The action last week could pave the way for a final resolution to an issue that has bedeviled the industry for nearly two decades. It drew an immediate, positive response from the London-based International Underwriting Association.

IUA CEO Dave Matcham said the NAIC's move “represents a real breakthrough in the discussions to introduce a more efficient system of regulating reinsurance business in the U.S.”

He said the current 100 percent collateral burden imposed unnecessary costs on the industry, adding that “any collateral requirement needs to be based on principles of financial strength rather than geographic location.”

“We look forward to the NAIC concluding its due process as soon as possible,” he said. “I would like to acknowledge and thank the association's Reinsurance Task Force for its leadership and vision in stating that the current system needs to be changed. The group's forward-thinking approach recognizes the global nature of the industry and the value of other regulatory platforms.”

North Dakota Insurance Commissioner Jim Poolman, who backs the resolution, said the vote should serve as a wake-up call to the industry that it could no longer continue “to say 'no, no, no,' without putting up any alternatives.”

But industry representatives–such as Mike Koziol, assistant vice president of the Property Casualty Insurers Association of America–said among the alternatives proposed were a federal reinsurance regulator as well as a working trust mechanism, similar to collateral, which would allow carriers to draw down the funds as claims are paid.

“It is a more vibrant scheme as opposed to collateral, which is static,” he said.

The proposed Reinsurance Evaluation Office will assess reinsurers primarily on their lowest financial strength rating, but also include other factors such as willingness to pay and effectiveness of the company's domiciliary regulator.

Critics contend that the current proposal contains too many unanswered questions, such as how a nongovernmental body like the NAIC could judge a foreign government's regulatory system, or what would be the effect if a carrier was downgraded by a rating agency.

American Insurance Association Assistant General Counsel Phil Carson said the proposal was backed by those who failed to look at alternatives–not only to collateral, but also risk other than credit risk. “This proposal is not responding to any identified problem in the reinsurance market, and is not necessary,” he added.

NAIC President Al Iuppa and Massachusetts Commissioner Julie Bowler (who chairs the Reinsurance Task Force) stunned industry representatives at the NAIC summer meeting when they made a proposal for an all-encompassing reinsurer ratings scheme.

Last week, Mr. Iuppa, who is Maine's insurance commissioner, said “the industry will take 300 years to come up with any alternative to collateral,” and has repeatedly insisted that 2006 was the year of decision on the issue.

He noted that alien reinsurers come primarily from four jurisdictions–Bermuda, the United Kingdom, Germany and Switzerland–that each have regulatory and solvency monitoring methods on par with, or better than the United States.

Meanwhile, the issue of possible federal preemption of reinsurance regulation from the states loomed over the NAIC hearings here as an unknown.

Illinois Insurance Director Mike McRaith repeatedly asked industry representatives to try to pin down U.S. Treasury officials as to whether the department considers reinsurance collateral a trade issue, and will therefore soon impose its own solution–which presumably might not be to the industry's liking.

Industry officials have said in the past that their discussions with Treasury officials have indicated no such desire on their part.