Collateral Reduction Years Away: NAIC

A proposal to reduce collateral requirements for approvednon-U.S. reinsures is getting a cold reception from stateregulators meeting here.

Some members of the National Association of InsuranceCommissioners said the notion wont find much support among thegroup for a few years, until there are common internationalaccounting standards to better account for foreign reinsurersfinances.

The International Accounting Standards Board is currentlyworking on such accounting standards that could pass muster amongthe NAIC members, but they will not be ready for use for foreignreinsurers until some time in 2005 at the earliest.

The proposal for reducing collateral requirements would allowfor U.S. regulators to establish and approve a list of qualifiedreinsurers. The regulators would make a determination of financialstrength and would put those reinsurers they feel are strong on thelist, said William Marcoux, partner at law firm LeBoeuf, Lamb,Greene & MacRae in London. Mr. Marcoux spoke on behalf ofnon-U.S. reinsurers at the reinsurance task force session duringthe NAIC summer meeting here.

“Reinsurers on that list would then be permitted to fund atsomething less than 100 percent–somewhere between 50 percent and100 percent,” Mr. Marcoux said.

He argued that the proposal is identical to what stateregulators and the NAIC have done for the past 40 years in thenon-admitted insurers surplus-lines area, “and its workedbeautifully.”

“I think it can be duplicated in the reinsurance sector, to thebenefit of everyone involved–from the reinsurers who are providingcapacity in the United States to the ceding companies,” Mr. Marcouxsaid.

But many members at the NAIC reinsurance task force wereunconvinced.

“The fundamentals for any agreement on collateral reductions arelacking,” said Ernst Csiszar, South Carolinas insurance directorwho is also the NAIC vice president and a member of the reinsurancetask force.

Commenting on the proposal, he noted that it was first proposedby some European companies, “primarily the London market and agroup of French reinsurance companies and some German companies aswell. Those were the three that originally came up with thisproposal.”

Mr. Csiszar told National Underwriter that what theyare asking, very simply, is a leeway–a reduction on the collateralthat would be applicable for certain qualified non-U.S.reinsurers.

“And that means we have to set up qualifying standards forgetting on that list. And this is where we are havingdifficulties,” he explained.

“When you look at reinsurance recoverables, they generally forma significant component of the balance sheet,” Mr. Csiszar said.Indeed, he suggested that with recent reserve additions announcedby several large insurers, recoverables could now represent as muchas 80 percent of some primary insurer balance sheets.

“That makes it a very, very significant solvency issue,” hesaid, particularly, “when you are trying to set standards withconflicting, non-existing, overlapping, unclear kinds of accountingstandards overseas.”

Also making a case against the proposal for collateral reductionwas a letter from Matt Mosher, group vice president at the Oldwick,N.J.-based A.M. Best Company, which was distributed to thoseattending the reinsurance task force session.

The letter, which was written in response to an inquiry fromCommissioner Mike Pickens, president of the NAIC, affirmed that theuse of reinsurance can, in certain cases, be an important issue inevaluating the capital strength of a company.

Therefore, “for a ceding company with large dependence onreinsurance to support capital strength, less collateral couldresult in a lower A.M. Best rating,” Mr. Mosher wrote. “Morecollateral provides greater protection for the ceding company.”

Holly Bakke, commissioner from New Jersey, also argued againstthe collateral reduction proposal at the reinsurance task forcesession. She noted that receivers in the NAIC insolvency taskforce, a group chaired by Commissioner Bakke, do not support theproposal at the moment because the lack of collateral could hurtcreditors, guaranty funds and policyholders in the case of aninsolvency.

Mr. Csiszar said there are no common international accountingstandards that can help regulators understand these reinsurersbetter.

“My fundamental problem with this whole proposal is that I thinkwe ought to wait for the International Accounting Standards Boardto make its common international accounting rules,” he said, addingthat his opinion reflects the “broad view” of other NAICmembers.

And when those IASB rules are made, that would be an appropriatetime to see how the FASB reacts, he noted. “And then we willfinally have a framework in place where we can compare apples toapples, oranges to oranges. Up until that time, I dont think thatany kind of SEC filing is going to do it.”

Mr. Csiszar noted that, from his experience, “there are thingsthat I recognize in other accounting standards and there are thosethat I dont. And there are things in our accounting standards, likegoodwill for instance, that other accounting standards dontrecognize at all,” he said.

“So until you have these gaps in these conflicts worked out, Ithink this proposal is premature.”

Mr. Csiszar also added that there are other problems, includingthe enforcement of judgments and the enforceability of accountingrules.

“For instance, Germany, until recently, didnt have anyenforcement of its accounting rules. There was no disciplinary bodysuch as the one we have in the United States. So the way theaccounting rules were enforced was rather lax,” he observed.

And he noted that while a country like Italy has very good,rigorous kind of accounting rules, no one follows them becausethere is no nationwide enforcement. “So there are a number ofissues that need to be resolved, but the fundamental one is theaccounting,” he said.

There is also the question of timing and whether this is theright time, economically, to lower collateral requirements forforeign reinsurers. Mr. Csiszar clearly thinks its not.

“European reinsurers are having a very difficult time. They arefighting for their lives, not least because their investmentportfolios are so different from ours. So we really have to dealwith the substantive issue as well as the timing issue,” hesaid.

Mr. Csiszar added that the reinsurance task force will continueto keep an open mind, but “my sense of it is that this will be anopen item up until the IASB comes out with its standards, either2005 or 2006.”

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, June 30, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.