By Mark Ford

Insurance regulators in the US are expressing concerns over the use of letters of credit (L/Cs) in the affiliated reinsurance entities (AREs) used by some of the country's largest insurers.

Some regulators are concerned that insurers have established AREs - which are essentially their own reinsurance subsidiaries - to bypass tough capital requirements that would apply if they kept the business on their own books.

Crisis concerns

Some regulators are concerned that the AREs are allowed to use L/Cs to back up the reserves they hold, rather than bonds or other assets that would be required if the reserves were held directly by the parent insurer.

The regulators fear a repeat of the 2008 global financial crisis, which they argue may leave some issuers unable to pay out on L/Cs should the insurers have insufficient capital to pay claims.

L/C users

Insurers that are reportedly big users of AREs include MetLife, American International Group and ING Group.

Concerns over the use of L/Cs as security in the UK's insurance market have also been expressed (DC World News, 23 November 2012).

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.