ABIR Watches American Collateral Debate
The US National Association of Insurance Commissioners voted to adopt an amended version of the proposed Credit for Reinsurance Model Law in a unanimous voice vote, marking the culmination of an issue that has been before the organisation for the past decade, A.M. Best’s news service reports today [Nov.7].
Bermuda re/insurers have been following the debate closely as the model law addresses how state insurance commissioners should go about approving reinsurance companies based outside the US for posting lower collateral than the 100 percent currently required by most states.
The amendments involved two key questions: which foreign jurisdictions should be considered “qualified” by the NAIC, and whether it should provide “advisory support and assistance” to states in the reinsurance collateral reduction evaluation.
The amended model law requires the NAIC to publish a list of qualified jurisdictions. If a commissioner approves a reinsurer from a jurisdiction that is not on that list, he or she must provide a detailed report on how that jurisdiction meets certain regulator requirements.
It also requires insurers to notify state commissioners of reinsurance recoverables that exceed 50 percent of the domestic insurer’s last reported surplus to policyholders. It requires insurers to diversify their reinsurance programs, as well.
The model was scheduled to be discussed during a session of the Reinsurance Task Force but New Jersey Commissioner Tom Considine, who chairs that task force, said he had been working with a small group of commissioners on several proposed amendments to the model law, which were not made available until this weekend.
“A special thanks to everyone involved with the model law for your hard work on something that has been 10 years in the making,” said NAIC President and Iowa Commissioner Susan Voss.
The reinsurance collateral issue was among the most closely followed topics at the NAIC meeting. The model law was largely supported by industry trade organizations, who argued it would help to promote competition and economic development in the marketplace.
Bradley Kading [pictured], president and executive director of the Association of Bermuda Insurers and Reinsurers [ABIR], told Best’s News Service prior to the meeting the current 100 percent collateral requirement was a major impediment for foreign-based reinsurers that wanted to do business in the United States.
“If you’re a foreign corporation and you’re looking to establish a US subsidiary, having to hold all of that extra capital is a significant issue for how you have to run your business,” Mr. Kading said.
The reinsurance collateral issue gained increased attention when the Dodd-Frank Act was under discussion because the NAIC sought to have issues related to reinsurance included in that piece of legislation.
As adopted by the NAIC in December 2008, a new framework would also reduce collateral obligations for non-US reinsurers on a sliding scale that could reach 0% for highly rated companies.
But some questioned the legality of the federal legislation because Article I, Section 10 of the US Constitution prohibits states from entering into “any treaty, alliance or confederation” with other nations.
The topic has generated increased attention more recently as more states announce they have backed away from the 100 percent collateral requirements that have been in place for years. Florida, New York and New Jersey already have laws allowing for lower collateral, and Illinois, Indiana and Louisiana are looking into the issue.
On November 4, former Federal Deposit Insurance Corporation chairwoman Sheila Bair cautioned state insurance regulators about the risks that may arise if they do not remain vigilant when lowering collateral requirements.
Florida Insurance Commissioner Kevin McCarty told Best’s News Service he agreed with Ms Bair’s assessment of the risks posed by lowering collateral requirements.
To date, Florida has approved lower collateral requirements for 17 companies based outside the United States — most of them operating from Bermuda.
“First, it’s important to note that Florida was very cautious in what they did. They limited it to catastrophe insurance,” Mr. McCarty said, adding that was an important distinction because unlike long-tail risks like life insurance, catastrophe insurance requires collateral to be posted at the time of the event.
“If we allow the collateral to leave the United States without some kind of safeguard to be put into place to ensure the collateral is there when we need it, we all know, as the chairwoman said, that when the music stops, the collateral stays in the jurisdiction. It’s ring-fenced. That’s my concern.”
And earlier this year XL Group announced that two of its Bermuda-based subsidiaries, XL Insurance [Bermuda] Ltd. and XL Re Ltd., had received approval from the New York Insurance Department to qualify for reduced collateral status in the state of New York pursuant to requirements set forth by New York insurance regulation.
Under the New York amendment both XLIB and XL Re Ltd. can post collateral for 20 percent of loss reserves rather than the 100 percent required of non-eligible foreign re/insurers.
