Proposed reinsurance collateral reforms for foreign carriers will have little impact on their financial strength, said a new report from Fitch Ratings.

The Chicago-based rating agency said it does not believe individual carriers' financial or competitive positions will be materially altered, and thus the agency does not expect to make a material number of ratings changes if the proposal is adopted in its current form.

In December, the National Association of Insurance Commissioners gave preliminary approval to a plan that would reduce the amount of collateral carriers outside of the United States must put up to do business. The proposed office would evaluate the strength of reinsurers regardless of country of domicile in order to determine the collateral required.

For years foreign reinsurers complained that the 100 percent collateral requirements disadvantaged them in this country, while representatives of the domestic industry maintained the rules were required for solvency protection.

The Fitch report termed the proposal credit neutral for primary insurers, a modest positive for alien reinsurers and a modest negative for authorized reinsurers.

Fitch analyst Mark Rouck, based in Chicago, said he expects collateral levels to decline under the proposal as reinsurers pressure cedants to accept minimum collateral levels required to receive reinsurance credit in their statutory financial statements.

"In exchange, we expect primary insurers to negotiate corresponding price reductions as the cost of funding collateral requirements declines and available capacity increases," he said.

The decline will occur over time since collateral requirements for reinsurance transactions entered into prior to the proposal's effective date will not change, he added.

The dollar amounts involved are significant. Collectively, U.S.-domiciled life and non-life insurers and reinsurers reported $605 billion of ceded reinsurance recoverables and $218 billion of collateral on recoverables from unauthorized reinsurers at year-end 2005, the report noted.

Although, over time, the proposal's implementation would reduce the collateral supporting primary insurers' reinsurance assets, the report states that the proposal's minimum collateral requirements are well in excess of historical default rates and thus provide more than adequate default protection.

Special Reports /

Fitch: Little Impact Expected From Collateral Reform

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