NAIC Lets Industry Settle Collateral Dispute

Currently, collateral rules require alien reinsurers to fund 100 percent of their gross liabilities in the United States, but many foreign reinsurers have been arguing that U.S. regulators should establish a list of qualified overseas reinsurers that would be permitted to fund at something less than 100 percent.

The collateral-reduction idea is still not generally popular among U.S. insurers. In opposing the idea, U.S. companies say 100 percent collaterals are needed to ensure U.S. insurer security, since there are still difficulties in enforcing U.S. court judgments in foreign jurisdictions when U.S. carriers run into trouble recovering claims from alien reinsurers.

However, John Oxendine, insurance commissioner for Georgia and chairman of the reinsurance task force, observed that the two sides have recently begun a dialogue to find common ground. He explained during the reinsurance task force session that representatives from both camps met in New York on March 11 at a gathering hosted by New York Insurance Superintendent Gregory Serio.

"We sat down at the table and we just let the two sides talk. It was two parties broaching the issue, looking at the quality of reinsurance companies in general," said Mr. Oxendine.

The meeting participants included representatives from American International Group, Cincinnati Financial Corp., CNA Financial Corp., The Liberty Corp., Endurance Specialty Holdings and Hannover Re, as well as from Reinsurance Association of America and the International Underwriting Association of London.

State regulators from Arkansas, Georgia, Maine, New York and Texas were also in attendance at the gathering as observers. "We had metal detectors and checked everybody for weapons or sharp instruments. We wanted to make sure they wouldn't shoot each other across the table," Mr. Oxendine joked. "The key component was the two parties going back and forth and they wanted the NAIC to maybe step back and let them get a chance to work this out."

The NAIC's position now is to encourage the industry participants to work together and develop a new approach. "We want to let them flesh this issue out and talk among themselves," said Mr. Oxendine, adding, "Obviously, any changes that will go to the state-law level will have to come back to the NAIC. But lets let the industry people work on it, come up with a proposal, bring it to the NAIC."

Ernst Csiszar, South Carolina insurance director and the current NAIC president, commended the decision taken by the reinsurance task force as "definitely a move in the right direction."

One potential compromise position among the parties is a working-trust proposal. With a working-trust, the reinsurer would fund the trust to match the required reserves as set forth in the most recent quarterly report. "Money will be coming in and out of the working trust, depending on payments or maybe market price. It will be a living financial arrangement," said Mike Koz'ol, a representative of the Property Casualty Insurers Association of America in Des Plaines, Ill.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, March 19, 2004. Copyright 2004 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.