Earlier this week, the Reinsurance Task Force (“RTF”) met at the NAIC’s quarterly conference in San Francisco to discuss ways to overhaul reinsurance regulation in the United States thereby reducing collateral charges for nonadmitted reinsurers.  Currently, all nonadmitted reinsurers must post 100% collateral, which some regulators believe puts the United States at a disadvantage globally.  In order to address this issue, the RTF has begun making plans for the creation of the Reinsurance Evaluation Office (“REO”).

Under this proposal, state insurance regulators, through the REO, will establish procedures for the evaluation of the financial strength and operating integrity of reinsurers and, based on the outcome of the evaluation, assign a rating (REO – 1 through REO – 6) to each reinsurer.  These ratings will be affirmed or modified through periodic reviews by the REO.  Collateral requirements, if any, would then be based on the reinsurer’s rating and range from 0 to 100% in 20% increments.

According to a survey by A.M. Best Co., a change in collateral for reinsurance recoverables would only have a material negative impact on the Bests Capital Adequacy Ratio of a handful of companies, with an overall material impact on approximately 5% of companies.  There is also discussion as to whether the rating system, if employed, should be made optional.  Some believe that an optional system would help foster compliance, because companies without an REO rating may end up at a competitive disadvantage.

Various U.S. insurance associations have criticized the proposal as they believe that the reduced collateral imposed on alien reinsurers exposes U.S. ceding companies to solvency risk and greater guaranty fund assessments and would require ceding insurers to be responsible for strengthening their balance sheets, should their reinsurer be downgraded.

European and Bermudian reinsurance representatives, however, view the progress made by the NAIC on this proposal after many years of debate as a breakthrough as they believe the current system stifles U.S. insurance markets and inhibits the free flow and efficient deployment of capital.