Associations Tell NAIC Not to Reduce Collateral, Requirements for Alien Reinsurers

June 11, 2003

The four property/casualty trade associations, joined by a workers’ compensation and a reinsurance association, have joined together to ask the National Association of Insurance Commissioners (NAIC) to reject any reduction of collateral requirements for alien reinsurers doing business in this country, in a joint letter Wednesday.

The NAIC’s Reinsurance Task Force, the body responsible for considering and developing model laws and regulations concerning reinsurance, reportedly continues a lengthy review of entreaties from primarily Western European reinsurers who want the current 100 percent collateral requirement lowered to half that for reinsurers that would qualify, based on an unstated set of solvency and soundness criteria.

The Alliance of American Insurers, the American Association of State
Compensation Insurance Funds, the American Insurance Association, the National Association of Independent Insurers, the National Association of Mutual Insurance Companies, and the Reinsurance Association of America represent approximately 85 percent of the property-casualty premium written by more than 2,000 primary insurers in the United States.

This is reportedly not the first time that individual trade associations have conveyed their members’ concerns about the non-U.S. proposals to reduce collateral which provides important consumer protections.

The two major reservations: the burden shifted to consumers through additional guaranty fund assessments that will be caused by a reduction in reinsurance collections and possible additional insurance insolvencies that may flow from uncollectible reinsurance; and the inability to perform detailed credit risk analyses on the reinsurers because of the varying disclosure, accounting and regulatory requirements imposed on the reinsurers in their countries of domicile, according to the letter.

The collateral at issue is the capital that the alien reinsurers must now keep on deposit on these shores in the amount of the risk they assume from domestic insurers. Having the capital here puts it within reach of the U.S. court system, which is reportedly a comfort for the companies that cede to the alien reinsurers. The alien reinsurers have asked for the collateralization to be reduced to as little as 50 percent for those reinsurers that could qualify. (Collateral would be reduced to as little as 30 percent in the case of affiliated
transactions.) The NAIC Task Force could change the NAIC model law on collateralization.

“Reinsurers participating as aliens in the U.S. reinsurance market-i. e., that do not establish U. S. domicile-now have 45 percent of the U. S. market (per NAIC research), a share that reflects significant growth in the last five years,” wrote the associations.

“To do business in the United States, reinsurers domiciled outside this country can now domesticate themselves here as authorized reinsurers, subject to the states’ regulatory powers, establish a U. S. branch, or remain in an alien jurisdiction and observe collateral requirements required for doing business here,” wrote the associations. “None of these options, we believe it is fully evident, involves an inequitable barrier to alien entities’ entry into the U. S.
reinsurance market.”

The associations wrote, “We believe that security for primary insurers is the foremost issue in the Working Group’s consideration of the alien reinsurers’ proposal to diminish collateral requirements. Departure from full collateralization of risks written by alien reinsurers brings potential disadvantage to primary insurers, who are promised no reciprocal advantage in compensation of alien reinsurers and who may additionally become liable to make whole the estates of failed companies in which uncollateralized reinsurance was uncollectible.”

The Task Force is expected to consider the joint letter during the Summer National NAIC meeting in New York City, June 21-24.

The full text of the joint letter can be read on NAMIC’s Web site, NAMIC Online, at .

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