The Association of Bermuda Insurers and Reinsurers (ABIR) has told the US Department of Treasury that state regulation of catastrophe insurance is putting a choke hold on the free flow of reinsurance capital into that market.In response to a solicitation for comment from Federal Insurance Office, ABIR President Brad Kading, who represents 22 insurance groups in Bermuda, sent a letter outlining the group’s position on the industry’s current and proposed regulation at the US federal and state level.The FIO’s request for feedback is part of an effort to seek input from interested parties for a report on the regulation of the insurance industry to Congress early next year.State regulation of insurance pricing has long irked reinsurers, particularly in the creation of federal insurance programmes for natural disasters that suppress rates and take on risks that, are in some cases, underfunded.“The $18 billion in debt of the US National Flood Insurance Program (NFIP) attests to the need to rethink federal natural disaster programmes,” said Mr Kading, adding that from 2001 to 2011, Bermuda’s reinsurers have paid out more than $32 billion to US clients for natural disaster claims. “ABIR members have an ongoing interest in writing cat risk for hurricanes, earthquakes and floods.“The lesson is that international reinsurance markets will willingly meet the needs of the US, but US policymakers can undercut that capital support by creating or expanding state or federal funds that displace private capital; or by enacting discriminatory tax laws.”Currently each US state has different laws and regulations governing insurance companies that operate there. Opponents of this system say that the administrative burden and cost of complying with each of these regulations, which are often redundant and sometimes conflicting, adds unnecessary complexity and costs to insurance products, which are ultimately passed on to consumers.In his letter, Mr Kading also explained ABIR’s view that the global property and casualty insurance industry is fundamentally different from banking and doesn’t pose a systemic risk of failure due to key issues involving liquidity, substitutability, insolvency, and interconnectedness.“Insurers’ policyholder claims are essentially pre-funded with premiums which are placed in reserve until claims’ payments are due,” he wrote. “The long tail pay out pattern of insurance claims allows insurers time to adjust for any shortfalls in the reserve accounts and prevents a ‘run on the bank’, which might cause immediate liquidity problems.”He stated that insurers are not highly leveraged and tend to operate with excess capital over what is required in order to demonstrate financial strength to their customers by way of positive financial ratings. Mr Kading added that companies within the insurance industry can easily be substituted for another and there is low risk for one insurer’s insolvency threatening the entire industry.“Insurance markets are not characterised by a high degree of interconnectedness and it would be a mistake to think of reinsurance utilisation as an example of bank intra-market trading,” he wrote. “Market share is not concentrated in specific lines of business and the market is characterised by a high degree of competition.”Part of the FIO’s request for feedback is the question of creating oversight of some lines of insurance at the US federal level rather than at the individual state level.According to Mr Kading’s letter, ABIR’s stance is that regulation of commercial lines of insurance can be separated from personal lines, which includes workers’ comp and home insurance.“Due to the sophistication of our counter parties we believe that a different level of regulation is appropriate for these commercial insurance markets than would be needed to protect consumers with their personal insurance needs,” he wrote, adding that Bermuda-based reinsurers are already looking to comply with international regulatory bodies, including Solvency II equivalence.Mr Kading added that the Bermuda Monetary Authority has statutory authority for group supervision in 2012, and Enterprise Risk Management measures have been in place since 2010.ABIR urged the FIO to work with the BMA on regulatory frameworks and information-sharing agreements.“We look for the FIO to assist with opportunities to create regulatory cooperation with state insurance regulators and the BMA since the BMA serves as a designated group supervisor for most of our membership,” he said. “We’d encourage the FIO to enter into agreements that allow for confidential information sharing and regulatory cooperation on a national basis with BMA supervised groups that have US legal entities.”Being that the US is the world’s largest insurance market, Mr Kading urged the FIO to help play a leading role in the development of international regulatory standards.