NAIC Collateral Plan Stuns Reinsurers

For nearly six years, so-called "alien" reinsurers-including mega-players such as Lloyd's of London-have been battling to convince regulators to lower their collateral requirements and create a more level playing field with their U.S. competitors.

The National Association of Insurance Commissioners shocked the industry last June by taking the argument one step further, with a proposal to demand collateral from all carriers-foreign and domestic-according to the financial risk they pose.

Currently, alien reinsurers must post 100 percent of their gross American liabilities as collateral, putting them at a competitive disadvantage. Under the NAIC's plan, a Reinsurance Evaluation Office would be established to rate all carriers and determine how much collateral each must post.

The rationale behind the move is that discriminating against foreign carriers undermines the benefits of globalization without benefiting buyers. The fact that most non-U.S. reinsurance comes from four countries with reliable regulatory systems-the United Kingdom, Germany, Switzerland and Bermuda-makes the collateral mandate moot, or at least unfair, critics contend.

U.S. carriers immediately started wailing, wondering what the value of a U.S. license would be if the NAIC proposal made it into law. There is also serious concern about the amount of money U.S. reinsurers would have to post. In response, the NAIC Reinsurance Task Force revised its proposal to exempt all domestic reinsurers in the top-three collateral rating categories.

The NAIC Financial Condition Committee must now respond to any further concerns raised by reinsurers before the full NAIC votes on whether to approve the new system by next September.

Although each state would still have to amend their Credit For Reinsurance Act to implement the concept, at least the end of this long, contentious debate is in sight.

Previous Story
Next Story