On September 24, 2008, the NAIC Financial Condition (E) Committee voted to adopt the reinsurance modernization and collateral proposal (the “Proposal”), which was approved by the Reinsurance Task Force earlier this week.
The adopted Proposal would, among other things: (1) create a new NAIC Reinsurance Supervision Review Department (“RSRD”) to evaluate which foreign regulatory regimes are “functionally equivalent” to that of the United States – a process leading to mutual recognition between domestic and foreign jurisdictions with similar regulatory regimes; (2) establish a single U.S. regulator system, under which authorization in one jurisdiction (the “home state”) would give such U.S. reinsurers (known as “national reinsurers”) access to the entire domestic market; and (3) institute a single point of entry certification process that would allow non-U.S. reinsurers from certain countries to enter the U.S. reinsurance market through a single point of entry (known as “POE reinsurers”).
Under the proposed system, both the national reinsurers and the POE reinsurers would be supervised by a single state (either the home state or POE state). National reinsurers would be licensed by the home state and POE reinsurers would be certified by the POE state. A reinsurer must be licensed by a non-U.S. jurisdiction recommended as eligible for recognition by the RSRD in order to be certified as a POE reinsurer. In order to qualify as a home state supervisor or a POE supervisor, a state must meet standards established by the RSRD. The Proposal recommends federal enabling legislation to provide the RSRD with sufficient authority to perform its functions.
The Proposal requires that reinsurers maintain a minimum of $250 million in capital and surplus in order to be a national reinsurer or a POE reinsurer. This requirement may also be satisfied by a group including incorporated and individual unincorporated underwriters (such as Lloyd’s) having minimum capital and surplus equivalents (net of liabilities) of at least $250 million and a Central Fund containing a balance of at least $250 million.
The level of collateral required to be posted for national reinsurers and POE reinsurers would be evaluated on a legal entity basis by the home state or POE supervisor as follows: tier (1) – 0% collateral; tier (2) – 10% collateral; tier (3) – 20% collateral, tier (4) – 75 % collateral, and rating (5) – 100% collateral. However, as U.S. state law protects policyholders and ensures stability of the U.S. financial system, national reinsurers would not have to post collateral if they are rated in tier (3) or above by their home state supervisor. A ceding insurer may only elect to take credit for reinsurance ceded to a national or POE reinsurer which has a financial strength rating from at least two SEC approved rating agencies. Failure to obtain or maintain such ratings would result in assignment of a (5) rating, which is considered vulnerable. Additionally, in determining the reinsurer’s rating for the purpose of collateral, the home state or POE supervisor will consider, among other things, whether the reinsurer has participated in any solvent scheme of arrangement involving U.S. cedents. If the reinsurer has entered into such an arrangement, it will be assigned a (5) rating.
The NAIC Executive Committee is expected to consider the proposal in Texas during the NAIC’s Winter Meeting this December.
