Alien Re Collateral Issue Shelved By NAIC

By Michael Ha

NU Online News Service, March 15, 11:58 a.m. EST?State regulators have voted to suspend debate over a potential reduction in collateral requirements for nondomestic reinsurers?a move designed to encourage informal negotiations among insurance interests involved.[@@]

The unanimous decision to "defer further consideration of any proposals" to amend the National Association of Insurance Commissioners model law on credit for reinsurance to lower collateral requirements was reached Saturday at a session of the NAIC reinsurance task force during the association's spring meeting in New York.

Currently, collateral rules require alien reinsurers to fund 100 percent of their gross liabilities in the United States, but many foreign reinsurers have been arguing that U.S. regulators should establish a list of qualified overseas reinsurers that would be permitted to fund at something less than 100 percent.

The collateral-reduction idea is still not popular in the U.S. industry generally. In opposing the idea, U.S. companies say 100 percent collaterals are needed to ensure U.S. insurers' security, since there are still difficulties in enforcing U.S. court judgments in foreign jurisdictions when U.S. insurers run into trouble recovering from alien reinsurers.

But John Oxendine, insurance commissioner for Georgia and chairman of the reinsurance task force, observed that the two sides have recently begun a dialogue to find common ground. He explained during the reinsurance task force session that representatives from both camps met in New York last Thursday at a gathering hosted by New York Insurance Superintendent Gregory Serio.

"We sat down at the table and we just let two sides talk. It was two parties broaching the issue, looking at the quality of reinsurance companies in general," said Mr. Oxendine.

The meeting participants included representatives from American International Group Inc., Cincinnati Financial Corporation, CNA Financial Corporation, The Liberty Corporation, Endurance Specialty Holdings and Hannover Re, as well as from Reinsurance Association of America and the International Underwriting Association of London.

State regulators from New York, Georgia, Maine, Arkansas and Texas were also in attendance at the gathering as observers. "We had metal detectors and checked everybody for weapons or sharp instruments. We wanted to make sure they wouldn't shoot each other across the table," Mr. Oxendine joked.

Mr. Oxendine added, "The key component was the two parties going back and forth?and they wanted the NAIC to maybe step back and let them get a chance to work this out."

The NAIC's position now is to encourage the industry participants to work together and develop a new approach. "We want to let them flesh this issue out and talk amongst themselves." But, Mr. Oxendine added, "obviously any changes that will go to the state-law level will have to come back to the NAIC. But let's let the industry people work on it, come up with a proposal, bring it to the NAIC."

"We may like it, we may not like it?we will have to wait and see what the proposal will look like. This is why we are tabling the debate at the NAIC?to give them an opportunity to work on the issue."

Ernst Csiszar, South Carolina insurance director and the current NAIC president, commended the decision taken by the reinsurance task force as "definitely a move in the right direction."

"I would hope that what comes out is a standard that's applicable to any reinsurer, whether it is an alien reinsurer or a non-alien reinsurer," Mr. Csiszar told National Underwriter. "It has become very, very clear that in terms of purely reducing collateral without anything further being done, you are never going to get any kind of consensus on this issue?not from the industry, not amongst regulators," the commissioner observed. "Certainly, collateral is not the only way to regulate?we know that. The parties will look at all their options."

An industry trade organization representative said one suggestion that could be raised as a comprise position among the parties is the working-trust proposal.

"More than anything, this is an opportunity to explore other avenues. For example, there were some suggestions of the working trust years ago. And now, that would be revisited," said Mike Koziol with the Property Casualty Insurers Association of America.

With a working-trust, the reinsurer would fund the trust to match the required reserves as set forth in the most recent quarterly report. "Money will be coming in and out of the working trust, depending on payments or maybe market price. It will be a living financial arrangement," Mr. Koziol said.

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Alien Re Collateral Issue Shelved By NAIC

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