Recent events prove that reinsurers can fail even in jurisdictions which pride themselves on the effectiveness of their regulation. We look at two issues in regulation which remain problematic -the globalisation of reinsurance and the localised structure of reinsurance regulation - and consider changes underway or under consideration and whether they will rectify the present faults.
The reinsurance market is sophisticated and well developed in terms of international trade. The regulatory system which safeguards the interests of the public, however, is archaic and undeveloped. In October 1994 a Sub-Committee of the United States House of Representatives led by John D Dingell issued a report entitled "Wishful Thinking" following years of investigations into the collapse of a number of insurance companies, including Transit Casualty. At the time of the issue of the report, the estimation of Transit's liabilities, nine years after it was placed in liquidation, was $4 billion although the liquidators were still seeking to determine the extent of the insolvency, and estimated the process would take until 2012. It was considered to be the "Titanic" of insurance insolvencies.
The report identified a number of important factors which gave rise to the collapse of Transit Casualty, including speculative excess and management incompetence. They considered these to be only the symptoms. The Sub-Committee identified "supervisory babble" as the real cause. That is, in their view the world-wide regulatory system suffered from divergent attitudes, laws, accounting rules, resources, languages and cultures creating an environment of local self interest which did not foster regulatory communication or co-operation.
This applied equally within the United States where each state had divergent laws and attitudes. They found, for example, that one state may have a properly funded and developed regulatory system and another a virtually non-existent system or one rife with fraud and corruption. Their primary concern was to make recommendations to rectify faults in the US system of supervision, and their recommendation was that the US Federal Government take overall responsibility for the regulation of reinsurance in lieu of the haphazard state by state approach.
Regulators can, and do, regulate insurers and reinsurers accepting risks within their regulatory jurisdiction. The chasm in the supervisory matrix occurs where the reinsurer is offshore or where the reinsurer is a subsidiary of a parent operating in an...