Life and property and casualty insurance companies have more on their minds than terrorism risk as the Senate Banking Committee prepares to deal with legislation reauthorizing the Terrorism Risk Insurance Act (TRIA) as Congress returns to work this week.

S. 2244, is seen as the only available “engine” this year for legislation the industry sees as important, and not only because reauthorization of the TRIA is a priority for the property and casualty industry.

That’s because they also want to use the bill to limit the Federal Reserve Board’s ability to impose bank-centric rules on insurers, as well as ensure that state regulators remain relevant as international insurance rules are crafted.

See also: Is the insurance industry using TRIA to pursue agendas?

Wil Rijksen, a spokesman for the American Insurance Association, said AIA “anticipates that TRIA will be a priority for both the Senate Banking and House Financial Services Committees during the next four to six weeks.” 

While property and casualty insurers are concerned about provisions of the Senate bill which would phase-in an increase in the deductible for insurers from a catastrophic attack by 33 percent for each company, life companies want to use the bill to ensure the states rather than the Fed maintain primary oversight of the industry.

There are also concerns about what will happen to the Senate bill in the House in the wake of indictment of the lead sponsor of the House bill, Rep. Michael Grimm, R-N.Y., today. He was indicted in Brooklyn on federal charges of underreporting payroll while running an Upper East Side restaurant. The probe started on allegations of illegal fund-raising.

PC insurers want prompt action on the legislation, as noted by AIA president and CEO, because market uncertainty “is beginning to emerge with TRIA’s looming expiration, reinforcing the important benefit of maintaining the public-private partnership established by the law.”

No insurance industry source would speculate on the potential impact of Grimm’s legal problems on House consideration of reauthorization legislation.

But, in a letter to members of the Senate Banking Committee last week, officials of the Property Casualty Insurers Association of America and the National Association of Mutual Insurance Companies also said they want Congress to investigate efforts to impose European-style capital standards on insurance companies despite objections from U.S. state regulators.

In an investment note, Ryan Schoen and Stuart Paul of Washington Analysis expect insurers to strongly support amendments to the Senate bill that, amongst other provisions, create a larger role for the National Association of Insurance Commissioners (NAIC) in providing input for new insurance regulations.

Such a provision would likely be included in legislation Schoen and Paul expect Sen. Susan Collins, R-Maine, to introduce in hopes it is attached to the TRIA bill.

They expect her bill to seek to exempt insurers subject to federal regulation from bank-centric leverage and risk-based capital requirements, so long as their activities are subject to state insurance regulation.

They said such legislation “will quickly attract the support of the 25 senators who have co-sponsored legislation from Sherrod Brown, D-Ohio, and Mike Johanns, R-Neb., that would explicitly allow the Fed to “establish capital standards that are properly tailored to the unique characteristics of the business of insurance.”

They also expect Collins to “explicitly carve out insurers” from the Collins Amendment, with legislation she attached to the Dodd-Frank Act, which are subject to consolidated regulation by the Fed additional flexibility that would allow them the flexibility to continue using statutory instead of GAAP accounting practices.

The American Council of Life Insurers acknowledged that the industry wants Congress to scale back Fed authority over insurers.

“We understand that Congress may be considering that as an option,” said Whit Cornman, an ACLI spokesman. “There is broad support on Capitol Hill for the principle that insurers should not be subject to bank-centric capital standards.”

The PCI/NAMIC letter seeking a hearing on international regulation asks the Senate panel to focus on the potential impact on consumers of ongoing efforts by international regulators to set a new global capital standard for internationally active insurers, even U.S.-based insurers already subject to the state-based system.

“This one-size-fits-all approach is being advocated over the strong objection of the states, who are the regulators in the U.S. for the business of insurance, without demonstration of need or concern for the loss of consumer focus, significant consumer costs and other negative impacts on our market,” PCI and NAMIC said in the letter.

At the heart of the issue, according to Jimi Grande, senior vice president of federal and political affairs for NAMIC, is the fact that the U.S. and European systems differ greatly in their focus.

“There’s a clear distinction between how we regulate insurance and what other nations do,” he said. “The state-based regulatory system we have is designed to allow for a competitive marketplace while, at the same time, using mechanisms like guaranty funds to ensure that claims will still be paid should an insurer fail.”

Grande said that the focus overseas is to prevent any company from failing so that bond holders, equity holders and other claimants are protected, “and that requires a higher capital standard than is appropriate in our regulatory structure.”

The letter added that in the view of PCI and NAMIC, Congress would find in examining the issue that “European standards would ultimately create needless and costly regulatory burdens for insurers and their policyholders while providing no added benefit to anyone.” 

Insurers ceding liabilities to affiliates

While insurers are saying there is “broad support” in Congress for insurers to not be subject to bank-centric capital standards, SNL Knowledge Center has come up with a sobering statistical study indicating that large insurers are ceding more than half of their liabilities to affiliates, and that for the industry as a whole, more than a quarter of their reinsurance load was ceded to captives.

This represents a more than 21 percent increase from levels seen five years ago, the SNL study found. The data is new, because before 2013, the NAIC intermingled captive moves with other reinsurance transactions. It is breaking out the vehicles used for reinsurance purposes as a result of pressure from both some insurance regulators as well as federal agencies, for example, the Federal Insurance Office.

Captives are called the “shadow insurance market,” and concerns about lack of transparency abound. And, in a November study commissioned by the Minneapolis Federal Reserve Bank, two economists found that captive activities raised the potential for systemic risk for insurers. The economists said they expect losses because of use of captive insurance by large insurers to be larger than if they were not used.

The latest data is in response to concerns voiced in the study about the lack of public disclosure by shadow reinsures. The study said this prevents “accurate assessment of their investment risk and the fragility of their funding arrangements.”

Overall, U.S.-filing life insurers ceded 50.87 percent of reinsured business to affiliates, which include captives and special purpose vehicles, in 2013, according to an SNL analysis of data reported to the NAIC showed. That level is essentially flat with the 50.96 percent ceded in that manner in 2012.

The SNL study found that among commercial life insurers with more than $2 billion in direct premiums in 2013, four — MetLife Inc., Prudential Financial Inc., American International Group Inc. and Voya Financial Inc. — ceded more than half of their reinsurance load to affiliates. The largest shares belonged to AIG, with 82.09 percent, and MetLife, with 76.43 percent.

As analyzed by SNL, the data include only the life insurance components of companies with products across industry sectors. Life insurers use captives as a means of dealing with perceived redundancies with XXX reserves, for term life products, and AXXX reserves, for universal life policies with secondary guarantees.

Captives accounted for 65.41 percent of MetLife’s reinsurance load. The insurer with the next-highest captive reinsurance load, Prudential Financial, directed 43.96 percent of its reinsurance to captives. Next in line for being captive-reinsurance heavy were AXA, AEGON NV and Nationwide Mutual Group.

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