Alien Re Collateral Rules Could Change

By Lisa S. Howard

Reinsurance Editor

The National Association of Insurance Commissioners continues to discuss possible changes to collateral rules that require alien reinsurers to fund 100 percent of their gross liabilities in the United States, according to market sources who spoke to National Underwriter recently.

“Theres a concept on the table that were looking at that would involve a certification process for individual companies,” said John Oxendine, insurance commissioner for Georgia.

Under the proposed concept, a reinsurer could be on an approved list and fund its outstanding liability collateralization requirement for less than 100 percent, subject to meeting certain regulatory and reporting criteria, said David Matcham, director of operations for the International Underwriting Association in London, which is pushing for the changes in the collateralization rules.

“Alien reinsurers would have to submit themselves to quite a bit of additional regulation to get on that list. Its not an easy process,” Mr. Matcham said. “In return of course, theyd be able to fund at a lower level, and therefore the costs of the product would reduce to the clients–to the cedents and the U.S. consumers,” he said.

“Its a concept that the surplus lines market has used successfully for many years. So its something the U.S. regulators are familiar with,” he said.

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

“I think most people agree that, if were going to do something, it should be pinpointed and targeted on a company-by-company basis,” Mr. Oxendine told National Underwriter.

Doing detailed reviews of individual companies to determine that its appropriate to reduce the requirement from 100 percent gross funding “is a better way to go, instead of just doing something across the board [for all alien reinsurers],” he said.

However, Mr. Oxendine, who chairs the reinsurance task force of the NAIC, emphasized there are still a lot of unanswered questions and a lot of things that need to be worked on before any changes are made to the model regulation.

He said he wants to get the process moving, but there isnt a set deadline. “Weve got to get everybody comfortable with it. Were all charged with making sure insurance companies stay solvent, and its something we have to take very seriously and make sure we do right.”

He noted that the regulators are currently “going through the process of trying to understand in detail how different European countries go about their licensing and regulation.” (The collateralization requirement was discussed at the recent NAIC meeting in March.)

The Reinsurance Association of America in Washington, D.C. has opposed relaxation of the rules, saying there arent common accounting standards, U.S. court judgments cant be enforced overseas, and theres not a common reinsurance regulatory system in Europe.

“We still believe, as do many of the U.S. ceding companies, that the current requirements enhance competition and protect against solvency risk,” said Frank Nutter, president of the RAA.

“In light of the recent rating agency actions regarding reinsurers, it seems to be the wrong time to reduce solvency requirements,” he said.

Mr. Matcham said these objections could be overcome through regulation. “An applicant would have to satisfy the regulator that their home state regulation is sophisticated, that you can enforce judgments, and that you can understand the balance sheet,” he said.

Mr. Matcham said there was a substantive debate on the application of the proposal during the March NAIC meeting because some regulators were concerned about retroactive funding reductions when contracts were bought on the basis of 100 percent collateral.

“The regulators agreed that they would continue their discussions on this proposal if [the proposal] was on a prospective basis only, although they recognized that an individual cedent could agree to retrospective funding,” he said. “That was a compromise we were happy with.”

Mr. Matcham said U.S. brokers have indicated that overseas reinsurers are very conscious of this regulation and it affects their decision to offer capacity.

“If the regulation is onerous and costly, its going to restrict the capacity and products available to U.S. consumers,” he said.

Mr. Oxendine said he has heard people argue that capacity is being restricted by the regulation, but “Im not sure how true that is.”

“I havent had anybody come to me and say, Were not writing in the United States, but we would be if we didnt have to collateralize. Ive heard those comments [about capacity being restricted] and I guess my response is, If thats true, where are these people? Who are these people?”

Mr. Matcham stressed that there are trade implications to the U.S. requirements and the issue has been raised with European trade negotiators for consideration at the World Trade Organization. “At the moment, its not a level playing field. If a U.S. reinsurer reinsures a European insurer, it doesnt have to pay the collateral in Europe.”

Mr. Matcham added that a European reinsurer that reinsures a U.S. risk has to fund it at a gross amount. “He cant take any account of his own retrocession protections, although a U.S. reinsurer can,” he said.

The U.S. trade representative has not included the collateral issue in the list of negotiable service industry items to be discussed at the WTO, according to Mr. Nutter.

Mr. Oxendine said he was sympathetic to the restraint of trade argument. “However, the view of most American regulators is that this should really be classified as more of a solvency issue than a trade issue,” he said. “Youve got the Europeans saying its trade, the Americans saying its solvency.”

The Americans and the Europeans have different ways of approaching insurance regulation and solvency regulation, he said. “There have been a lot of questions raised lately about the possibility the European system might have some weaknesses to it. Thats a matter thats to be debated.”

Reproduced from National Underwriter Edition, April 7, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.