ABIR Comments on NAIC Process for Developing and Maintaining the List of Qualified Jurisdictions
January 8, 2013
The Honorable Michael Consedine
Chair, NAIC Reinsurance Task Force
Commissioner of Insurance, State of Pennsylvania
Cc: Mr. Ryan Couch and Mr. Dan Schelp, NAIC
Subject: ABIR Comments, NAIC Process for Developing and Maintaining the List of Qualified Jurisdictions
Dear Chair Consedine:
On behalf of the 21 members of the Association of Bermuda Insurers and Reinsurers (ABIR) we provide these written comments which supplement our oral comments provided on Dec. 1 with regard to the NAIC Process for Developing and Maintaining the List of Qualified Jurisdictions under the NAIC credit for Reinsurance Model Law and Model Regulation frameworks.
Bermuda’s Economic Support of US Insurers
ABIR’s members are global providers of commercial insurance and reinsurance and have excellent reputations with clients and regulators globally. At year end 2011 ABIR members wrote on a global group basis, $65 billion in gross written premium on a group capital base of $90 Billion. From Bermuda ABIR members provide reinsurance on a cross-border basis to assume risk on all lines of US business. A study by Wharton/Temple Professor J. David Cummins found that Bermuda’s reinsurers were the largest recipients of unaffiliated ceded reinsurance premium from the top 50 US insurers in all 12 lines of business measured. The share held by Bermuda reinsurers ranged from 34% on medical malpractice to 42% on home owners. *
To illustrate our US economic impact, with regard to year end public filings on Hurricane Sandy loss estimates, ABIR members have reported in aggregate about $3 billion in loss estimates for the storm. Increasingly aggregate loss estimates are now settling around $25 Billion, for that size loss the Bermuda share is expected to increase to $5 billion according to several ABIR member CEO’s. This is a large number, but it is not a number that strains either market resources or capital budgets. And it pales in comparison to the estimated $17 billion in catastrophe payments made by Bermuda reinsurers to their US clients following Hurricane Katrina. Our claims payment record is excellent; and individual ABIR member’s capital bases continue to meet or exceed regulatory and rating agency requirements. In addition, ABIR members score among the best under the enterprise risk management analyses performed by various rating agencies. Because of these two points (the large US utilization of Bermuda reinsurers; and our strong capital standing) it is not surprising that both Florida and New York have approved a large number of Bermuda reinsurers for collateral reduction under their credit for reinsurance regulations. According to the NAIC list distributed and dated Nov. 28, Florida has certified 19 reinsurers and of these 17 are shown with Bermuda domiciles. Similarly in New York of the 23 certified reinsurers, 17 are Bermuda domiciled. The states that pioneered the review of the collateral reduction rules have widely recognized both Bermuda as a domicile and the high financial and market standing of the reinsurers which have been approved. We know that 11 states have now approved the NAIC model law, but regrettably only two have actually certified reinsurers.
The BMA’s Regulatory Standing
The Bermuda Monetary Authority (BMA) is now widely recognized globally as a robust financial supervisor. This recognition comes from the BMA’s work in conforming to IAIS international standards; from seeking cooperation and information sharing agreements with regulatory peers; for standing for independent assessment by the EU, US states and the IMF; and in employing excellent regulatory talent from around the world. In addition for US state regulators, many features of the Bermuda system will be familiar: risk based capital requirements, legal entity public financial reports and on site financial exams. In addition for EU supervisors: the ORSA requirements, mandatory stress testing, economic capital model option and approval and RBC calibration to TVAR will be familiar. The corporate governance requirements and group supervision requirements contain components of both the US and EU models. Bermuda was one of only three jurisdictions to stand for the EU’s EIOPA equivalence testing under Solvency II and the BMA performed well in the initial assessment. The BMA has also been the subject of two IMF assessments comparing the BMA’s regulatory regime to the IAIS standards. In addition, Bermuda as a government has been widely recognized by various US federal officials as a cooperative jurisdiction in tax law compliance and information sharing**; and anti-money laundering and anti-terrorism financing measures. With regard to information sharing, the BMA now has in place MOU’s with the following governmental or regulatory bodies (US agencies highlighted):
Signed MOUs with other jurisdictions / organizations:
- International Association of Insurance Supervisors (IAIS) – signed June 25th 2009
Signed MOUs with other jurisdictions / organizations:
- US Commodity Futures Trading Commission – signed March 3rd 1997
- States of Jersey Financial Services Department – signed April 10th 1997
- Isle of Man Financial Supervision Commission – signed October 28th 2002
- UK Financial Services Authority – signed April 21st 2004
- Luxembourg (Commission de Surveillance du Secteur Financier) – signed May 31st 2005
- Cayman Islands Monetary Authority – signed June 30th 2005
- Financial Services Board of the Republic of South Africa – signed August 15th 2005
- International Organization of Securities Commissions – signed June 6th 2007
- Malta Financial Services Authority – signed June 3rd 2008
- The Office of the Superintendent of Financial Institutions of Canada – signed August 19th 2008
- New York State Insurance Department – signed September 25th 2008
- Luxembourg (Commissariat Aux Assurances) – signed February 2nd 2009
- Florida Office of Insurance Regulation – signed September 24th 2009
- Nebraska Department of Insurance – signed October 28th 2009
- Pennsylvania Insurance Department – signed December 10th 2009
- Swiss Financial Market Supervisory Authority – signed March 11th 2010
- Regional Regulatory Authorities (Caribbean) – signed May 27th 2011
- Financial Supervisory Authority of Norway – signed May 2nd 2012
The BMA is a member of the following international standard setting bodies:
- International Association of Insurance Supervisors (IAIS)
- International Organization of Securities Commissions (IOSCO)
- Offshore Group of Insurance Supervisors (OGIS).
The BMA has discussions ongoing with additional states on MOU’s.
Specific Comments on NAIC Draft
In reviewing the NAIC draft we appreciate very much the comments noted on page 4, Part II, paragraph 3, where the evaluation of non US jurisdictions is described as an “outcomes-based comparison to financial solvency regulation under the NAIC accreditation Program”.
Furthermore “it is not intended as a prescriptive comparison to the NAIC Accreditation Standards”. And we note that the paragraph 6 requirements of: sharing information, cooperation, history of performance, and absence of substantial problems with enforcing judgments are appropriate and sensible. Bermuda as a self-governing territory of the United Kingdom follows UK law and the same precedents that cover enforceability of judgments in the UK apply to Bermuda. Bermuda will perform well under this assessment.
We also are pleased with the plan as noted on page 5, Part III, Paragraph 1 (a) that the NAIC will initially review the jurisdictions that Florida and New York have certified, notably: Bermuda, Germany, Switzerland and the United Kingdom. We hope the assessment can begin with Bermuda – for more reasons than just the alphabet—since its reinsurers are the most overwhelmingly approved already by those two states.
We were encouraged by your comments supporting a “fast-track” approach to certification of the priority jurisdictions. We believe starting with the jurisdictional self-assessment is an efficient way to implement this fact track approach. That self-assessment can then be validated by publicly available assessments, in Bermuda’s case that would include the preliminary EIOPA assessment, supplemented by regulatory action since this assessment date; or the most recent IMF FSAP, supplemented by the update the BMA would provide. In both the EIOPA and the IMF assessments it’s important to recognize that they are out of date as soon as they are completed and thus the BMA needs to be allowed to provide pertinent updates about action taken as a result of findings in these published evaluation reports. But the critical piece should be the self-assessment because that is where the BMA is best able to document its approach to a robust financial supervision framework. During the Committee’s consideration it was suggested that a fast track review could lead to approval of jurisdictions by mid-year 2013. That seems like an appropriate time to complete the review of the four priority jurisdictions.
Our chief concern with the draft is the unfortunate migration that may occur from an “outcomes based assessment” to a “prescriptive comparison” to the NAIC accreditation standards. Our outsider’s view of the EU Commission’s EIOPA equivalency assessment is that it started at the same point, focused on 12 broad principles, but in reality it came down to a more than 50 item check-listed evaluation. We’d suggest a major revision of the language on pages 11-18 dealing with Section A Laws and Regulations and Section B Regulatory Practices and Procedures. These sections contain more than 70 lettered subparagraphs that expand upon the 21 separately stated principles for evaluation. It seems to us to be inevitable that this very specific checklist type description will devolve the process away from an outcomes based assessment. The 21 principles identified in these two sections are what is important. These seven pages should be rewritten to direct the supervisory authority to explain how it accomplishes the objectives inherent in each principle. It is not necessary to document more than 70 specific US regulatory component points to illustrate that a robust regulatory framework is in place. When reviewing the additional sections that follow Section A and B it is clear that an additional series of specific principles are required to be met. This brings a total of nearly 30 principles that have to be reviewed by the candidate jurisdiction in its self-assessment. As we stated at the Task Force meeting this seems excessive, unnecessary, expensive, cumbersome and a deterrent to the accomplishment of the objective stated in the draft — assessing the quality of regulation in effect based on the outcomes known from actual regulatory practice. If the goal is to deter jurisdictions from seeking certification, we suggest that is contradictory to the stated goals of the NAIC in adopting the new framework in the first place.
We specifically note our concern with regard to the “independent opinion of counsel” on page 4, Part III, Section 2 (b). We don’t understand why you would require a regulatory agency from a candidate jurisdiction to obtain an outside legal opinion asserting to the accuracy of the filing of that regulatory agency. We frankly find that requirement offensive. The fact that the filing is being made by a competent regulatory authority should speak for itself. If you want it recognized that a regulatory lawyer, subject to specific legal and ethical training and licensing, participated in the self-assessment that is completely different from what is written and should be corrected.
We appreciate the time you have granted in December for us to comment at the Task Force meeting and for this written consultation opportunity. We appreciate the great leap forward the NAIC has taken with its model law and regulation changes and we appreciate the fact that 11 states have enacted the model legislation. Fast-tracking the qualified jurisdiction provisions seem to be an essential part of encouraging states to implement the laws they have enacted. Please let me know if we can answer any questions on our statement.
Bradley L. Kading
President and Executive Director
* The Bermuda Insurance Market, An Economic Analysis, J. David Cummins, Wharton/Temple, May 6, 2008
** The Bermuda government has signed more than three dozen tax information exchange treaties with foreign governments – including with all its major trading partners