WASHINGTON--A framework to eliminate the requirement thatforeign reinsurers post collateral to support U.S. transactions hasmoved a step closer to approval by the nation's insuranceregulators.

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

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

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

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

Several opponents of the plan argued that ratings do notnecessarily reflect the soundness of a company. They pointed to thefact that American International Group was highly rated beforeliquidity problems forced it to negotiate an $85 billion bridgeloan from the federal government.

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

His comment came after speakers offered final appeals for thetask force to reconsider the proposal. Among the trade groups thatdo 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 ofAmerica, Des Plaines, Ill.

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

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

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

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

New York is in the process of developing a regulation and lastweek Florida's State Cabinet approved a rule implementinglegislation giving the insurance commissioner discretion to allowreinsurers to conduct business in Florida without posting 100percent collateral.