Alien Re Collateral Rules Could Change

By Lisa S. Howard, Reinsurance Editor

NU Online News Service, April 3, 9:12 a.m.EST?The National Association of Insurance Commissionerscontinues to discuss possible changes to collateral rules thatrequire alien reinsurers to fund 100 percent of their grossliabilities in the United States, according to market sources whospoke to National Underwriter recently.

"There's a concept on the table that we're looking at that wouldinvolve a certification process for individual companies," saidJohn Oxendine, insurance commissioner for Georgia.

Under the proposed concept, a reinsurer could be on an approvedlist and fund its outstanding liability collateralizationrequirement for less than 100 percent, subject to meeting certainregulatory and reporting criteria, said David Matcham, director ofoperations for the International Underwriting Association inLondon, which is pushing for the changes in the collateralizationrules.

"Alien reinsurers would have to submit themselves to quite a bitof additional regulation to get on that list. It's not an easyprocess," Mr. Matcham said. "In return of course, they'd be able tofund at a lower level and therefore the costs of the product wouldreduce to the clients--to the cedents and the U.S. consumers," hesaid.

The proposals are aimed "at the highest, strongest, biggest,most secure reinsurers, so it could be no more than 10-12companies," he said.

"I think most people agree that, if we're going to do something,it should be pinpointed and targeted on a company-by-companybasis," Mr. Oxendine told National Underwriter.

Doing detailed reviews of individual companies to determine thatit's appropriate to reduce the requirement from 100 percent grossfunding "is a better way to go, instead of just doing somethingacross the board [for all alien reinsurers]," he said.

However, Mr. Oxendine, who chairs the reinsurance task force ofthe NAIC, emphasized there are still a lot of unanswered questionsand a lot of things that need to be worked on before any changesare made.

He said he wants to get the process moving, but there isn't aset deadline. "We've got to get everybody comfortable with it.We're all charged with making sure insurance companies staysolvent, and it's something we have to take very seriously and makesure we do it right."

He noted that the regulators are currently "going through theprocess of trying to understand in detail how different Europeancountries go about their licensing and regulation." (Thecollateralization requirement was discussed at the recent NAICmeeting in March).

The Reinsurance Association of America in Washington, D.C., hasopposed relaxation of the rules, saying there aren't commonaccounting standards, U.S. court judgments can't be enforcedoverseas and there's not a common reinsurance regulatory system inEurope.

"We still believe, as do many of the U.S. ceding companies, thatthe current requirements enhance competition and protect againstsolvency risk," said Frank Nutter, president of the RAA.

"In light of the recent rating agency actions regardingreinsurers, it seems to be the wrong time to reduce solvencyrequirements," he said.

Mr. Matcham said these objections could be overcome throughregulation. "An applicant would have to satisfy the regulator thattheir home state regulation is sophisticated, that you can enforcejudgments and that you can understand the balance sheet," hesaid.

Mr. Matcham said there was a substantive debate on theapplication of the proposal during the March NAIC meeting becausesome regulators were concerned about retroactive funding reductionswhen contracts were bought on the basis of 100 percentcollateral.

"The regulators agreed that they would continue theirdiscussions on this proposal if [the proposal] was on a prospectivebasis only, although they recognized that an individual cedentcould agree to retrospective funding," he said. "That was acompromise we were happy with."

Mr. Matcham said U.S. brokers have indicated that overseasreinsurers are very conscious of this regulation and it affectstheir decisions to offer capacity. "If the regulation is onerousand costly, it's going to restrict the capacity and productsavailable to U.S. consumers," he said.

Mr. Oxendine said he has heard people argue that capacity isbeing restricted by the regulation, but he's not sure how true thatis. "I haven't had anybody come to me and say, ? We're not writingin the United States, but we would be if we didn't have tocollateralize.' I've heard those comments [about capacity beingrestricted] and I guess my response is, ?If that's true, where arethese people? Who are these people?'" he said.