NAIC Model Law on Reduced Collateral Credit-Negative for U.S. Primary Insurers

NU Online News Service, Nov. 15, 2:35 p.m. EST

A model law passed by the National Association of Insurance Commissioners that, if adopted by states, would allow foreign reinsurers in qualified jurisdictions to post reduced collateral benefits those foreign reinsurers but is credit-negative for U.S. insurers that buy reinsurance, according to Moody's Investors Service.

In its Weekly Credit Outlook, Moody's says the model law calling for lower collateral requirements will be positive for unsecured creditors of foreign reinsurers. “Collateral provides more security to reinsurance buyers but that enhanced security comes at the expense of liquidity to the reinsurers' unsecured creditors, making this latest news an incremental positive for reinsurers' bondholders.”

Moody's adds that foreign reinsurers will also benefit from a lower cost of doing business “putting them on a more level playing field with U.S. reinsurers.”

U.S. primary insurers, though, will be in a less-secure position due to the lower collateral requirements, Moody's says.

“This will be mitigated by the potential for lower reinsurance prices,” Moody's says, “reflecting reinsurers' lower costs, but we believe any benefit from this will be minimal, with reinsurance prices in the long run being determined mainly by capacity and losses.”

In 2010, Moody's says U.S. property and casualty insurers ceded $57 billion in premiums to foreign reinsurers, or 58 percent of all reinsurance ceded that year.