State insurance regulators have approved a new model law and regulation on credit for reinsurance that allows some foreign reinsurers to post reduced collateral.
The new rules and regulations, which have taken 12 years to complete, would – if adopted by the individual states – create a new framework for approval of both qualified foreign jurisdictions and qualified reinsurers from those jurisdictions. Florida, Indiana, New Jersey and New York have already approved similar legislation or regulations.
The National Association of Insurance Commissioners (NAIC) adopted the revisions to the Credit For Reinsurance Model Law and Regulation in a unanimous vote on Nov. 6.
Under the current NAIC model law and 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 to the reinsurance models would reduce these reinsurance collateral requirements for non-U.S. licensed reinsurers domiciled in qualified jurisdictions, according to the NAIC.
A state would be required to evaluate a reinsurer that applies for certification, and would assign a rating based on the evaluation. A certified reinsurer will be required to post collateral in an amount that corresponds with its assigned rating (0%, 10%, 20%, 50%, 75% or 100%), in order for a U.S. ceding insurer to be allowed full credit for the reinsurance ceded.
Each state will have the authority to certify reinsurers, or a state insurance commissioner could choose to recognize the certification issued by another NAIC-accredited state.
The NAIC said it will publish a list of qualified non-U.S. jurisdictions. The commissioner must document any reasons for approving a jurisdiction not on this list, under the model law.
The NAIC also added a new notification provision requiring a U.S. ceding insurer to notify its domestic regulator if reinsurance ceded to an individual reinsurer or group of affiliated reinsurers exceeds certain specified amounts.
The NAIC achieved unanimous support of the proposed reinsurance reforms with input from domestic and international reinsurers and insurers, according to New Jersey Banking and Insurance Commissioner Thomas B. Considine, who chaired the NAIC task force that developed the changes.
“The NAIC has worked diligently on this project for a number of years, and we believe we have delivered well-crafted legislation that will modernize reinsurance solvency regulation by the states,” said Joseph Torti, III, Rhode Island deputy director and superintendent of insurance and banking, who heads the financial committee that oversees the work of Considine’s reinsurance task force.
A number of associations, including the International Underwriting Association (IUA), the Reinsurance Association of America (RAA) and the Association of Bermuda Insurers and Reinsurers (ABIR), voiced their support for the new model rules.
Dave Matcham, chief executive, International Underwriting Association, said the unanimous vote “shows the breadth of support for these important improvements” in U.S. credit for reinsurance. “We hope individual states will now act promptly to implement these new provisions,” he said.
“Modernization of reinsurance regulation, including collateral reform, is necessary and we applaud the NAIC for taking this important step,” said Franklin W. Nutter, president Reinsurance Association of America.
Bradley Kading, president, Association of Bermuda Insurers and Reinsurers, said that the model language, if implemented, “will recognize the important contribution made to U.S. consumers by financially strong international reinsurers regulated under Bermuda’s internationally recognized regulatory regime.”
The property/casualty insurer group, the American Insurance Association, also supported the new rules.
“The amended models preserve the promise and sanctity of contracts while promoting free markets and competition,” said Steven A. Bennett, AIA assistant general counsel.