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Foreign insurers in the U.S. market.

With much discussion focused on threatening trade wars and protectionism, and in light of an increase in fraudulent activities perpetrated by foreign nationals and insurers operating in the U.S. market, it is hardly surprising that some people feel that alien insurers may be more trouble than they are worth. But many who artended a recent International Insurance Council (11C) 1993 North American Roundtable in New York would beg to differ.

"Non-U.S. insurers are an important part of our market, in virtually every state. If the United States is to remain healthy, and we are to move towards a global insurance marketplace, then we must recognize that non-U.S. insurers and reinsurers are an essential portion of the capacity that the consumers in this country need," stated David Walsh, director of insurance for the state of Alaska and chairman of the National Association of Insurance Commissioners' (NAIC) International Insurance Relations Task Force. He noted that in his jurisdiction, the non-U.S. insurers, including surplus lines, have over 50 percent of the market - though Alaska is a somewhat unique situation given the state's heavy emphasis on the non-admitted market for marine and aviation coverage. Alien insurers - those insurers domiciled in a foreign country - have always played a major role in the U.S. market, beginning in colonial times when all marine insurance was written in the London or European markets, according to Sean Mooney, a senior vice president and economist for the Insurance Information Institute in New York. He added that "a very dominant role has always been played by alien insurance companies up to today. Interestingly, there were actually nine Russian insurance companies operating in the United States prior to the 1917 revolution."

Just how much of a role do alien insurers play today in the U.S. market?

Where they write insurance on a direct, admitted basis, alien insurers have 15 percent of the property/casualty market, numbering 903 companies they also control 5 percent of the life/health market, and number 247 companies, Mr. Mooney said. Alien insurance companies also operate in the U.S. market on the reinsurance side, with $10.4 billion of reinsurance ceded to alien reinsurance companies. This represents about 25 percent of the ceded reinsurance to non-affiliates Mr. Mooney added.

The assertion that the current 50-state regulatory system constitute barrier to entry by foreign compet tion "is disingenuous at best," Director Walsh declared, noting that a trade barrier is based upon disparate treatment between a domestic and a foreign concern. "Now our system of regulation may be something that people don't like. To the extent that it is ineffi cient, it is inefficient to U.S. insures and non-U.S. insurers equally. It has never been shown that there is any particular barrier in the U.S. system that is specific to non-U.S. insurers," he remarked. Conversely, to the extent that the U.S. system is efficient and serves the consumer's best interests does so equitably as well.

The sheer need for additional capacity appears to be driving many of the states to streamline their regulatory systems, thus bringing down barriers to trade. "After what happened in Florida, Louisiana, Mississippi, California and Hawaii, in terms of natural disasters, those are markets that are looking for capacity because they need it desperately," Director Walsh reported. He also contended that largest percentage growth of business in the United States goes to non-U.S. insurers: "The countries that are most critical of our system can't say the same thing." Moreover, the U.S. market "doesn't have any single dominant insurer as many other countries do; and for any alien insurer coming to this market, there is a ready-made distribution system that is eager and waiting to link up with an insurer with capital," Mr. Mooney pointed out.

Those in the NAIC will acknowledge that there may be some structural impediments to entering the U.S. market. In fact, some lawyers have claimed it could take 10 years for an insurer to become fully licensed in every state. However, Director Walsh finds those estimates "a bit overblown," noting that in Alaska, an applicant will hear within 30 days, maximum, from his office regarding acceptance or denial, with the average response time being 12 working days. Besides, U.S.-domiciled insurers face the same structural impediments, to the extent that they exist, as do foreign concerns.

The NAIC has been working to reduce the negative effects of 50-state regulation by establishing greater uniformity and consistency. The NAIC's accreditation program, which assures some uniformity in financial regulation among the 55 insurance jurisdictions in the United States, has 19 states accredited so far, with 21 more States and jurisdictions expected to be ready this year, plus another five if their legislatures act, Director Walsh reported. "The second step in the process has been the study by the NAIC of the possibility of developing common forms and procedures for licensing and adopting forms and rates," he added. He cited the successful example of security licenses, which are acquired utilizing a standardized form that is then submitted to each state, individually. If this insurance licensing proposal becomes reality, it should negate any objections based upon the notion of having to fill out 50 different forms to conduct business in 50 different states.

Fraud in the System

In July 1992, the U.S. Senate Permanent Subcommittee on Investigations released its report entitled "Problems With the Regulation of the Insurance and Reinsurance Industry," citing a whole host of examples of fraud perpetrated by a number of international criminal syndicates. Subcommittee Chairman Sam Nunn (D-Ga.) noted that the committee members "found current U.S. insurance regulations replete with a number of significant loopholes that permit fraudulent insurance companies to operate with virtual impunity. In particular, we found that the offshore reinsurance, surplus lines and risk retention segments of the U.S. insurance industry were grossly unregulated thereby permitting unsuspecting consumers to be victimized by these criminals."

In response to such criticisms, Director Walsh stated that "the vast bulk of non-U.S. reinsurers are honest, they provide a good product at a fair price, and they service claims fairly and equitably. However, there are some [fraudulent] non-U.S. reinsurers who hide under different names and in different jurisdictions." Thus, he readily admitted that "there is definitely an enforcement role to be played by the federal government. Congress has yet to act on it. This is an area where federal assistance is absolutely essential."

The subcommittee report noted that "the various states must have a way of identifying and certifying the financial bonafides of offshore insurance and reinsurance companies accepting risks in the United States. Currently, state regulators are not always aware of an offshore company selling direct insurance in their states via surplus lines authority or the Risk Retention Act until the damage is done. Likewise, regulators have little, if any, information on many of the offshore companies that are not licensed in any state but that still accept millions of dollars of U.S. insurance risk."

Federal or State Rule

The NAIC'S response to its critics was the adoption of the proposed "Federal Non-U.S. Insurer Act," which would federally authorize the NAIC to expand its screening of non-U.S. insurers and reinsurers. Under the proposed legislation, the NAIC's Non-Admitted Insurers Information

Global Business

Office would be permitted to regulate these companies by establishing minimum net worth, collateralization and reporting requirements, as opposed to retaining the status quo (fraud aside) or moving to full-blown regulation - treating the reinsurers, for example, as if they were direct insurers, an approach that has been espoused by many on Capitol Hill.

With regard to surplus lines,

Director Walsh feels that the system currently in place "has worked very well for many years." This system has been referred to as a "white list" approach where the U.S. State Department, with the help of the NAIC, determines whether an insurer meets minimal capitalization requirements and has a good track record in the marketplace. "In Alaska, the system has worked very well and been very efficient for agents and brokers, and more importantly, the state's consumers," he adds.

On the other hand, the Senate Subcommittee recommended that the U.S. Congress, not the states, "establish federal certification as a prerequisite before an offshore reinsurance or insurance company is allowed to accept direct or reinsurance risk in the United States." In so doing, the recommendation continued, "Congress should mandate that such registration or certification entail that the offshore companies meet minimum capital and surplus requirements, provide access to their books and records, periodic audited financial examinations and relevant background information on their officers, directors and shareholders." Ironically, this form of federal regulation could permit non-U.S. insurers to enter the U.S. market without having to be licensed in all 50 states, while U.S.-domiciled insurers unfairly would still need to obtain all 50 licenses.

This federal proposal is also opposed by Director Walsh on reinsurance grounds: "In my view, this would dry up the marketplace and dry it very quickly. I don't think that there are any other countries that put those types of regulatory restrictions on reinsurers." Furthermore, with reinsurance, there is no reason to believe that the purchaser is "'unsophisticated"- as regulators sometimes claim for protecting the general public - since the buyer is itself an insurance company.
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Author:Kurland, Orin M.
Publication:Risk Management
Date:Apr 1, 1993
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