The proposal for reducing collateral requirements would allow for U.S. regulators to establish and approve a list of qualified reinsurers. The regulators would make a determination of financial strength and would put those reinsurers they feel are strong on the list, said William Marcoux, partner at law firm LeBoeuf, Lamb, Greene & MacRae in London. Mr. Marcoux spoke on behalf of non-U.S. reinsurers at the reinsurance task force session during the NAIC summer meeting here.

“Reinsurers on that list would then be permitted to fund at something less than 100 percent–somewhere between 50 percent and 100 percent,” Mr. Marcoux said.

He argued that the proposal is identical to what state regulators and the NAIC have done for the past 40 years in the non-admitted insurers surplus-lines area, “and its worked beautifully.”

“I think it can be duplicated in the reinsurance sector, to the benefit of everyone involved–from the reinsurers who are providing capacity in the United States to the ceding companies,” Mr. Marcoux said.

But many members at the NAIC reinsurance task force were unconvinced.

“The fundamentals for any agreement on collateral reductions are lacking,” said Ernst Csiszar, South Carolinas insurance director who is also the NAIC vice president and a member of the reinsurance task force.

Commenting on the proposal, he noted that it was first proposed by some European companies, “primarily the London market and a group of French reinsurance companies and some German companies as well. Those were the three that originally came up with this proposal.”

Mr. Csiszar told National Underwriter that what they are asking, very simply, is a leeway–a reduction on the collateral that would be applicable for certain qualified non-U.S. reinsurers.

“And that means we have to set up qualifying standards for getting on that list. And this is where we are having difficulties,” he explained.

“When you look at reinsurance recoverables, they generally form a significant component of the balance sheet,” Mr. Csiszar said. Indeed, he suggested that with recent reserve additions announced by several large insurers, recoverables could now represent as much as 80 percent of some primary insurer balance sheets.

“That makes it a very, very significant solvency issue,” he said, particularly, “when you are trying to set standards with conflicting, non-existing, overlapping, unclear kinds of accounting standards overseas.”

Also making a case against the proposal for collateral reduction was a letter from Matt Mosher, group vice president at the Oldwick, N.J.-based A.M. Best Company, which was distributed to those attending the reinsurance task force session.

The letter, which was written in response to an inquiry from Commissioner Mike Pickens, president of the NAIC, affirmed that the use of reinsurance can, in certain cases, be an important issue in evaluating the capital strength of a company.

Therefore, “for a ceding company with large dependence on reinsurance to support capital strength, less collateral could result in a lower A.M. Best rating,” Mr. Mosher wrote. “More collateral provides greater protection for the ceding company.”

Holly Bakke, commissioner from New Jersey, also argued against the collateral reduction proposal at the reinsurance task force session. She noted that receivers in the NAIC insolvency task force, a group chaired by Commissioner Bakke, do not support the proposal at the moment because the lack of collateral could hurt creditors, guaranty funds and policyholders in the case of an insolvency.

Mr. Csiszar said there are no common international accounting standards that can help regulators understand these reinsurers better.

“My fundamental problem with this whole proposal is that I think we ought to wait for the International Accounting Standards Board to make its common international accounting rules,” he said, adding that his opinion reflects the “broad view” of other NAIC members.

And when those IASB rules are made, that would be an appropriate time to see how the FASB reacts, he noted. “And then we will finally have a framework in place where we can compare apples to apples, oranges to oranges. Up until that time, I dont think that any kind of SEC filing is going to do it.”

Mr. Csiszar noted that, from his experience, “there are things that I recognize in other accounting standards and there are those that I dont. And there are things in our accounting standards, like goodwill for instance, that other accounting standards dont recognize at all,” he said.

“So until you have these gaps in these conflicts worked out, I think this proposal is premature.”

Mr. Csiszar also added that there are other problems, including the enforcement of judgments and the enforceability of accounting rules.

“For instance, Germany, until recently, didnt have any enforcement of its accounting rules. There was no disciplinary body such as the one we have in the United States. So the way the accounting rules were enforced was rather lax,” he observed.

And he noted that while a country like Italy has very good, rigorous kind of accounting rules, no one follows them because there is no nationwide enforcement. “So there are a number of issues that need to be resolved, but the fundamental one is the accounting,” he said.

There is also the question of timing and whether this is the right time, economically, to lower collateral requirements for foreign reinsurers. Mr. Csiszar clearly thinks its not.

“European reinsurers are having a very difficult time. They are fighting for their lives, not least because their investment portfolios are so different from ours. So we really have to deal with the substantive issue as well as the timing issue,” he said.

Mr. Csiszar added that the reinsurance task force will continue to keep an open mind, but “my sense of it is that this will be an open item up until the IASB comes out with its standards, either 2005 or 2006.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, June 30, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.