In the era of globalization, should U.S. reinsurers be treated no differently than their alien counterparts? Thats the key question facing regulators next week as they debate a controversial proposal to assess all reinsurers equally when it comes to collateral requirements.

Indeed, the collateral proposal is one of the hottest issues up for debate at next week's meeting of the National Association of Insurance Commissioners. Instead of imposing more burdensome mandates on “alien” carriers, the idea is to require all reinsurers to post some collateral to cover potential U.S. liabilities–with the amount depending upon a number of criteria, to be determined by a new Reinsurance Evaluation Office.

Making such a plan feasible, proponents say, is the fact that four major foreign domiciles generate the bulk of U.S. “alien” reinsurance capacity–the United Kingdom, Germany, Switzerland and Bermuda, all with sophisticated and capable regulatory authorities. That lessens the need to impose a burdensome collateral charge on carriers that just happen to be from outside the United States.

It makes a lot of sense to treat all carriers equally in the spirit of free trade, but U.S. reinsurers are understandably up in arms.

I'm not confident anything will come of this, given the NAIC's snail-like pace in making regulatory change–after all, we've been debating this issue (but not this particular, radical proposal) for close to six years now. Still, I find the idea intriguing and worthy of serious consideration.

NU Assistant Editor Steve Tuckey, our regulatory beat reporter, has been following this battle for years. He weighed in with a column this week setting the stage for the debate to come. Read on and feel free to offer your take on the proposal.

Are Collateral Rules
Really That Inalienable?

BY STEVEN TUCKEY

Covering the alien reinsurer collateral dispute has been one of the more fun issues for me as a reporter this past decade. The arguments are relatively simple, particularly when repeated ad infinitum.

But unfortunately there is no one to say, Stop! You are both right! The arguments have gone on and on, with even a two-year time-out when the parties attempted to work through their differences in private.

And so this weekend in San Antonio, at the winter meeting of the National Association of Insurance Commissioners, the issue will be joined, with a group of regulators putting up purportedly their best and final offer, challenging domestic carriers to get off the stick and solve this problem.

What problem? the domestic industry asks in puzzlement and dismay.

Well, the critics respond, the fact is, insurance is now a global industry, and you people have yet to adjust to this brave, new world.

Any time the word global comes up in arguments, I think of Pat Buchanan, who likes to dismiss them as so much globaloney. Nevertheless, that globaloney may prove all too real, depending on just how serious the Treasury Department is about getting the issue settled in favor of appeasing international free trade pressures.

Here accounts differ. Some lobbyists I have talked to have stated flat out that Treasury will give the regulators and industry one more year to solve the problem before a solution is imposed upon them.

But some pro-domestic industry lobbyists say equally flat out that Treasury officials have stated in numerous discussions with them that the issue is one of solvency and not of trade.

Since Treasury has more officials than you could shake a stick at, I suppose it is possible to say, Stop! Youre both right! But that really doesnt help move the discussions forward.

Not that there hasnt been some progress.

For instance, in their latest proposal that regulators will vote on this weekend, alien reinsurerswho are neither illegal, nor have anything to do with Sigourney Weaverare now referred to as non-U.S. reinsurers. Good to see all those LeBoeuf Lamb billable hours have not been for naught.

The proposal would require all reinsurersboth U.S. and non-U.S.to post collateral to cover potential U.S. liabilities. Under the plan, the NAIC would set up a Reinsurance Evaluation Office to look at criteria such as financial strength, willingness to pay, and the efficacy of solvency regulation in a reinsurers home country, and to create a score to determine the percentage of liability to be posted.

It is important to keep in mind that these discussions are taking place in the context of an overall rethinking of insurance regulation, with many companies and trade groups clamoring for an optional federal charter as an answer to the costs and local government barriers of 50-state regulation. Yet these same groups oppose extending the same concept globally.

So the next time someone asks, What will be the value of a U.S. license? the response could be, My point exactly.

To be fair, these same folks are not averse to change, but rather assert that an overall revamping of reinsurance regulation is needed before any such half measures, such as the current proposal, are approved.

For in a sense, the proposed Reinsurance Evaluation Office, run under the aegis of the NAIC, will be the de facto federal reinsurance regulator. While this may be the goal of some in the industry, what this proposal amounts to is a new layer of regulation rather than a replaced layer.

While all the arguments go on, change will creep up in almost imperceptible ways.
For example, after a number of trips to European capitals by top officials of the National Conference of Insurance Legislators, that group seems to have a bias in favor of the non-U.S. insurers position.

In a similar vein, outgoing NAIC President Alessandro Iuppas chairmanship of the International Association of Insurance Supervisors seems to have changed his mindset from skeptic to internationalist.

Is it because a trip to Brussels beats one to the local grange, or is there a genuine belief that liberalizing collateral rules will increase capacity, thereby easing some of the rising property insurance bills lawmakers are hearing about day and night?

Then again, if collateral requirements on alien reinsurers restrict capacity, would not imposing them on all carriers restrict it even more?

So now, let the games begin! This weekend the NAIC Reinsurance Task Force will decide if REO will be the speed wagon to not only resolve this issue, but provide the first step toward federal regulation.

If not, the International Underwriting Association will have to just take comfort in the fact they are no longer officially viewed as coming from outer space.

(Assistant Editor Steven Tuckey covers state regulation. He may be reached at stuckey@nuco.com.)

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