FITCH LOOKS AT EFFECTS OF REINSURANCE PROPOSAL

March 12, 2007

Fitch Ratings says it does not believe that individual (re)insurers’ financial or competitive positions will be materially altered under the National Association of Insurance Commissioners’ reinsurance task force’s proposal to revamp regulations governing reinsurers’ collateral requirements and cedants’ corresponding ability to take reinsurance credit in their statutory financial statements.

Fitch views the proposal as a credit neutral for primary insurers, a modest positive for unauthorized reinsurers and a modest negative for authorized reinsurers.

The agency expects collateral levels to decline under the proposal as reinsurers pressure cedants to accept minimum collateral levels required to receive reinsurance credit in their statutory financial statements. In exchange, Fitch expects primary insurers to negotiate corresponding price reductions as the cost of funding collateral requirements declines and available capacity increases. This decline will occur over time since collateral requirements for reinsurance transactions entered into prior to the proposal’s effective date will not change.

The dollar amounts involved are significant. Collectively, U.S.-domiciled life and non-life (re)insurers reported $605 billion of ceded reinsurance recoverables and $218 billion of collateral on recoverables from unauthorized reinsurers at year-end 2005. Over time the proposal’s implementation would reduce the collateral supporting primary insurers’ reinsurance assets, the agency believes that the proposal’s minimum collateral requirements are well in excess of historical default rates and thus provide more than adequate default protection.

Topics Reinsurance

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