Insurers Take Issue with Regulators’ Reinsurance Evaluation Proposal

November 21, 2006

A national insurer trade group has raised questions recently about a proposal involving the Reinsurance Evaluation office which is under auspices of the National Association of Insurance Commissioners (NAIC).

The Property Casualty Insurers Association of America (PCI) contends that the proposal exposes U.S. ceding companies to a lower level of security than under the existing collateral requirements and that it contains too many provisions that are not clearly defined.

The proposal is scheduled to discussed and voted on at the NAIC’s Reinsurance (E) Task Force during the December national meeting.

The Reinsurance Task Force was charged with developing alternatives to the current reinsurance regulatory framework, including the requirement of collateral to U.S. ceding companies. It is also considering approaches that account for a reinsurer’s financial strength regardless of state or country, according to the PCI statement.

“When has anyone ever shown that there is a need for or the benefit that would be gained by moving forward with this proposal?” said Mike Koziol, assistant vice president and counsel for PCI. “While the proposal would establish collateral requirements for fully licensed and U.S. regulated U.S. reinsurers, it would lower the alien requirements. However, the increase for U.S. reinsurers would be less than the decrease for alien reinsurers, resulting in a net decrease in collateral.

Koziol added that a net decrease is not the only concern because the REO does not assure that collateral reduction will not have adverse consequences. That is the beauty of 100 percent collateral from alien companies, he said.

“Under the REO, there can be ‘selective’ reduction of collateral as applied to reinsurers not subject to U.S. accounting rules and not subject to the same enforceability of judgments as within the U.S. The reduced collateral exposes U.S. ceding companies to solvency risk and greater guaranty fund assessments. Regulators must recognize the risks this proposal places upon domestics and companies doing business in their states,” Koziol said.

PCI’s members are concerned that because the proposal is incomplete that it raises too many questions. For example, it is not explicitly clear if the proposal is intended to be proscriptive only. There are many provisions left open, which could lead to confusion and unintended consequences, Koziol explained.

The REO proposal places greater burdens on ceding companies than before.

“Instead of situations where 100 percent collateral is posted and 100 percent credit given, regardless of a weakening of the financial position of a reinsurer, ceding companies would get lesser credit as the reinsurer becomes more troubled,” said Koziol. “Additionally, ceding companies would be faced with potential increases to guaranty fund assessments in insolvencies. This can happen from uncollectible, uncollateralized, reinsurance from insolvent alien reinsurers or less assets or delayed payment to the estate of an insolvent company because a liquidator cannot collect the uncollateralized reinsurance. The task force seems to give little weight to the delays and costs to a solvent company in collections of uncollateralized or dercollateralized reinsurance.”

Disputed and delayed reinsurance recoverables are major concerns to PCI members. “While we oppose reduction of collateral requirements relating to alien reinsurance, we are willing to consider a proposal that would give the same level of security that exists under current collateral requirements,” Koziol said.

PCI identifies itself as a national property casualty insurance trade association that is composed of more than 1,000 member companies.

Source: PCI

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