US Embraces Reform of Collateral Requirement Rules
London & Bermuda Newsletter
The National Association of Insurance Commissioners (NAIC) has agreed in principle to an overhaul of the regulatory framework that governs the operation of non-US reinsurers in the United States. Although the proposed regulatory changes are years away from full implementation, they nonetheless mark a bold move that will be welcomed by reinsurers domiciled outside the US.
The hallmark of the NAIC’s proposal is the reduction (and possible elimination) of the collateral requirements placed on non-US reinsurers. At present alien reinsurers are required to fully collateralize the liabilities of their US ceding companies. This has the effect of restricting the ability of alien reinsurers to employ their capital efficiently. The collateral requirements have been criticized for unfairly increasing the operating costs of non-US carriers.
It is envisioned that the new regulatory regime will better respond to the needs of US policyholders in a number of respects, most notably that more efficient deployment of capital will result in an increase in available reinsurance capacity.
In addition to overhauling collateral requirements for non-US reinsurers, the proposed regulator framework will also create a regulatory regime based upon the concepts of single-state licensure and certification for US and alien reinsurers. US reinsurers will be permitted to obtain a license from a single state and to operate on a cross-border basis provided the sate in which they are licensed is itself certified to regulate reinsurance on a cross-border basis. In addition, alien reinsurers will also be eligible for single-state certification provided they are domiciled in an “approved jurisdiction”.
The framework provides for the creation of the NAIC Reinsurance Supervision Review Department which will be tasked with evaluating the regulatory and supervisory regimes of other countries with a view to determining which non-US jurisdictions are “approved jurisdictions” for the purpose of the new framework. The department will also establish standards that must be satisfied before a state will be allowed to regulate reinsurance on a cross border basis.
The proposed framework is not without its detractors. Insurance Commissioners from Indiana, Kentucky, Ohio, Utah and Wisconsin voted against the proposed changes. Critics have described the NAIC’s decision as “imprudent”, especially in the current economic climate, as they believe the proposed regime will disadvantage US policy holders and reinsurers alike. Supporters of the proposals are not swayed by these criticisms and instead argue that the NAIC’s proposed framework is an important step forward in modernizing US regulation to ensure it keeps pace with global insurance practice.