Bill offers reduced collateral requirements to insurers
Non-US (re)insurers that operate in the US market will have their collateral requirements reduced, after a financial reform bill passed the Senate.
The bill also mandates the creation of the first national insurance regulatory body, the Office of National Insurance (ONI), which will sit within the Treasury.
At present, (re)insurers writing US business are forced to hold collateral as proof of their creditworthiness regardless of their pedigree, the strength of their balance sheet or their global reach.
This additional capital requirement is not imposed on US-domiciled insurers, offering them a significant competitive advantage.
The successful passage of the so-called Dodd-Frank Bill through the Senate by 59 votes to 39 prepares the way for the playing field to be levelled as early as next summer.
HR4173 has been passed to the White House for executive approval and President Obama is expected to sign it into law in the next week.
The ONI will be empowered to overrule any state regulators putting (re)insurers domiciled outside the US at a disadvantage by imposing higher collateral requirements or adopting other protectionist measures.
Additionally, the ONI would be authorised to "pre-empt" any state regulator that tries to adopt regulations inconsistent with bilateral or multilateral international agreements concluded by the Treasury.
The act will effectively give the federal government a veto over the regulatory framework imposed by state regulators as it applies to non-domestic insurers.
Lloyd's general counsel Sean McGovern welcomed the passage of the Dodd-Frank Act and the prospect of working with the proposed ONI as it develops its policy on international insurance issues.
McGovern said: "We hope it will play an active role in harmonising regulatory standards and dealing with the equivalence issues which arise under Solvency II."
Nevertheless, the legislation states in unambiguous terms that the ONI is not being created as a full-blown national regulator for the (re)insurance industry.
Whether or not it migrates in that direction, with mission-creep trimming the authority of state commissioners, will depend largely upon the agency's success in performing its wider functions.
Primarily, the ONI will be given a macro-prudential supervision role, as Congress looks to prevent a recurrence of the problems triggered by AIG's travails.
According to the draft legislation, it will "monitor all aspects of the insurance industry, including identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry or the United States financial system".
The ONI will also take the lead in setting the agenda for longer-term regulatory change.
The bill reads: "Not later than 18 months after the date of enactment of this section, the director [of the ONI] shall conduct a study and submit a report to Congress on how to modernise and improve the system of insurance regulation in the United States."
This will be expected, the legislation states, to cover capital standards, state-by-state variation and the coordination of international regulation.
Further to this, the ONI will have a role to play in administering the Terrorism Insurance Program set up in the wake of 9/11.
The director of the office will be a senior career civil servant appointed by the Secretary of the Treasury.
Observers will be watching the ONI closely from its inception to see if it is able to work harmoniously alongside the National Association of Insurance Commissioners (NAIC).
NAIC is a membership organisation that brings together the insurance regulators of the 50 different states.