WASHINGTON--A framework to eliminate the requirement that foreign reinsurers post collateral to support U.S. transactions has moved a step closer to approval by the nation's insurance regulators.

The proposed format, which has drawn criticism from opponents of the move, was approved by a committee of the National Association of Insurance Commissioners at its fall meeting here.

The plan was adopted by the Reinsurance "E" Task Force and was due for adoption by the full "E" Committee tomorrow. If it is adopted at the "E" Committee, it will go to the NAIC's executive committee and plenary at the NAIC's December meeting.

The plan would link collateral posted by a foreign reinsurer to a financial strength rating from a Securities and Exchange Committee-approved rating agency as well as to the discretion of a port-of-entry or home state insurance commissioner.

Based on a five-tier strength rating system, collateral would range from no collateral for tiers three and above, 75 percent collateral for tier four (secure), and 100 percent collateral for tier five (vulnerable.)

Several opponents of the plan argued that ratings do not necessarily reflect the soundness of a company. They pointed to the fact that American International Group was highly rated before liquidity problems forced it to negotiate an $85 billion bridge loan from the federal government.

Steven Goldman, New Jersey commissioner and chair of the Reinsurance "E" Task Force, said that recent events including the AIG financial problems were a "shock to the financial system" impacting the economy and confidence in general, but "with all that said, we need to recognize that this was an extraordinary event--not just AIG but circumstances in general. Clearly this is not business as usual, but at some point we have to move forward."

His comment came after speakers offered final appeals for the task force to reconsider the proposal. Among the trade groups that do not want it to advance are the American Insurance Association, Washington; the National Association of Mutual Insurance Companies, Indianapolis; and the Property Casualty Insurers Association of America, Des Plaines, Ill.

"The current news reinforces that it is a mistake to reduce collateral. Collateral exists to make sure that insurers are paid," said Steven Bennett, AIA assistant general counsel. He noted that when a company is downgraded and there is financial stress, there is not the ability to defer assets with declining value as collateral for foreign companies.

But Commissioner Goldman pointed out that if a reinsurer is a domestic, then it would not be required to post collateral. He asked whether domestic reinsurers should be made to post 100 percent collateral if it provides security of payment. In such a case, he said, "all reinsurers should post 100 percent collateral and then there would never be a problem."

Michael Moriarty, a New York regulator, acknowledged that "this might not be the best time to review this issue, but it is not the regulator's job to eliminate credit risk, and that is what 100 percent collateral does." Mr. Moriarty also noted that the plan is prospective, applying to new business, and will be introduced over time.

Both New York and Florida took action months ago to begin the process of removing the collateral requirement for foreign reinsurers with good financial ratings.

New York is in the process of developing a regulation and last week Florida's State Cabinet approved a rule implementing legislation giving the insurance commissioner discretion to allow reinsurers to conduct business in Florida without posting 100 percent collateral.

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NAIC Panel Okays Dropping Foreign Reinsurer Collateral Rule

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