Collateral Reduction Plan Draws Fire

"The idea is still not popular in the U.S. industry generally, but certainly its popular in the non-U.S. reinsurance industry. We have been lobbying on this for the last two years," said David Matcham, director of operations at the International Underwriting Association of London. Mr. Matcham was one of the participants at the NAIC reinsurance task force meeting in Anaheim, Calif., held earlier this month.

In opposing the idea, U.S. companies continue to cite difficulties in enforcing U.S. court judgments in foreign jurisdictions when U.S. insurers run into trouble recovering from alien reinsurers.

At the NAIC reinsurance task force meeting, for example, one participant even presented a letter from the U.S. State Department to the effect that enforcement of U.S. court judgments is often problematic in foreign courts.

Also presenting testimony at the reinsurance task force meeting was the Washington-based Reinsurance Association of America, discussing the merits of keeping alien reinsurance collateral requirements right where they are.

"All these groups, of course, were at odds with foreign reinsurers who were making their case for reducing collateral," said William Boyd, financial regulation manager at the Indianapolis-based National Association of Mutual Insurance Companies. "There was no resolution on this question at all."

Mr. Boyd said NAMIC, along with other industry groups, continues to believe that alien collateralization should be kept at 100 percent, rather than allowing some foreign reinsurers to participate in the U.S. market at reduced collateralization.

"If there are difficulties in recovering from an alien reinsurer, the collateralization assures that a primary insurer in the United States can recover," Mr. Boyd said. "The collateral capital is not in some foreign jurisdiction. Its on these shores and can be accessed by court order or arbitration."

Additionally, some NAIC members also predict that the proposal wont find much support for a few yearsperhaps until there are common international accounting standards to better account for foreign reinsurers finances.

On the other side of the debate, Mr. Matcham argued that both the enforceability and accounting-standards issues are "not insurmountable in terms of advancing our proposal."

Commenting on the enforceability argument, Mr. Matcham told National Underwriter that the issue really depends on jurisdictions. "The issue of enforcing U.S. judgments in the U.K., for example, is completely fine. There are no problems," he said.

It is also worth emphasizing, he added, that reinsurance contracts very often have arbitration clauses. He said arbitration awards are "enforced universally, because they are subject to the New York convention[for such awards], which has been signed by the United States, the U.K. and many other European countries. So its rare for a reinsurance contract to go to litigation to be disputed."

Furthermore, Mr. Matcham noted that under the proposal, a foreign reinsurer cannot get on the preferred collateralization list unless it can demonstrate that its own jurisdiction would enforce U.S. courts judgments. "So there are two safeguards here: You can have it by the [arbitration] convention, or you satisfy regulators that there wont be a problem in your jurisdiction. So we dont feel this is a substantive opposing argument given the rigid criteria that have to be met anyway."

Regarding the uniform accounting standards argument, "our proposal says that for a reinsurer to be on the list, it would have to submit their financial statements in the U.S. or U.K. GAAP figures, which are widely understood," noted Mr. Matcham.

The NAIC accounting subgroup is also tackling this accounting-standards issue. The subgroup announced at the reinsurance task force meeting that its members would be talking to a few select foreign reinsurers to better understand the reliability and interpretability of their own financial statements.

"We sincerely hope the proposal will be adopted," Mr. Matcham said. "The current rules are nonsensical in that they treat every foreign reinsurer the same. Its basically saying every foreign reinsurer is a credit risk, and that cant be right."

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, December 19, 2003. Copyright 2003 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.