U.S. Regulators May Scrap Full Collateral Requirements for ‘Alien’ Reinsurers

In an abrupt departure from procedures that have been in place since Wold War II, the National Association of Insurance Commissioners has taken a first step towards scrapping the “full collateral” requirements imposed on non-U.S.-based reinsurers.

In a motion, tabled by NAIC President Al Iuppa at the organization’s recently concluded meeting in Washington D.C., attending regulators voted unanimously to explore an alternative to full collateralization for alien reinsurers. In asking for comments from interested parties the NAIC stressed that the proposal, which would replace collateral requirements with a ratings based system, was aimed at “not only alien, but all reinsurers, based on their financial strength.”

The proposal seems to have a real chance of adoption. A NAIC bulletin noted: “The high proportion of principal regulators participating in the meeting of the NAIC¹s Reinsurance Task Force underscored the importance of issues accompanying a possible departure from the NAIC¹s current rule that alien reinsurers fully collateralize their writings in this country.”

The current requirement is particularly onerous for Lloyd’s, whose structure as an insurance market, rather than a single company precludes it from setting up U.S. subsidiaries – as most reinsurers have done – that would fall under domestic regulation. Lloyd’s Chairman Lord Peter Levene has been a persistent and outspoken advocate for changing the trust fund requirements, repeatedly calling for U.S. regulators to assure “a level playing field.” The NAIC seems to have heard his plea.

“We’re very pleased that the NAIC has demonstrated leadership on this issue,” said Lloyd’s Director of Worldwide Markets, Julian James in a telephone interview. “They’ve recognized where the debate should be focused, and I think there’s a good chance of success.”

Good, perhaps, but by no means assured, as there are powerful forces, led by the American Insurance Association, which opposes any change in the current requirements. “This measure allows certain influential foreign reinsurers to reduce the capital they are currently required to post in order to back-up the reinsurance contracts they write in this country,” stated AIA senior counsel Phillip Carson in the association’s comment on the proposal.

The AIA objects to changing a law that it doesn’t think needs changing on the grounds that “alien reinsurers” have the option of becoming licensed in the U.S. It also attacked the approval of the proposal as, in Carson’s words, being “pre-determined that the Task Force would take the course they did.” He added that the “abrupt decision calls into question the integrity of the evaluation process.”

The AIA is urging state regulators to “defend the interests of Americans who rely on insurance and their insurers in international negotiation,” added David Snyder, AIA vice president and assistant general counsel.

However, from an international point of view the collateral requirements are being seen as increasingly indefensible. There are only two major companies based in the U.S. which actually write P/C reinsurance – Berkshire Hathaway and AIG. This makes America’s primary carriers increasingly dependent on foreign, or alien, reinsurers, mainly located in Bermuda and Europe.