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Collateral vote favors shift to risk-based rules for alien reinsurers

Posted On: Dec. 17, 2006 12:00 AM CST

[SAN ANTONIO, Texas]—After years of discussion and debate, a subgroup of the National Association of Insurance Commissioners has voted to change the collateral requirements for reinsurers doing business in the United States (BIE November 6, page 18).

At the NAIC's winter meeting in San Antonio this month, members of the association's Reinsurance Task Force voted 15-5 to adopt the latest draft of a proposal that would introduce a system under which reinsurers' collateral requirements would be determined individually.

Under the current system, reinsurers licensed in the United States do not face a collateral requirement, while other reinsurers must post collateral equal to 100% of their U.S. liabilities before a ceding company can take full credit for the reinsurance.

According to the proposal, state insurance regulators, through a new entity called the Reinsurance Evaluation Office, would analyze reinsurers doing business in the United States—regardless of where they are domiciled—in terms of several factors, including financial strength and operating integrity. Based on the outcome of the evaluation, the REO would assign one of six ratings to each reinsurer. Collateral requirements, if any, would then be based on the rating and range from zero to 100% in 20% increments.

The task force moved the proposal on to its parent committee—the Financial Condition Committee—for further refinement by September next year.

"This is the most contentious issue the NAIC has dealt with regarding reinsurance in recent years," said Debra Hall, vice-president and regulatory counsel for Swiss Re America Holding Corp. in Armonk, New York, who is co-chair of the task force's interested persons group.

Outgoing NAIC President Alessandro Iuppa, who is Maine's superintendent of insurance, said he had enough faith in the U.S. system of supervision that it was appropriate to discard the status quo and "move into the 21st century."

Among the opponents of the measure were ceding company representatives including Michael Koziol, assistant vice-president and counsel for the Des Plaines, Illinois-based Property Casualty Insurers Association of America. "We oppose the reduction of collateral in any way, shape or form. It is a solvency issue and will ultimately affect the ceding companies," he said.

Dave Matcham, London-based chief executive of the International Underwriting Association, said: "It's a significant step forward—a breakthrough after many years of debate."

The London-based IUA has been campaigning for many years for states to swap to a more risk-based approach to regulating so-called "alien" reinsurance companies.

Mr. Matcham said that the IUA would now work with NAIC representatives to "hone [the Reinsurance Evaluation Office] into a really good product."

Lloyd's of London also welcomed the news of the NAIC vote.

"As this issue has been debated thoroughly for over six years, it is now important that the recommendations for change are put into place as soon as possible. Only then can the U.S. consumer benefit," said Julian James, director of worldwide markets at Lloyd's.

If collateral rules are relaxed, increased competition could eventually lead to reductions in rates charged to end consumers, sources contend.

Risk managers are "cautiously supportive" of the REO plan, according to Janice Ochenkowski, managing director of Chicago-based Jones Lang LaSalle Inc., and vice president of the Risk & Insurance Management Society in New York.

"The theoretical outline of the REO and its safeguards is very positive, but the execution of the plan will be the test of its merit," she said.

One London market source expressed disappointment that no firmer moves towards relaxing the collateral requirements had been made.

There is still a long way to go before the matter finally is resolved, noted another source, who described the NAIC's latest move as "the end of the beginning."