Search for a solution

"It is an interesting proposal and deserves consideration," especially as a way to further the discussion, Mr. Matcham said.

"The Mirel draft is an effort to streamline, to make commercially reasonable, the REO approach," said Bradley Kading, Washington-based ABIR's president and executive director. "It's an attempt to make the system work in the state regulation framework."

Opponents say idea 'flawed'

To opponents of the REO proposal, Mr. Mirel's ideas create problems as well as questions.

Tracey Laws, senior vp and general counsel of the Washington-based Reinsurance Assn. of America, said Mr. Mirel's draft contains many of the same problems as the NAIC's REO proposal, including the fact that it is not comprehensive reform.

"The voluntary features of Mirel's draft perpetuate the patchwork system of state regulation," Ms. Laws said. The RAA supports comprehensive--not piecemeal--reform, she said.

"The draft reflects some improvements...but the structure of using the NAIC to achieve a rating system is still flawed," said Debra Hall, senior vp, group legal for Swiss Reinsurance Co. The company favors rating reinsurers based on their financial strength and that of their domiciliary jurisdiction. It also says that federal regulation through an optional federal charter approach is better than the REO structure through the NAIC, said Ms. Hall, who also heads an NAIC interested persons' group on the issue.

Mr. Koziol said one positive aspect of Mr. Mirel's proposal is that it "has the merit of domiciliary deference as the single regulator," but "still has the problem of the NAIC determining the status of foreign nations."

Contrastingly, Jeffery C. Alton, vp-financial regulation and capital analysis for Chicago-based CNA Financial Corp., proposed requiring all reinsurers writing U.S. business to participate in the REO, which would operate as a pool with a guaranty fund. If each reinsurer were jointly and severally liable for losses, ceding insurers would know that all their claims would be paid, he said.

Such a pooling proposal "will never fly," Mr. Matcham said after the meeting.

REO supporters point to an A.M. Best Co. Inc. announcement in late May that the REO proposal would have little impact on the financial strength ratings of U.S. property/casualty and life/health insurers.

The findings, which are consistent with the findings of Fitch Ratings and Standard & Poor's Corp., "amply demonstrate that the current collateral rules are excessive and that new rules can be imposed without any real solvency risk," Mr. Matcham said.

Mr. Kading agreed, noting that major rating agencies have said "as long as collateral reduction is applied on a prospective basis, it should not be viewed as a measure that affects the ratings of U.S. insurers."

"The agencies have also pointed to the positive effects of the collateral alternative proposals--that being that they further focus ceding insurers on the credit quality of the reinsurers with whom they are dealing," Mr. Kading said.

From a ceding insurer's perspective, Mr. Koziol said Best looked at one aspect of the issue. "A rating doesn't help should a reinsurer become impaired or insolvent," he said. In that case, a troubled reinsurer should be asked to provide more collateral, but would be unlikely to post it, he said.

If a reinsurer becomes insolvent, then the ceding company takes a hit to its surplus, he said. "To the extent that impairs the ceding company, the guaranty funds may have to pay claims and policyholders would not be covered," he said.

Questions also have been raised about whether the NAIC has the authority to operate an REO-type entity.

The Kansas City, Mo.-based NAIC is a trade association of insurance commissioners, who are either appointed or elected representatives of individual states or territories.

"The NAIC is not a regulatory body and can't make binding decisions," Mr. Mirel said. The single-regulator approach he proposes is similar in concept to that which Congress previously approved for risk retention groups, he said.

In addition, any major changes to states' credit for reinsurance laws would have to be approved by the individual states.

Legal analysis 'confidential'

The interested person's group asked the NAIC last year to review and seek advice, as needed, about the feasibility of an REO-type entity, Ms. Hall said. "I understand that an analysis was prepared and, on behalf of the interested persons, I requested a copy of that analysis, but was advised by the NAIC that it was confidential," she said. "These are important issues to many stakeholders and the analysis and consideration of them should be transparent."

Regulatory modernization "is a difficult assignment, both substantively and politically, and probably inevitably leads to federal legislation as a necessary implementation tool," Mr. Kading said.

Some insurers are already supporting federal involvement.

For example, Swiss Re believes that a change in collateral rules is "appropriate," but also believes that global reinsurers need to have the option of being federally regulated, Ms. Hall said.

"If state regulators cannot resolve this important regulatory debate, it will just become another argument for when federal regulation is needed," Mr. Kading said. "The states have to demonstrate that they are up to the task of regulatory modernization."

In search of answers

The National Assn. of Insurance Commissioners is facing questions about the proposed Reinsurance Evaluation Office, including: