London Reinsurers Heartened By NAIC Attention To Collateralization Proposal

The proposal is the brainchild of the International Underwriting Association of London, and the Comit? Europ?en des Assurances, based in Paris.

The Reinsurance Task Force agreed to create a new working group to review the proposal, and its members acknowledged that they need to learn more about alien reinsurers.

IUA Chairman Stephen Cane told National Underwriter that the task force's actions signaled progress. According to its Web site, IUA is the world's largest representative organization for international and wholesale insurers and reinsurers.

Mr. Cane explained that "key" states such as Illinois and California have called for state regulators to consider the proposal.

In his view, this indicates the regulators' first public acknowledgement that trade, including the area of reinsurance, is headed toward liberalization.

As explained by Mr. Cane, insurers in the United States are free to reinsure with whatever carrier they choose, but they cannot take credit for that reinsurance in their balance sheets unless the reinsurer is licensed or accredited.

Among other standards, to be accredited a non-U.S. reinsurer must establish a trust fund in the United States that is funded at 100 percent of its gross reinsurance liabilities, "plus an extra buffer on top of that" of $20 million, Mr. Cane said.

Alternatively, the alien reinsurer must collateralize the liability by a letter of credit for each individual cedant, Mr. Cane continued.

But, by and large, there are no similar barriers for U.S. companies operating in the United Kingdom or in European Union countries, Mr. Cane noted.

"The problem with setting up the 100 percent [U.S.] trust fundis you effectively tie up and remove from your everyday operations a significant amount of money that you cannot touch," he said.

At the same time, "reinsurance relies on spread, with the premiums collected from one company used to pay claims to another company. You hope that disasters don't happen simultaneously around the world, and that's how you run your business," Mr. Cane said.

Under the IUA-CEA proposal, an alien reinsurer, in return for reduction of the 100 percent requirement, would submit to a certain amount of regulatory scrutiny in the United States.

"Weve set out criteria which include a certain minimum capital requirement, the filing of details about the reinsurer's directors and officers, and an agreement that the local regulators can understand the accounting and methodology of the company," Mr. Cane stated.

These criteria would be above and beyond existing regulations, he stressed. This is in answer to some industry critics of the proposal, who have howled that since they must be subject to U.S. regulation, so should alien reinsurers.

Additionally, he noted, only the large reinsurers are the ones likely to apply for this special accreditation.

Regulators would always retain the discretion to turn down an application and/or to require a company to continue to fund at 100 percent.

But for the higher end of the market, there would be the recognition of the strength of the companies' balance sheets and operations, and a concession would be granted, Mr. Cane said.

He added that the 100 percent requirement is out of step with initiatives from the World Trade Organization and others groups calling for breaking down trade barriers around the world.

Another criticism lobbed by U.S. interested parties at the NAIC meetings is that differences exist in the accounting standards of the U.S. and other nations.

Some also questioned whether the proposal was premature because international accounting groups are developing international Generally Accepted Accounting Practice rules.

Mr. Cane's reply is that non-U.S. accounting standards may differ from those of the United States, but U.K. GAAP, for instance, "is not so fundamentally different from U.S. GAAP that an experienced financial analyst can't understand it."

He also noted that the IUA and CEA have long argued that competition is not an issue. This is because of the reality that U.S. ceding companies tend to purposely devise reinsurance programs that place part of the reinsurance in domestic markets and the rest in foreign markets.

Because the risk is "fairly evenly spread" between the U.S. and the global markets, Mr. Cane does not think that alien reinsurers will stampede to the United States just because of a concession in the collateralization requirements.

"Frankly, if everyone operated on the U.S. system, it would gum up the works eventually in that no one would get reinsurance," Mr. Cane said. Reinsurers "cannot tie up pots of money around the world in every jurisdiction because they really do need to use their financial resources to pay claims wherever they occur."

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, July 8, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.