Federal Insurance Office Issues Reinsurance Report

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Among other provisions, Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) authorizes the Federal Insurance Office (the FIO) to monitor all aspects of the insurance industry, including reinsurance. {Dodd-Frank Act, §§ 501-502; 31 U.S.C. § 313 (c)(1)(A) (2010)}. On December 31, 2014, pursuant to Title V of the Dodd-Frank Act, the FIO issued its report on reinsurance entitled “The Breadth and Scope of the Global Reinsurance Market and the Critical Role Such Market Plays in Supporting Insurance in the United States” (the Report).

The Report discussed several areas including:

  • A Brief History of Reinsurance;
  • The Definition and Forms of Reinsurance;
  • The Purpose and Importance of Reinsurance;
  • Regulation of Reinsurance in the United States; and
  • Global Reinsurance Markets.

While much of the Report focused on the basics and structure of reinsurance and reinsurance transactions, the Report outlined several interesting statistics relating to the status of reinsurance in the United States and globally.  For example,

  • “Today, the reinsurance industry supporting the U.S. direct insurance market is global in scope, and primarily consists of approximately 50 large, professional reinsurers and reinsurance groups, as well as many smaller reinsurers. According to analysis by the Reinsurance Association of America, in 2013 approximately $46 billion in total (P/C) reinsurance premiums were ceded by U.S.-based insurers to unaffiliated reinsurers; of this amount, approximately $28.4 billion of premiums were ceded to non-U.S. reinsurers and approximately $17.6 billion of premiums were ceded to U.S. professional reinsurers” (pg. 5).
  • “Five of the six largest reinsurance groups in the world, by premium volume, are based in Europe: Munich Reinsurance Co., Swiss Reinsurance Co. Ltd., Hannover Rueckversicherung AG, SCOR SE and the Lloyd’s market” (pg. 36).
  • “The U.S. life reinsurance market is led by a relatively few global reinsurers. In October 2013, SCOR SE, a French-based reinsurance group, completed its acquisition of Generali’s U.S. life reinsurance operations, giving SCOR SE the largest share of life reinsurance business in the United States.  Other major participants assuming U.S. life reinsurance business include Reinsurance Group of America, Inc. (RGA), Swiss Reinsurance Co. Ltd., and Munich Reinsurance Co. In 2012, these reinsurers comprised 83 percent of the life reinsurance market for U.S. risks.  Of the four, RGA is the only life reinsurer primarily headquartered at the group level in the United States” (pg. 36).
  • “In recent years the share of premium ceded by U.S. insurers to non-U.S. reinsurers has been increasing steadily. As seen in Figure 11 [of the Report], the share of premiums ceded by U.S. insurers to U.S.- based reinsurers declined fairly uniformly from 61 percent in 1997 to only 38 percent in 2013” (pg. 35).
  • “Of the $28.4 billion in U.S. premiums ceded to non-U.S. companies in 2013, most were assumed by reinsurers in seven jurisdictions: Bermuda ($9.7 billion), United Kingdom ($4.8 billion), Germany ($3.7 billion), Cayman Islands ($3.3 billion), Switzerland ($1.4 billion), Channel Islands ($1.3 billion), and Turks & Caicos ($1.0 billion)” (pg. 36).
  • “Although not as large as European reinsurance groups, Asia-Pacific reinsurers are nonetheless key participants in the international arena. Seven of the world’s largest reinsurance groups are based in the Asia-Pacific region. In 2013 these reinsurers combined to assume almost $19 billion in net written premiums. The Asia-Pacific reinsurance market is largely driven by reinsurers domiciled in Japan ($10.89 billion), Korea ($3.57 billion), India ($2.21 billion), and Australia ($1.77 billion)” (pg. 38).

During the early years of the 21st century, when insurers and reinsurers  sought additional means of protecting against increasing losses from catastrophes (both natural and manmade), insurers were looking to alternative reinsurance instruments as additional channels for capacity and diversification. In addition to more traditional forms of reinsurance contracts, other reinsurance instruments such as Catastrophe (Cat) Bonds, Sidecars, Industry Loss Warranties, and Collateralized Reinsurance emerged and now offer a variety of benefits to cedents and retrocedents (pg. 39-40).  The Report notes (pg. 42),

In recent years, the non-traditional reinsurance market has continued to evolve, and it is    now a standard consideration for many reinsurance buyers. Broker Guy Carpenter   estimates a total of $20.5 billion in cat bonds outstanding as of mid-2014 (Figure 12). In    the first quarter of 2014, sponsors issued $1.6 billion of insurance-linked securities, primarily cat bonds, which was a record amount for a single quarter.  The second-quarter   set another new record, with the issuance of $4.6 billion in cat bonds.  Insurance-linked securities investments for calendar year 2014 are on track to set a new annual record.

The growth of alternative risk transfer markets extends interconnections between the  insurance and reinsurance sector and capital markets. While such instruments serve the economic function of expanding markets for catastrophe and other insurance risks, exposure to such risks could be problematic for unsophisticated investors. These instruments have been described as increasingly mainstream products, although the long-term commitment of non-traditional capital sources has not yet been tested. As some analysts have noted, very few cat bonds to date have experienced major losses.

The Report concludes that “[t]he strength and viability of both the insurance and reinsurance sectors are vitally important to the United States, which is the largest single-country insurance market in the world” (pg. 43).  In addition, due to the “importance of the global reinsurance market to U.S. insurers,” the Treasury Department and United States Trade Representative are considering a “covered agreement with respect to collateral requirements for reinsurers” (pg. 43).