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TMCNet:  A.M. Best Briefing: Shifting Tides in Global Regulation Present Challenges, Opportunities for Reinsurers

[February 16, 2017]

A.M. Best Briefing: Shifting Tides in Global Regulation Present Challenges, Opportunities for Reinsurers

Regulatory risk is growing for reinsurance companies, which could represent a mix of favorable and unfavorable changes for offshore domiciles should U.S. tax reforms be adopted, according to a new A.M. Best briefing.

The Best's Briefing, titled, "Shifting Tides in Global Regulation Present Challenges and Opportunities," states that should tax and regulatory changes result in lower after tax earnings, organizations would likely respond by finding alternative operating structures to sustain earnings and manage capital cost efficiently. This also could potentially lead to the decline of one domicile over another.

With the new U.S. administration in place, lowering the corporate tax rate and taxes on imports remain on the table, as they were among President Donald Trump's campaign promises, intended to bring business back onshore to stimulate the U.S. economy. According to the briefing, this would benefit U.S. reinsurers; however, Bermuda and other offshore domiciles could be negatively impacted, and they have cited the risks of less capacity and higher rates to U.S. consumers in their opposition.

In January 2017, the United States and the European Union announced a bilateral agreement regarding insurers and reinsurers, which provides for mutual recognition in the areas of reinsurance, group suprvision and exchange of information. A key provision of the agreement is the elimination of the requirement for an assuming reinsurer in either jurisdiction to post collateral to a cedent in another jurisdiction, subject to certain conditions. In a market flush with abundant capacity, the reduction of collateral requirements in A.M. Best's view could result in more pressure on rates or terms and conditions from increased competition. From a ratings perspective, required capital, as measured by Best's Capital Adequacy Ratio (BCAR), could increase, since collateral will no longer serve as an offset to required capital for credit risk.

The risk of changes in the regulatory environment is just one component in an organization's enterprise risk management framework, and the potential change in tax structure or treatment of internal reinsurance is not a new concept for the reinsurance industry. Companies will continue to seek the most efficient structure for their business, and they are not opposed to restructuring operations or even re-domiciling in order to do so.

A.M. Best will continue to communicate with companies as they navigate the complexities of the regulatory landscape.

To access the full copy of this briefing, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=258713.

A.M. Best is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

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