At a later session devoted exclusively to regulatory issues, Brad Kading, president and executive director of the Association of Bermuda Insurance and Reinsurers, asked Mr. Dreyer what the ratings impact would be on ceding companies if the United States abolished collateral requirements?

Capital charges within S&P's ratings formula would go up for cedents, and those using the most creditworthy reinsurers would suffer the worst near-term impact, said Mr. Dreyer, referring to a proposal that would have collateral requirements gauged to financial strength of reinsurers.

Under the current system, where liabilities are 100 percent collateralized, there is no capital charge in S&P's ratings model, he explained.

"For the U.S. ceding companies, in our analysis of capital, we're providing full credit for collateral that's in place," he said. "So if the collateral goes away, the immediate impact will be increased capital requirements for the ceding companies."

He noted that the National Association of Insurance Commissioners may be headed toward a risk-based collateral standard--where less collateral would be required to be put up for stronger reinsurers, and none for the strongest. "That makes a lot of sense to us from a philosophical standpoint," he said.

"But, ironically, the adjustment period would be harshest on those companies that use the strongest reinsurers," he said, noting that since collateral would disappear, S&P would subject the uncollateralized portion of recoverables--as it does currently--to risk-based charges in its capital model.

Mr. Dreyer said he believes that over the longer term, the proposed system would be "healthier than the head-in-the-sand approach" that doesn't worry about the financial strength of reinsurers at all, and instead just has regulators requiring letters of credit or trust funds be in place to back up reinsurance obligations of alien carriers.

"That's a nice world to live in," he said, referring to the current system, "but as reinsurance needs grow, the financial markets are going to be more challenged to provide letters of credit and other forms of collateral at economic terms."

Meanwhile, last week NAIC's Executive Committee voted to have a Reinsurance Task Force examine the controversial collateral requirement and issue a report by year's end. The move--announced in Orlando during NAIC's quarterly meeting--created alarm among those who oppose changing the rules.

David Snyder, assistant general counsel for the American Insurance Association, said the burden of proof has shifted to the domestic industry as to why the status quo should remain in place. "Unfortunately, the [NAIC's] charge was not to consider the validity of making a change, but rather to direct the task force to come up with changes," he said. "We view that as fundamentally contradictory...to statements made by leadership that it was not assuming any changes would be made."

Mr. Snyder said the charge developed "behind closed doors will ultimately take the NAIC in a particular direction we believe will ultimately harm insurance consumers and insurance companies in this country."

Domestic carriers argue the collateral requirements are needed to help ensure payments will be made by companies that operate under differing accounting and regulatory regimens from the United States.

NAIC's president, Maine Commissioner Al Iuppa, has called 2006 the "year of decision," and hinted that his position was evolving from his previous opposition to any change to a more open-minded approach.

Among the factors favoring change, he said, were extended discussions commissioners had recently with counterparts from the United Kingdom, Germany and Switzerland, as well as a recent European Union directive providing for more standardized reinsurance oversight.

North Dakota Commissioner Jim Poolman, a member of the Ad Hoc group that developed alternatives to the collateral system, said there will not be any change unless one can be provided that will offer the same amount of solvency and consumer protection as the current system.

"Some commissioners are sympathetic to the idea of 'why are we treating them differently,' but most have not really focused on the issue," he said. "So as always, the devil will be in the details."

Bill Marcoux, a London-based attorney who represents the International Underwriters Association, agreed the "yeast is rising," and said the charge to the Task Force indicated a tilt in favor of change.

"What has changed is that there is more of an agreement that the time is right for this to happen," he said. "People have had a chance to study the issue and have seen that the show-stopping issues are probably not all that show-stopping. And I think it is an evolution of the relationship of the U.S. regulators and the European regulators, and that is a function of time."

Past domestic concerns have centered on enforceability of U.S. judgments in foreign courts and differing accounting standards that would make regulatory oversight challenging for U.S. regulators.

Last week a study by the Insurance Legislators Foundation--which examined the enforceability of U.S. judgments and arbitration awards against unauthorized, non-U.S. domiciled reinsurers--found that, as a general rule, U.S. judgments and awards are enforced overseas.