Reinsurance Collateral Battle Continues At NAIC

WASHINGTON–A National Association of Insurance Commissioners task force announced that it is extending the comment period on the NAIC proposal to “modernize” U.S. reinsurance regulation, which has provoked deeply divided opinions.

The decision Saturday to extend the comment period on the proposal to Oct. 19 was made at a public hearing on the issue here held in conjunction with the NAIC's fall meeting that ends today.

The subgroup of the NAIC's Reinsurance Task Force that is drafting the proposal will also discuss the issue in advance of the NAIC's December quarterly meeting at an interim meeting Nov. 7-8 in Atlanta in conjunction with the NAIC's Financial Summit.

The proposal would scrap the existing regulatory framework by creating a single-state licensing system for U.S. reinsurers and encourage the NAIC to develop a Reinsurance Supervision Review Department (RSRD).

Currently, foreign and unlicensed reinsurers most produce collateral to support the credit for reinsurance on which primary insurers depend for regulatory capital. U.S.-domiciled reinsurers are not subject to collateral.

A plan considered by the task force earlier this year, the Reinsurance Evaluation Office proposal, would have established a system whereby a reinsurer's collateral would be based on its financial strength. That proposal would have applied to all reinsurers, regardless of U.S. or foreign domicile.

The newest proposal by the task force, called the “port of entry” system, would allow non-U.S. reinsurers from approved jurisdictions to be allowed to access the U.S. market by submitting to regulation by one state. It would also impose a minimum 60 percent collateral standard–a point of huge contention within the world insurance market.

The NAIC commissioners are placing great emphasis on the work of the task force, touting it as moving the U.S. “towards international standards.”

But in their comment letters to the task force and in comments during the two-hour hearing, representatives of U.S. and foreign insurers voiced many concerns.

William Boyd, National Association of Mutual Insurance Companies financial regulation manager said, “Both proposals raise one question: “Who in the NAIC leadership, in Congress, or in the administration says there must be less than full collateral?” Mr. Boyd contended that, “This should be explained.”

Steven Bennett, an AIA assistant general counsel, said no specific problem has as yet been identified with the current system “that would justify overhauling the current collateral system that has worked without serious problems for decades.”

Mr. Bennett told the members of the task force, as well as interested parties who filled a large hall at the meeting, that, “AIA supports the current collateralization system that provides reinsurers an option to either become licensed in the U.S. or post 100 percent collateral and not submit to U.S. licensing requirements.”

He argued that, “The collateral option is pro-competitive and promotes a healthy reinsurance market where foreign reinsurers can either become licensed or post collateral.”

Michael Koziol, assistant vice president and counsel for the Property Casualty Insurers of America., testified that what concerns PCI the most is the proposal's failure to address, “as a clear purpose of insurance regulation, regulation for solvency of ceding companies for the protection of policyholders.” This was an issue also brought by representatives of Bermuda-based reinsurers.

Mr. Koziol argued that, “This is a point that seems to have become lost in the rush to collateral reduction.”

But Brian Fuller, an NAIC staff member, and Steven Goldman, an official with the New Jersey Department of Insurance, noted as the hearing started that solvency issues are only one of many issues that have been identified as concerning interested parties, and that is why the comment period has been extended.