Why Should Regulators Give Foreign Insurers a Break?

(MoneyWatch)  The National Association of Insurance Commissioners has been fired up of late, taking on the credit rating agencies in today's high-profile fight and, in a lower-profile but equally important decision, letting foreign reinsurers slip across the border and do business more easily in the states.

The NAIC "approved for submission to Congress" the Reinsurance Regulatory Modernization Act of 2009, which would give foreign reinsurers such as Munich Re and Swiss Re, and consortiums like Lloyds, a "port of entry" or national license to operate here. Each state that licenses a reinsurer would be responsible for making sure it put up proper collateral, if any.

That's a big break for the overseas crowd. Currently foreign insurers have to post 100 percent collateral to write policies here. In other words, to write a million dollar policy you have to deposit a million in a U.S. bank in case you go belly-up. And while there is a dearth of capital in this market, the chances of a Munich Re defaulting is about as likely as Bernie Madoff getting out of jail.

Reinsurers provide "insurance for insurance companies" to back them up in case a major disaster like Hurricane Katrina depletes their capital. After that hurricane and two others in 2005 caused more than $80 billion of insured losses, regulators saw the need to bring more overseas capital into the U.S. market. Helping foreign insurers is a way to do that.

"This looks like a welcome opening to competitive capital, something likely to be helpful for insurance consumers and market efficiency," says Morningstar analyst Bill Bergman in an interview.

A valid argument, but how would it impact the domestic reinsurance companies doing business here? These companies already operate under a tax burden that foreign reinsurers do not.

The American Insurance Association, which represents 350 homegrown property and casualty carriers, quickly went on the warpath. "We will fight this in the states and certainly at the federal level because we believe that this is not in the interests of the U.S.," promised Vice President Dave Snyder.

What about "Buy American?" says the AIA. "Against a backdrop of financial stresses in the economic system, it is impossible to justify shipping billions of dollars of security out of the U.S. without obtaining at least equal concessions that would benefit U.S. companies overseas," says Snyder.

Don't pose that question to Warren Buffett. America's richest insurance executive is busy touting Chinese suits.