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Panel Breaks Alien Re Collateral Logjam

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A National Association of Insurance Commissioners panel has moved to break the logjam over the question of 100% collateral requirements for alien reinsurers, focusing efforts on an effort to rate all companies in the same manner regardless of nation of domicile.

The Reinsurance Task Force’s move stunned and angered domestic primary and reinsurance industry representatives who feel solvency protection has been sacrificed for foreign interests.

The vote came at the behest of Maine Commissioner and NAIC President Al Iuppa, who felt the time was ripe to break through the rhetoric that has been echoing through regulatory forums for the past several years on the matter.

For the last few months, a large group of industry representatives from both sides of the issue failed to reach any consensus on an alternative to the 100% collateral rule, which foreign reinsurers feel puts an undue burden on them and represents an unfair trade barrier.

“From my perspective, I was having a sense we were beginning to fall back into the same kind of rhetoric we were hearing for the past several years,” Iuppa said. “So I thought it was time we throw a fastball instead of a slider and move the discussion forward.”

As for where he thinks they are now in the overall process, “I would say we are at second base in the bottom of the fifth.”

However, to primary industry representatives such as David Snyder, an assistant vice president at the American Insurance Association, Washington, the move was a sellout of the U.S. consumer for no apparent reason. “When you sell someone down the river, you should at least get something in return,” he said.

An interested parties group now will work to flesh out and revise the proposed new rating system in time for final task force action in December–and ultimately full NAIC approval not long after that.

The proposal now in play will create some yet-to-be-determined mechanism to rate all reinsurers–alien or domestic–to determine what percentage of collateral they must post to operate in this country.

The proposal came from a so-called ad hoc group of commissioners formed several years ago to come up with collateral alternatives after the initial three years of debate failed to reach any consensus.

Mike Koziol, assistant vice president of the Property Casualty Insurers Association of America, Des Plaines, Ill., said the rating proposal could in theory offer the same solvency protection as the current system, but it was currently so amorphous as to be almost meaningless.

Iuppa said regulators would work with interested parties to “resolve any questions as to exactly what we are looking for in the next couple of weeks”–but emphasized he would make every effort “to make sure the rhetoric does not escalate to where it was before.”

Many in the domestic industry have resisted changes to the collateral rule, arguing there was no reason to “reform” the rules since the present system was working fine.

“This action is inexplicable in that it harms U.S. consumers, insurance companies and benefits only selected foreign reinsurers,” Snyder said. “The winners are influential economic interests outside the U.S.”

Many industry officials had been expecting some recommendation for halfway measures to replace collateral requirements that could be approved by December, with further discussions on the overall question to follow.

The interested party group, which has about 100 members, noted when it gave a 45-page PowerPoint presentation at the NAIC summer meeting that consensus support had not emerged for any of the proposals. But the group did outline many alternatives, along with some of the pros and cons of each.

“It is almost as if 27 hours of meetings has now gone down the drain,” said PCI’s Koziol, who expected this work product to be winnowed down at the session for further discussion. Instead, one proposal that predated this group’s discussions is now in play.

The new rating entity could in theory be any National Rated Standards Rating Organization, such as Fitch or A.M. Best., or a new, NAIC-related entity that might resemble the Securities Valuation Office.

Whatever it is, the standards by which the reinsurers will now be rated must be worked out, which could be a long and drawn-out process.

After final approval, the Credit For Reinsurance Model Act would have to be amended both at the NAIC level and in individual states–which could take years, since the model is an accreditation standard.

Until that happens, Koziol said a state regulator could in theory challenge the authority of the new agency to hold sway in their state.

Since about 2000, alien reinsurers–including Lloyd’s of London and companies that are part of the International Underwriters Association, London–have pressed for regulators to reduce the 100% collateral they were forced to post for potential claims after an event, maintaining that the great majority were from well-regulated countries and should not be judged too great a risk merely because they are from a foreign domicile.

However, the domestic insurance industry had successfully held back any change with the argument that differing accounting standards had made judging companies too risky, and the collateral requirements was the only adequate means to assure primary companies their reinsurance obligations could be met.

The adversaries took a nearly three-year break in an ultimately futile effort to reach a compromise. In the interim, efforts have moved forward to harmonize U.S. and foreign accounting standards, while European regulation was growing increasingly standardized through European Union auspices.

The International Association of Insurance Supervisors, Basel, Switzerland, in which Iuppa plays a leading role, has also assumed a new prominence in promoting more global regulatory harmonization.

However, while virtually all players realized some change was inevitable, there was a sharp degree of difference over how much change was needed and how soon it had to be made. Those differences won’t die down in the coming six months, as the Task Force could in theory reverse itself and maintain the status quo.

Opinions differed as to the likelihood for that happening, but the vehemence and anger of those who might be termed the losers in this question indicated that a major change is now almost inevitable.


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