A new framework to modernize U.S. regulation of foreign reinsurers being considered by state insurance commissioners is probably unconstitutional, according to a legal analysis commissioned by one of the world's biggest foreign carriers.

The issue of foreign reinsurer regulation was under scrutiny last week here at the quarterly meeting of the National Association of Insurance Commissioners, which heard comment from interested parties at its Reinsurance (E) Task Force session.

One of those speaking was Swiss Re representative Debra Hall, who said her company felt a federal regulator was the way to go, but that the carrier was not abandoning efforts to shape a state regulatory solution. "We think you [the NAIC] have made progress," she said.

The NAIC is proposing creation of a new entity called the Reinsurance Supervision Review Department, which would determine which non-U.S. jurisdictions are entitled to enter into mutual recognition agreements.

According to a legal study done for Swiss Re, the idea of states entering a mutual recognition framework with foreign countries would most likely violate the foreign affairs doctrine of the U.S. Constitution because Congress has not approved such action by the NAIC.

A memo prepared for the task force said the NAIC would be hiring outside counsel to provide a legal opinion on the Swiss Re analysis, which found that the latest NAIC reinsurance proposal mandates higher burdens for certified foreign companies and leaves "unbridled discretion" for states to impose further burdens.

The NAIC proposal calls for developing a system where a national reinsurer would have one regulator from one state supervising all its domestic U.S. business. Such a regulator would be certified by the NAIC Reinsurance Supervisory Department.

The draft proposal would also require a host state to grant credit for reinsurance ceded by one of its domestic insurers to a national reinsurer authorized by a certified reinsurance supervisor.

A host state supervisor would retain authority to evaluate the amount of liabilities ceded and to determine whether the contract transfers risk.

To be certified as a national reinsurer, a company would have to be domiciled and licensed as a national reinsurer under a jurisdiction certified by the Reinsurance Supervision Review Department, according to the draft.

Frank Nutter, president of the Reinsurance Association of America, commended the task force and its chair, New Jersey Insurance Commissioner Steven Goldman, for working on a constructive framework that contrasted with past proceedings, which he said had an adversarial nature.

The RAA, he said, would like to see the NAIC keep on the table the option of supporting federal legislation to enable a state-based system to achieve uniformity and address any constitutional questions.