State insurance regulators are thinking about how life insurers should treat collateral in trusts when computing risk-based capital ratios for life reinsurance ceded reserve credits.
The topic is likely to come up at the spring meeting of the National Association of Insurance Commissioners, Kansas City, Mo., which is set to begin in Orlando, Fla., March 28.
A subgroup of the NAIC’s Capital Adequacy Task Force is reviewing a proposal that discusses the topic of trusteed collateral.
Under the current rules, the computation for net reinsurance ceded risk does not provide a credit charge offset for reinsurance contracts with authorized reinsurers supported by trusteed collateral, according the authors of the proposal.
Authorized reinsurers are the reinsurers that are licensed to do business in a state or jurisdiction; non-authorized reinsurers are not licensed to do business in that state or jurisdiction.
When insurers do business with non-authorized reinsurers, the resulting reinsurance treaties must be backed with letters of credit, a trust agreement, funds withheld or other guarantees.
However, reinsurance arrangements secured with “funds held” arrangements do qualify for a credit charge offset.
Funds withheld are monies a ceding company holds to get credit for non-admitted reinsurance, to reduce credit risk or to retain control over investments.
Some reinsurers are arguing that funds in a trust are equivalent to the funds held and ought to qualify for the same offset.
The authors of the CATF subgroup proposal are recommending a change in the rules to incorporate the principle that collateral held in a trust by an authorized reinsurer “may be considered legally and economically equivalent to funds held for purposes of credit risk if there is evidence of periodic draws upon such collateral.”