Regulation of Reinsurance Recoverables: Protection or Protectionism?
Cole, Cassandra, Kathleen McCullough and Lars Powell, 2010. “Collateralization of International Reinsurance Liabilities in the U.S. Insurance Industry”, Insurance Markets and Companies: Analyses and Actuarial Computations, Vol. 1(2): 32-38.
25 Pages Posted: 8 Aug 2006 Last revised: 26 Feb 2014
Date Written: May 18, 2007
United States regulators and alien insurers are currently debating the appropriateness and efficacy of existing collateralization requirements. U.S. insurers are required to report the provision for reinsurance which decreases statutory assets to reflect the possibility that a portion of reinsurance recoverables may be uncollectible. To avoid this penalty, unauthorized reinsurers must fully collateralize gross U.S. liabilities. Regulators view the collateralization requirements as necessary to protect U.S. consumers, given the differences in accounting practices and regulatory legal authority in the U.S. and abroad. Alien reinsurers contend the collateralization requirements impose unjustified costs on some financially secure reinsurers, effectively limiting market capacity. We measure the impact of insurers' balance sheet entries for the provision for unauthorized reinsurance on the price of insurance. This provides a test of the market's valuation of uncollateralized reinsurance recoverables from unauthorized alien reinsurers. We find no significant relation between the use of unauthorized reinsurance and price, suggesting the required collateralization of recoverables is not necessary to protect U.S. insurers and insurance consumers. The result is consistent across numerous specifications, including variations based on the domicile and size of reinsurers.
Keywords: Insurance Regulation, International Reinsurance
JEL Classification: G22, F42, G28
Suggested Citation: Suggested Citation