New President, New Challenges for Risk Transfer

The Obama Administration will face several decisions that could reshape the markets for insurance, reinsurance and insurance-linked securities.

While some initiatives are more likely to pass through the political gauntlet than others, the breadth of proposals will mean the industry will at least be grilled over issues from tax breaks to regulatory oversight as Washington rethinks the role of the financial services industry.

Over the past several weeks U.S.-based insurance executives — especially from the property/casualty side — have been arguing that they should be spared major regulatory changes because they did not take part in the excesses of banks and broker/dealers.

But many are taking a more realistic approach that all types of insurance and risk transfer will feel some measure of change following today’s inauguration.

“What happens in Washington needs to be reconciled with the fact that we are in a new era,” said Michael Pritula, director of McKinsey & Company at a P/C industry event last week. “There is a broader tidal wave of financial services re-regulation that we will have deal with.”

Some of the top regulatory issues the industry will need to consider are:

Reinsurance Tax Changes : The ability of domestic and foreign reinsurers to deduct premium ceded to offshore affiliates became such a hot topic during the campaign that then candidate Obama mentioned the practice in a campaign commercial.

In September U.S. Rep Richard Neal introduced H.R. 6969 as an amendment to the U.S. Tax code that would limit deductions or related-party reinsurance cessions to the average percentage of premium ceded to unrelated reinsurers.

Although the bill died in the House Ways and Means Committee, industry watchers expect the issue to be revived as the administration looks for ways to increase tax revenues as the push through a broader tax cut.

Optional Federal Charter : How and where U.S. insurers are regulated has been debated for at least the past decade as insurers criticized the existing state-based system as overly complex.

Over the past several years legislation has been introduced that would allow insurers, reinsurers and brokers to “opt in” to a federal charter and move away from regulation at the state level. Recently, a plan optional federal charter (OFC was included as part of the initial financial services overhaul proposed by the Bush Administration last year.
But the collapse of the banking sector and the relative strength of the P/C industry has emboldened OFC opponents — especially state regulators — that the current system works and any changes could threaten the solvency of the U.S. insurance industry.

“The optional federal charter is tantamount to deregulation, and deregulation won’t work in this environment,” said Thomas Sullivan, Connecticut’s Insurance Commissioner last week. “Optional is dead.”

National Catastrophe Fund: Backed by then candidate Obama, the creation of a federally backed pool to for catastrophe risk continues to be debated.

Last year President Obama tentatively endorsed the H.R. 3355 Homeowners Defense Act as a “good start,” according to published reports. The bill would create a federal program that that would backstop losses from state-based catastrophe pools. The federal pool would be funded by issuing bonds.

Opponents have argued that the program would supplant existing private reinsurance options and that the bonds would have an implicit federal guarantee.

Less of a priority than other regulatory initiative facing the industry, a national cat fund remains on the Administration’s radar.

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