NU Online News Service, Nov. 7, 1:48 p.m. EDT

NATIONAL HARBOR, Md.—The full National Association of Insurance Commissions passed a landmark model law Sunday that seeks to reduce reinsurance collateral requirements for non-U.S. reinsurers domiciled in qualified jurisdictions.

Specifically, the model law was passed by the NAIC executive committee and plenary at the closing session of the fall meeting held here.

Under the current NAIC Credit for Reinsurance Model Law & Regulation, in order for U.S. ceding companies to receive reinsurance credit, the reinsurance must either be ceded to U.S. licensed reinsurers or secured by collateral representing 100 percent of U.S. liabilities for which the credit is recorded.

The revisions provide substantive flexibility to state regulators regarding collateral requirements.

For example, a reinsurer certified by a state will be required to post collateral in an amount that corresponds with its assigned rating (0 percent, 10 percent, 20 percent, 50 percent, 75 percent or 100 percent) in order for a U.S. ceding insurer to be allowed full credit for the reinsurance ceded.

The vote ends 12 years of efforts by insurance and reinsurance interests who say that the new system represents a compromise and is superior to the current system.

Officials of the Bermuda Insurers and Reinsurers voice strong support, as do officials of the American Insurance Association and the Reinsurance Association of America.

“We congratulate [New Jersey Commissioner Thomas Considine] for his leadership in completing the NAIC's 12-year effort to approve a collateral reduction measure for financially strong, well-regulated international reinsurers,” says Bradley Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers.

He says, “Bermuda reinsurers are major providers of reinsurance to U.S. clients and paid more than $17 billion in claims to U.S. clients for Hurricane Katrina alone.”

He says this model bill, if  implemented—as already done by Florida and New York—will recognize the important contribution made to U.S. consumers by financially strong international reinsurers regulated under a stringent solvency regime in Bermuda's internationally sanctioned regulatory regime.”

But some domestic insurance interests voice deep concern. For example, Scott Gilliam, vice president & government relations officer, Cincinnati Insurance Companies, says, “From our perspective, the three pillars upon which the collateral obligation is premised still exist—uneven non-U.S. reinsurance regulation; differences in U.S. and non-U.S. accounting systems; enforceability of judgments. As such, now is not the time to exchange the security of collateral for an untested rating system.” 

Considine says at the plenary session, that for the first time, no trade groups are opposed   to the model. He says one may be neutral or tepid, but no one is opposed.

He acknowledges that the issue had “languished for years,” but he said the action shows that the NAIC is no longer to stand for “No Action Is Contemplated,” as it once did.

He says action was necessary or there would be a move to preempt the states using Dodd-Frank via the Federal Insurance Office.