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NAIC Reinsurance Task Force Pushes 'Modernization' Plan, Acknowledges Congressional Act May be Required

Insisting that it is taking a middle ground in its proposal that eases alien reinsurers’ participation in the U.S. reinsurance market, an NAIC committee heard lengthy industry and public testimony on that proposal Wednesday and Thursday in New York.

Steven M. Goldman, NAIC Reinsurance Task Force chair, said during the hearing Thursday, “What we’re doing is trying to maintain the system of state-based regulation.” The remark was made in a context that included discussion of EU-wide insurance regulation and continuing ferment in Washington, D.C., that threatens state regulation of insurance.

The current proposal in Goldman’s task force for overhaul of the states’ system of credit for reinsurance has gone farther and faster than any other in what has been a tenacious and lengthy effort by alien reinsurers to diminish collateral requirements and simplify dealing with respective licensure requirements of the states. Comprehensive overhaul of insurance regulation in EU countries under what is known as “Solvency II” and the fact of minimal collateral requirements in most EU countries’ regulatory requirements has added to momentum of the NAIC proposal.

The rapid development of the proposal was due in part to the task force’s work behind closed doors until this hearing. Goldman said he and members gained a great deal through the written and oral comments received for the occasion.

It is possible, Goldman said, that the proposal, which is a detailed framework rather than a completed model, would be ready for a vote during the NAIC fall meeting. To maintain NAIC accreditation, such a completed model would eventually have to replace the states’ existing credit-for-reinsurance regulations or statutes.

NAMIC and two other national property/casualty trade associations reiterated their preference for the current system of 100 percent collateral as simple and reliable for assuring the validity of credit for reinsurance. All, however, also added their suggestions for improvement of the pending proposal, suggesting recognition of some viability of the proposal. A representative of the ACLI said his association favored the proposal, so long as liberalization of reserving requirements, known as principles-based reserving, accompanied such change.

An NAIC legal department memorandum, prepared in part by the law firm Sidley & Austin, entered into testimony received by the task force for the hearing related that congressional authorization would probably be required for legitimate operation of that part of the proposal involving what has been called “mutual recognition” of alien jurisdictions’ regulatory regimen:

“To the extent that [it] would involve states negotiating with foreign countries to achieve reciprocal recognition by facilitating the entry of U.S. companies into foreign markets, it calls into question whether the mutual recognition framework may be invalid under the Compact Clause, in the absence of Congressional consent[.]”

Although the task force’s focus now is on easing alien reinsurers’ participation in the U.S. market, the proposal’s viability would seem to be weakened if “mutual recognition,” permitting two-way commerce in reinsurance, is not built into its other provisions that accommodate alien reinsurers’ entry in the U. S. market.

Salient features of the proposal’s consolidation of licensure for the market in this country include:

  • Establishment of a “national reinsurer” status that would allow any reinsurer, regardless of domicile, to establish itself and be regulated in a single state but have access to all states for assumptions from primary insurers.
  • Establishment of a new port-of-entry status via which an alien reinsurer, if domiciled in a mutually recognized alien domicile by the NAIC and the port-of-entry state, could have access to primary insurers in all the states. Supposedly, the port-of-entry state would be wholly responsible for determining the quality of regulation in the alien as support for credit for reinsurance, but a number of commenters suggested that the NAIC would have the larger role in such broad-gauge judgments.
  • With respect to the proposal’s provisions on collateral for all reinsurers, regardless of domicile, collateral is calibrated based on financial strength:
  • For full credit for reinsurance a five-tiered categorization allows (Best ratings are used here) A++ reinsurers to post zero collateral; A+ reinsurers to post 10 percent collateral; A and A- insurers to post 20 percent collateral; B++ and B+ reinsurers to post 75 percent collateral; and requires reinsurers with lower ratings to post 100 percent collateral. The proposal has no prohibition on ceding and assuming entities contracting for higher collateral than that suggested by the proposal.
  • Nominally, although the NAIC may be a significant factor in such judgments, individual states that are the domicile of national reinsurers or the port of entry for alien reinsurers will be the authority for a reinsurer’s rating, which would use nationally recognized firms’ rating adjusted for other factors, particularly market behaviors. A state other than that doing the rating could still reject credit for reinsurance commensurate with the rating.

Testifying that the proposal resulted in a net transfer of risk to primary insurers and their policyholders and that full collateral should be maintained, William Boyd, NAMIC’s financial regulation manager told the task force Wednesday that the proposal needed to “state affirmatively that intra-group reinsurance transactions and pooling arrangements are not covered.”

He also testified that the proposal’s language suggesting that primary insurers need plural reinsurance arrangements was not reasonable for small companies. “It is not economical for small companies to have multiple reinsurers,” he said. “The facts are that very small insurers get along with one reinsurer.”

A broad list of those who testified included representatives of the France-based association of insurers and reinsurers, CEA, and the International Underwriting Association, whose members operate through the London market, clearly favor the proposal but stated reservations that included:

  • Dislike of U.S.-style reporting requirements.
  • Suggestion that the port-of-entry status in the proposal amounted to additional regulation.
  • Belief that financial reporting should be in International Financial Reporting Standards.
  • Resentment that U.S.-domiciled reinsurers could still avoid collateral altogether.

One reservation common to the Association of Bermuda Insurers and Reinsurers (whose members write 25 percent of reinsurance in the U.S. market) and the Reinsurance Association of America were certain requirements in the proposal for reinsurance contracts.

One EU regulator, Robert Meindl, supervisor of reinsurance in Germany’s financial regulation authority, told the task force that Germany did not require collateral for reinsurance transactions. Responding to a question from the task force, he said he believed that only France and Portugal did require use of collateral in some degree.

Direct questions to NAMIC's Financial Regulation Manager William Boyd.

Posted: Tuesday, July 29, 2008 12:00:00 AM. Modified: Tuesday, July 29, 2008 1:43:06 PM.

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