Regulators May Take Up Collateral Rule

The National Association of Insurance Commissioners will “more than likely” reexamine the issue of continuing collateral requirements for alien reinsurers, the group's president said yesterday.

Maine Superintendent of Insurance Alessandro Iuppa said the issue was thoroughly discussed at the annual commissioners' retreat earlier this month, where a number of European regulators were also present.

No final charge has been given to the Reinsurance Task Force, but regulators last December approved an NAIC white paper that outlined the issues involved in a possible debate, which would seem to leave the way clear for a fruitful discussion, Mr. Iuppa said.

Lowering collateral requirements for reinsurers not domiciled in the U.S. was debated at the NAIC in the early part of the decade. U.S. regulators and industry representatives claimed such a move could have severe solvency ramifications, while alien reinsurer representatives said it was a matter of fairness as well as helping to provide a more stable market.

The parties suspended debate for a couple of years while attempts were made to reach a compromise. When that proved fruitless, a so-called ad hoc group of regulators presented a series of compromise proposals that could serve as the basis of this year's debates, if they should come about.

Supporters of the status quo raise concerns about the difficulty of enforcing judgments in foreign courts and differing accounting standards making transparency of the financial strength of foreign concerns difficult.

With the issue again on the forefront, Standard & Poor's has issued a frequently asked questions report that, while not taking any outright stand, does raise a number of issues.

“Collateral can provide a false sense of security by removing an incentive for ceding companies to make thoughtful decisions about selecting reinsurers,” said the report.

In addition, the fact that collateral is only required after a claim is recognized could mean that it would be too late at that stage to see the funds of a troubled insurer.

“History has shown that the best protection against uncollectible reinsurance is to select a diverse group of stable, reliable reinsurance providers in the first place, not to rely on backstops like collateral,” the report said.

The report added that relaxing collateral requirements would provide challenges to risk-averse regulators. “In addition, changing the rules would affect capital requirements for ceding insurers and funding needs for reinsurers, and would shuffle market dynamics as well,” the report said.