While the domestic and non-U.S. reinsurance industries have dueled for years over collateralization requirements, regulators now are exploring a more holistic approach to reinsurance supervision.

How the two aims of modifying collateralization practices along with overall reform will play out is anybody's guess because of the divergence of views of what needs to be reformed and how.

Brad Kading, president of the Association of Bermuda Insurers and Reinsurers, said the two main issues remain how reinsurance is treated as an asset of a ceding insurer, and how reinsurers should be regulated. "It is not really clear where the National Association of Insurance Commissioners wants to go with this," he said. "It seems to be an open-ended review, and open-ended reviews often go nowhere."

As is the case with virtually all issues of regulatory reform, stakeholders in the reinsurance arena would like to see either one federal regulator or a more nationalized approach to regulation, with much more deference by the states to each other's regulatory powers.

"The financial statements of the reinsurer as approved by its state of domicile need to be accepted by other states," according to Mr. Kading.

New York seems to be the main culprit, although there are about a dozen other states that engage in the practice of so-called "extraterritoriality" in demanding adjustments to financial statements.

While not addressing the reinsurance issue specifically, the state's new superintendent of insurance, Eric Dinallo, has said he looks forward to working toward gaining accreditation status, which would indicate at least a mindset toward a more national approach.

At the Reinsurance Task Force hearing at last month's quarterly NAIC meeting, Chairman (and Georgia Commissioner) John Oxendine said uniformity and elimination of extraterritoriality should be the main target of any overall reinsurance reform effort.

Tracey Laws, general counsel of the Reinsurance Association of America, said her organization has called for a single state regulator with national regulatory oversight and the power to preempt conflicting or inconsistent state laws in an effective and efficient manner.

The RAA has called for federal enabling legislation to create an entity to certify states as single-state reinsurance regulators. "This will ensure against a race to the bottom and to recognize non-U.S. jurisdictions, which states are not independently authorized to do," she said.

Thus, a method for recognizing substantially equivalent regulatory standards outside the United States will help solve the collateralization quandary, since carriers in that jurisdiction would be licensed to operate in this country.

Ms. Laws stressed that federal enabling legislation does not mean creation of a federal regulator. "It would be utilized to support state regulation by addressing constitutional limitation on states' authority and by ensuring efficient and effective regulation by a single state regulator," she said.

An interstate compact might accomplish the same goal, but their track records are not all that encouraging, she added.

Last year, the NAIC proposed a Reinsurance Evaluation Office, which would evaluate all reinsurers regardless of country of domicile and charge collateral requirements based on that assessment.

Since its introduction, the proposal has been modified to exempt the best-rated U.S. reinsurers but still keep the concept of collateralization regardless of domicile.

Regulators and industry representatives are still hashing over the implementation of that proposal and have yet to decide whether to move first with the REO mechanics or pursue overall reform.

Domestic reinsurers still remain opposed to any reduction of the 100 percent collateral requirement for their non-U.S. counterparts as an undue threat to solvency.

Many observers refer to the so-called Passport system devised in the current European Union Reinsurance Directive as the way to accomplish the goals of nationalizing reinsurance regulation.

As a representative of the London-based International Underwriting Association, attorney Bill Marcoux has butted heads for the past several years with domestic industry representatives over the issue of reducing collateral requirements for alien insurers. "The goal must be to prune the thicket of laws and regulations which have grown up around reinsurance transactions," he said.

Numerous states have imposed requirements, including the dictating of certain contract terms, arbitration and termination provisions as well as various rules concerning the use of intermediaries.

"When you multiply these great ideas by 50 individual regulators, you wind up with a bewildering array of special requirements, and in some instances conflicting provisions," he said, citing the example of conflicting rules regarding letters of credit between New York and California as a prime example.

The new NAIC model law procedure--requiring approval by the Executive Committee as well as the parent committee of any new or amended model law--could be the next juncture at which some decisions have to be made, since the discussions now technically violate the spirit of the rule.

But allowing for what NAIC Senior Vice President Andrew Beal called the "awkward phase" of implementing that rule, such a fork in the road could still be put off for some time.

"It is not really clear where the National Association of Insurance Commissioners wants to go with this. It seems to be an open-ended review, and open-ended reviews often go nowhere."

Brad Kading, President

Association of Bermuda Insurers & Reinsurers

Special Reports /

U.S. Regulators, Industry Leaders Grapple With How Best To Referee All Re Players

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