NU Online News Service, Nov. 7, 1:48 p.m.EDT

NATIONAL HARBOR, Md.—The full National Association of InsuranceCommissions passed a landmark model law Sunday that seeks to reducereinsurance collateral requirements for non-U.S. reinsurersdomiciled in qualified jurisdictions.

Specifically, the model law was passed by the NAIC executivecommittee and plenary at the closing session of the fall meetingheld here.

Under the current NAIC Credit for Reinsurance Model Law &Regulation, in order for U.S. ceding companies to receivereinsurance credit, the reinsurance must either be ceded to U.S.licensed reinsurers or secured by collateral representing 100percent of U.S. liabilities for which the credit is recorded.

The revisions provide substantive flexibility to stateregulators regarding collateral requirements.

For example, a reinsurer certified by a state will be requiredto post collateral in an amount that corresponds with its assignedrating (0 percent, 10 percent, 20 percent, 50 percent, 75 percentor 100 percent) in order for a U.S. ceding insurer to be allowedfull credit for the reinsurance ceded.

The vote ends 12 years of efforts by insurance and reinsuranceinterests who say that the new system represents a compromise andis superior to the current system.

Officials of the Bermuda Insurers and Reinsurers voice strongsupport, as do officials of the American Insurance Association andthe Reinsurance Association of America.

“We congratulate [New Jersey Commissioner Thomas Considine] forhis leadership in completing the NAIC's 12-year effort to approve acollateral reduction measure for financially strong, well-regulatedinternational reinsurers,” says Bradley Kading, president andexecutive director of the Association of Bermuda Insurers andReinsurers.

He says, “Bermuda reinsurers are major providers of reinsuranceto U.S. clients and paid more than $17 billion in claims to U.S.clients for Hurricane Katrina alone.”

He says this model bill, if implemented—as already done byFlorida and New York—will recognize the important contribution madeto U.S. consumers by financially strong international reinsurersregulated under a stringent solvency regime in Bermuda'sinternationally sanctioned regulatory regime.”

But some domestic insurance interests voice deep concern. Forexample, Scott Gilliam, vice president & government relationsofficer, Cincinnati Insurance Companies, says, “From ourperspective, the three pillars upon which the collateral obligationis premised still exist—uneven non-U.S. reinsurance regulation;differences in U.S. and non-U.S. accounting systems; enforceabilityof judgments. As such, now is not the time to exchange the securityof collateral for an untested rating system.”

Considine says at the plenary session, that for the first time,no trade groups are opposed to the model. He says onemay be neutral or tepid, but no one is opposed.

He acknowledges that the issue had “languished for years,” buthe said the action shows that the NAIC is no longer to stand for“No Action Is Contemplated,” as it once did.

He says action was necessary or there would be a move topreempt the states using Dodd-Frank via the Federal InsuranceOffice.