U.S. Carriers Not Happy Over NAIC's Proposed New Re Collateral Rules

She said the current system–premised on the belief that all U.S.-regulated carriers pose no payment risk, while their alien counterparts pose just the opposite–is out of date in today's global economy.

Ms. Bowler said the NAIC now seeks a "regulatory paradigm shift," which recognizes that most of the alien reinsurance in the United States comes from four countries–the United Kingdom, Germany, Switzerland and Bermuda–with comparably evolved regulatory systems.

Last June, the Task Force stunned the insurance industry with its proposal to scrap the five-year debate over alien collateral requirements with a proposal based on some still-undefined ratings system.

The new proposal builds on that, with the financial strength ratings of the Nationally Recognized Standard Rating Organizations–such as Fitch and Standard & Poor's–serving as what Ms. Bowler termed a "starting point."

Under the plan, the NAIC will establish a Reinsurance Evaluation Office that will look at–in addition to financial strength ratings–criteria such as willingness to pay, as well as the efficacy of solvency regulation in the insurer's country of domicile, to create a score that would determine what percentage of collateral needs to be posted.

The RAA's Ms. Cohen asserted that under the new regime, non-U.S. reinsurers will have no reason to obtain U.S. licenses, since it will not affect the amount of collateral they will have to post.

It was also noted that a company such as insurance giant State Farm will have to post at least the minimum 20 percent collateral requirement for the reinsurance it provides to its subsidiaries. (A State Farm representative, James Tuite, said the company has yet to evaluate the proposal.)

Also at the NCOIL meeting, Mr. Iuppa said the proposal would represent the last NAIC effort to reach a consensus on this issue, although he did not make clear how he would carry out that promise.

"This is the time for regulators to deal with this," he said.

If the NAIC proposal fails, he said non-U.S. insurers could challenge the current collateral requirement in the global trade arena. "But to me this is a solvency issue," he said.

Final comments on the NAIC proposal were due last week. Ms. Bowler said she hoped both the Task Force and the parent Financial Condition Committee would approve the measure at the NAIC's winter meeting next month.

NCOIL has had a proposal pending for four years that would have liberalized collateral requirements. The NCOIL executive committee is expected to take up the collateral issue in March, depending on what the NAIC does.

State lawmakers will ultimately have to approve any new system regarding collateral since it will involve amending each state's Credit For Reinsurance Act, which are virtually uniformly standard throughout the country.

For nearly six years, reinsurers domiciled outside the United States have attempted to reduce the 100 percent collateral requirements, claiming it provides an unlevel playing field. For several years they have pushed for an NAIC-administered, so-called "white list" of insurers that could be accorded varying degrees of collateral reduction based on their financial strength.

The parties even took about two years off when no proposals were put before the NAIC, while they attempted to work out their differences in private under the aegis of the New York superintendent of insurance.

But when that effort ran aground, the NAIC started reviewing the issue once again, culminating in the current proposal on the table.

Insurance industry representatives such as Bill Boyd, financial regulation manager at the National Association of Mutual Insurance Companies, contend there is no need to change a system that is working fine–protecting the policyholder while granting access to the U.S. market to alien reinsurers.

"The magnitude of the proposed change requires powerful reason for its adoption," Mr. Boyd said. "If such reasons exist, they have not been demonstrated in the deliberations by the Task Force."

As the chairman for the past year of the International Association of Insurance Supervisors, Mr. Iuppa, Maine's superintendent of insurance, said he has taken a more global view of insurance regulation, and feels the current solvency regimes in European countries meet or surpass U.S. rules.

But he seems to be ahead of the industry in that regard, observers contend.

Like Ms. Cohen, Mr. Boyd sees the current proposal as an "implicit devaluation of existing state solvency regulation, not supported by the Task Force's brief deliberations, and which deserves intense consideration."

He also questioned whether the additional capital U.S. reinsurers will have to come up with will be worth it in terms of reduced failure of companies.

"At minimum, an estimate must be made of the incremental collateral to be mustered by U.S.-domiciled companies that would assume the risk and be subject to the proposal," he said.