance companies that assumed premium from U.S. companies

$22.85 billion Amount of premiums U.S. companies ceded to unaffiliated non-U.S. reinsurers.

$30.66 billion Amount of premiums U.S. companies ceded to non-U.S. reinsurers with U.S.-based subsidiaries

$54.97 billion Amount of reinsurance recoverables unaffiliated non-U.S. reinsurers owe to U.S. companies

$47.40 billion Amount of reinsurance recoverables non-U.S.-based reinsurers with U.S.-based subsidiaries owe to U.S. companies

46.8%* Percentage of U.S. reinsurance premiums assumed by non-U.S. reinsurance companies

53.2%* Percentage of U.S. reinsurance premiums assumed by U.S.-owned reinsurers

* Refers to reinsurers that principally assume unaffiliated reinsurance. Excludes pools and associations, as well as premiums ceded to non-reinsurance companies.

Source: Reinsurance Association of America

What is the EU Reinsurance Directive?

The European Parliament passed the directive June 7, and it will take two years to implement. The directive:

* Imposes the same minimum standards of regulation in all EU member nations;

* Gives companies licensed in any member country a regulatory "passport" to operate anywhere in the European Union while reporting only to the regulator in their home country;

* Eliminates deposit requirements in France, Spain and Portugal; and

* Strengthens Europe's position to push for free trade access with other international markets, including the United States.

Source: International Underwriting Association

Alien Reinsurers Grow U.S. Presence

Alien reinsurers, both those affiliated with U.S. operations--such as Munich Re, the parent company of American Re--and unaffiliated alien reinsurers, or those not related to a U.S. subsidiary, have been growing their business in the United States.

Reinsurance Collateral Held
In the United States in 2004*

Companies not licensed to do
business in a given state are
required to post 100% collateral
to back up their reinsurance
recoverables.

Collateral Posted
by Reinsurers     $98 Billion

Posted by U.S.
Reinsurers $10 Billion

Posted by Non-U.S.
Reinsurers         $88 Billion

* Does not include Lloyd's or any collateral voluntarily
posted.

Source: Reinsurance Association of America

--David Pilla contributed to this article

Top 35 Global Reinsurance Groups

Ranked by consolidated gross premium written in 2004.

(US$ Millions)

2005                                            Prior Rankings (1)
Ranking (1)   Group Name                      2004   2003   2002

          1   Munich Re                          1      1      1
          2   Swiss Re Group                     2      2      2
          3   Berkshire Hathaway Group           4      3      3
          4   Hannover Re                        3      4      5
          5   Lloyd's of London                  5      5      6

          6   GE Global Ins Hldgs                6      6      4
          7   XL Capital                         9      9     11
          8   Everest Re Group                   8     13     15
          9   Transatlantic Hldgs Inc Group     12     11     13
         10   Partner Re Group                  13     14     14

         11   Converium Group (2)               11     10     10
         12   RGA Reins Co                      15     15     17
         13   Scor Group (2                      7      7      8
         14   London Reins Group                14     12     12
         15   Odyssey Re Group (Fairfax)        16     16     24

         16   Korean Reins Co (3)               17     18     21
         17   ING Group (2)                     19     17     19
         18   White Mountains Re                26     29     34
         19   Ace Group                         23     28     31
         20   Caisse Centrale de Reassur        24     27     30

         21   Endurance Specialty Ins Ltd       21     33     -
         22   Platinum Underwriters Group       31     21     -
         23   Arch Reins Ltd                    20     32     -
         24   QBE                               18     23     25
         25   Alea Groult                       29     30     -

         26   Mapfre                            32     35     33
         27   RenaissanceRe                     27     24     35
         28   Aegon                             25     26     18
         29   Axa Re Group                      10      8      9
        30    Toa Reins Group (3)               22     20     23

         31   Assicurazioni Generali SpA        30     19     22
         32   Chubb                             34     -      -
         33   Aspen Insurance                   28     -      -
         34   Axis Capital Holdings Limited     -      -      -
         35   W.R. Berkley                      33     -      -

                                                 Consolidated
2005                                               Premiums
Ranking (1)   Group Name                       Gross       Net

          1   Munich Re                       $30,558   $26,408
          2   Swiss Re Group                   28,047    25,789
          3   Berkshire Hathaway Group         13,085    11,816
          4   Hannover Re                      13,053    10,129
          5   Lloyd's of London                11,883     7,654

          6   GE Global Ins Hldgs               9,631     8,173
          7   XL Capital                        4,764     4,149
          8   Everest Re Group                  4,704     4,531
          9   Transatlantic Hldgs Inc Group     4,141     3,749
         10   Partner Re Group                  3,888     3,853

         11   Converium Group (2)               3,841     3,553
         12   RGA Reins Co                      3,649     3,347
         13   Scor Group (2                     3,449     3,298
         14   London Reins Group                3,068     2,757
         15   Odyssey Re Group (Fairfax)        2,657     2,363

         16   Korean Reins Co (3)               2,209     1,523
         17   ING Group (2)                     2,037       N/A
         18   White Mountains Re                1,933     1,246
         19   Ace Group                         1,795     1,745
         20   Caisse Centrale de Reassur        1,784     1,719

         21   Endurance Specialty Ins Ltd       1,711     1,697
         22   Platinum Underwriters Group       1,660     1,646
         23   Arch Reins Ltd                    1,658     1,588
         24   QBE                               1,600     1,306
         25   Alea Groult                       1,583     1,338

         26   Mapfre                            1,545     1,053
         27   RenaissanceRe                     1,544     1,349
         28   Aegon                             1,494     1,254
         29   Axa Re Group                      1,459     1,441
        30    Toa Reins Group (3)               1,455     1,279

         31   Assicurazioni Generali SpA        1,381       N/A
         32   Chubb                             1,184     1,139
         33   Aspen Insurance                   1,178     1,009
         34   Axis Capital Holdings Limited     1,093     1,060
         35   W.R. Berkley                        963       866

                                                   Total
2005                                          Shareholder
Ranking (1)   Group Name                           Funds

          1   Munich Re                           $26,445
          2   Swiss Re Group                       16,950
          3   Berkshire Hathaway Group             64,099
          4   Hannover Re                           4,219
          5   Lloyd's of London                    26,242

          6   GE Global Ins Hldgs                   9,415
          7   XL Capital                            7,812
          8   Everest Re Group                      3,713
          9   Transatlantic Hldgs Inc Group         2,587
         10   Partner Re Group                      3,352

         11   Converium Group (2)                   1,720
         12   RGA Reins Co                          2,279
         13   Scor Group (2                         2,056
         14   London Reins Group                    3,724
         15   Odyssey Re Group (Fairfax)            1,586

         16   Korean Reins Co (3)                     401
         17   ING Group (2)                        38,310
         18   White Mountains Re                    3,884
         19   Ace Group                             9,836
         20   Caisse Centrale de Reassur            1,224

         21   Endurance Specialty Ins Ltd           1,863
         22   Platinum Underwriters Group           1,133
         23   Arch Reins Ltd                        2,242
         24   QBE                                   3,495
         25   Alea Groult                             706

         26   Mapfre                                  734
         27   RenaissanceRe                         2,992
         28   Aegon                                   978
         29   Axa Re Group                         38,698
        30    Toa Reins Group (3)                   1,320

         31   Assicurazioni Generali SpA           16,134
         32   Chubb                                10,126
         33   Aspen Insurance                       1,482
         34   Axis Capital Holdings Limited         3,238
         35   W.R. Berkley                          2,155

2005                                                   Ratios
Ranking (1)   Group Name                      Loss   Expense   Combined

          1   Munich Re                       71.8      33.4      105.2
          2   Swiss Re Group                  72.0      29.8      101.8
          3   Berkshire Hathaway Group        69.9      25.2       95.1
          4   Hannover Re                     81.6      23.1      104.7
          5   Lloyd's of London                N/A       N/A        N/A

          6   GE Global Ins Hldgs             91.4      26.8      118.2
          7   XL Capital                      66.3      28.8       95.1
          8   Everest Re Group                74.4      24.5       98.8
          9   Transatlantic Hldgs Inc Group   75.3      26.2      101.5
         10   Partner Re Group                65.5      30.5       96.0

         11   Converium Group (2)             90.3      27.7      118.0
         12   RGA Reins Co                     N/A       N/A        N/A
         13   Scor Group (2                   68.5      33.4      101.9
         14   London Reins Group               N/A       N/A        N/A
         15   Odyssey Re Group (Fairfax)      69.9     281.0       98.0

         16   Korean Reins Co (3)             67.3      29.5       96.8
         17   ING Group (2)                    N/A       N/A        N/A
         18   White Mountains Re              72.6      31.2      103.8
         19   Ace Group                       69.7      24.1       93.8
         20   Caisse Centrale de Reassur      76.8      12.2       88.9

         21   Endurance Specialty Ins Ltd     57.4      28.4       85.8
         22   Platinum Underwriters Group     70.4      27.2       97.7
         23   Arch Reins Ltd                  63.5      28.9       92.4
         24   QBE                             65.3      32.0       97.3
         25   Alea Groult                     70.5      32.7      103.2

         26   Mapfre                          58.4      33.1       91.6
         27   RenaissanceRe                   81.9      22.5      104.4
         28   Aegon                            N/A       N/A        N/A
         29   Axa Re Group                    80.8      14.7       95.5
        30    Toa Reins Group (3)             85.5      23.3      108.8

         31   Assicurazioni Generali SpA       N/A       N/A        N/A
         32   Chubb                           62.3      32.8       95.1
         33   Aspen Insurance                 59.6      25.1       84.8
         34   Axis Capital Holdings Limited   63.4      21.1       84.6
         35   W.R. Berkley                    69.3      29.4       98.7

1 Rankings are based on prior-year gross written premium.

2 Operations were materially curtailed in 2005.

3 Year end is March 31, 2005.

Source: A.M. Best Co.