Editor: Please tell our readers about your background as the State of New Jersey's Department of Banking and Insurance Commissioner. What in your experience equipped you to serve in this role?
Goldman: My background and experience involved engaging in various business transactions - banking and insurance - as a mergers and acquisitions lawyer for more than 20 years, not as a regulator. Obviously, in connection with all of the transactions financings with lenders were involved. I acted as counsel in connection with the purchase and sale of banks, and I had been involved in mergers and acquisitions involving insurance brokerages and insurance companies.
Editor: You have long been a champion for reform of reinsurance regulation. You were chair of the Reinsurance Task Force of the National Association of Insurance Commissioners (NAIC) which designed a framework for modernizing the framework for regulating reinsurance in the U.S. and between the U.S. and other countries called the Reinsurance Regulatory Modernization Act. What is the status of that proposal today?
Goldman: It has not been implemented, but it is presently being discussed between the NAIC and Congress. There are elements of the proposed bill that are part of the financial regulatory reform proposals, which are presently actively being discussed in Congress, but the bill in the form in which the Reinsurance Task Force wrote it is not being taken up.
Editor: Who is sponsoring the legislation in Congress?
Goldman: The NAIC has not gotten sponsors. Part of the delay has been because the reinsurance industry has been unable to coalesce around the entirety of the bill. It supports the notion of reducing the collateral requirements of non-U.S. reinsurers, but a number of the companies have reservations about the Reinsurance Supervision Review Board. Some of the ceding companies (i.e. the companies that purchase reinsurance) are opposed to the reduction of collateral for foreign insurers and are vocal in opposing the bill on Capitol Hill and there is no party on the other side actively supporting the measure. In the context of the regulatory reform bill, as Imentioned earlier, elements of the principles of the bill are being actively considered.
Editor: I understand the Reinsurance Regulatory Modernization Framework establishes two classes of reinsurers: National Reinsurers and Port of Entry Reinsurers. States with the requisite resources and expertise would establish "Home State" and "Port of Entry" supervisors. What resources and expertise would be required?
Goldman: You would need to have on the staff of the state insurance department sufficient resources so that the department would be able to have the ability to understand and coordinate with regulatory regimes in other countries. If you are going to develop some of the processes proposed in the EU reforms under solvency II, a different methodology for assessing risk is involved. You need people, unlike the present actuarial and accounting people in insurance departments, who have the ability to do modeling and assessment of risks beyond the balance sheet and who could determine the degree of risk-based capital that would be required, based on the company's proposed models and broad-based risk assessment.
Editor: The language in the Act refers to "Port of Entry Supervisor" and "Port of Entry State." Please explain the meaning of these terms. How does the "Port of Entry" state regulation avoid violating the Compact Clause of the U.S. Constitution?
Goldman: The "Port of Entry Supervisor" and the "Port of Entry State" refer to a state in which the insurance supervisory department qualified as a port of entry state with a port of entry supervisor, who would regulate the non-U.S. reinsurers exclusively and who, through that port of entry state, would have the ability to write reinsurance across the entire United States. Not every state would have the resources or the desire to qualify to be a port of entry state with a port of entry supervisor. The measure would avoid violating the Compact Clause of the U.S. Constitution because it would be part of a federal bill, not a compact among the states.
Editor: What powers were given to the Port of Entry Supervisor and the Home State Supervisor over the state regulators?
Goldman: The power of preemption was given to the Port of Entry Supervisor and the Home State Supervisor in terms of determining the financial solvency of the reinsurer. This decision would be binding on state regulators. Nonetheless, state regulators would still be able to determine whether or not there was a sufficient risk transfer in the reinsurance contract for a reinsurer to get credit for reinsurance on the balance sheet of a ceding company. However, with respect to the determination of whether or not the reinsurer was fiscally able to pay claims as they were presented, that determination would be preempted by the two supervisory groups.
Editor: To provide some history, what has been the status of regulation of reinsurance up until the present time? Why were these reforms needed?
Goldman: Reinsurance is regulated by way of common provisions that are adopted by the states under model acts that the NAIC has developed over time. The principal problem has been that non-U.S. reinsurers, who have chosen not to form a U.S. domestic reinsurance company, are required for each reinsurance risk that they write on behalf of the ceding company to post 100 percent collateral for that risk. Non-U.S. reinsurers, such as Lloyds of London and others, have been very vocal in their opposition to this requirement. They have chosen not to form U.S. entities, which would be subject to U.S. taxation and state insurance regulation. They have a legitimate argument in that if they're financially sound, why should they have to post 100 percent collateral, tying up in the aggregate billions of dollars that in their view they could otherwise use more productively in their businesses? From the ceding companies' point of view it's a secure feeling to have 100 percent collateral behind your liability because you don't have to worry about collecting if you're successful in your claim.
The other element that is somewhat problematic is the credit for reinsurance on a ceding company's balance sheet, required by the state insurance commissioner. There is the question about the degree to which a reinsurer is financially capable of paying in the event of a claim. The domestic regulator has the authority to deny some or all of the credit for reinsurance on the balance sheet of the ceding company, thus indirectly determining the financial viability of the reinsurer. One benefit of the bill that we developed was that this element would no longer be present. Once the port of entry state or home state regulator determined that the reinsurer was financially able to pay claims, there could not be a refusal on the part of the domestic regulator of the ceding company to deny credit for the reinsurance.
The other reason the reform is needed is because reinsurance is an international business. In fact, about 85 percent of the reinsurance written in the United States is by non-U.S. insurers. There is a gap to a degree in the interface between the U.S. reinsurance regulatory scheme and the regulatory scheme in each foreign country in terms of the regulatory interaction between the non-U.S. reinsurers and the U.S. reinsurance regulatory system. One function of the bill would be to begin to develop a system of potential reliance by U.S. regulators on the regulatory authorities in a foreign country. That would streamline the process to the benefit of all countries and the carriers.
Editor: Are the regulations overseas more stringent or less?
Goldman: It depends on the country. Part of the bill would call for an analysis of what's referred to as "mutual recognition" or "recognition between regulators" - meaning that if I were a port of entry supervisor in the State of New York, for example, and my insurance department determined that the FSA in the UK was an equivalent regulator to my supervisory regulatory system, I could then rely on the UK supervisor's regulation of that UK reinsurer and only peripherally be concerned with problems here. If there were problems with a particular reinsurer, I would refer the matter back to the FSA to deal with, and similarly the UK regulatory authority would have a like governance structure over a U.S. reinsurer operating in the UK.
Editor: Has there been an effort to make the rules uniform within the EU?
Goldman: There has been an effort within the EU although that too is a work in progress. The regulatory scheme between the EU and the United States or the EU and other countries hasn't really been uniform. I also chaired the Reinsurance and Other Forms of Risk Transfer Subcommittee at the International Association of Insurance Supervisors where the topic of standardizing rules governing reinsurance was often discussed - there are major differences in each of the markets.
Editor: Was the Reinsurance Supervision Review Board in existence before the Reinsurance Regulatory Modernization Act proposal was conceived? Please tell our readers about the composition of this Board.
Goldman: While not previously in existence or even today, the Board is conceived as a means by which the implementation of the various port of entry supervisor and home state supervisor requirements can be met. It was designed to involve foreign trade so that there could be a forum for an interface between the state supervisory system and the federal government in terms of dealing with other countries. It is intended to be the place where a great deal of analysis and activity having to do with things like mutual recognition and supervision of international reinsurance companies could be accomplished. The ultimate judgments would be made by state supervisors and to a more limited degree by the Reinsurance Supervision Review Board.
The Board would be made up of two-thirds state supervisory personnel and one-third federal officials from the Departments of the Treasury, Commerce, etc. The heavy weighting to the state regulators is owing to the fact that the states are, under McCarren-Ferguson, principally responsible for the supervision of insurance in the United States, and reinsurance is an important component of the insurance marketplace.
Editor: Will this proposed measure bring us closer to national oversight of reinsurance?
Goldman: I think it would bring us closer to the federal government being involved in the interaction between non-U.S. reinsurers and the U.S. insurance industry, but the basic system would still be a state-based system. To the extent that a federal government agency's involvement is needed in order to set trade policy, for example, this composition of the Board would enable that to take place.
Editor: What mechanism does the Board have for determining the qualifications of supervisory systems of insurance companies in non-U.S. jurisdictions?
Goldman: The Board's staff would do an in-depth analysis of the regulatory staff and scheme in a particular jurisdiction and make recommendations as to whether the regulatory system in the particular jurisdiction provided sufficient protection to consumers and sufficient oversight of the reinsurers so that the U.S. Port of Entry Supervisor could feel comfortable relying on its insurance supervisory regime. There would be resources at the Board level to assign to a particular country's insurance supervision department, whether the FSA or the German Insurance Regulatory Group, for example, to make that analysis and report back to the Board as to whether the state regulatory bodies could rely on that foreign oversight.
Editor: What other functions do you see the Board providing?
Goldman: In instances where there were conflicts among state regulators, the Board could provide a forum in which they could be discussed and resolved.