One of the key consequences of the Reinsurance Directive will be the dismantling of the various collateral requirements of Member States. The debate about the removal of collateral requirements reflected the different cultural attitudes across Member States to risk. The argument of those in favour of removing the collateral requirements was that if the Reinsurance Directive introduced a sufficient level of regulation to be approved by each Member State, why would any single country’s regulator require a higher degree of security than other Member States?

By far the most cogent argument in the end was the belief that abandoning collateral requirements would persuade the US to dismantle their current requirement that all “alien” (i.e. non-US) reinsurers working in the US post collateral, equivalent to 100 per cent of gross liabilities, to US insurers in addition to maintaining reserves for all future claims. If this requirement were removed, there would be a significant amount of assets released for use by EU reinsurers. For many the opening up of the US reinsurance market remains one of the driving factors behind the introduction of the Reinsurance Directive. The current cost of US collateral requirements to the EU reinsurance industry could be as much as $5.5 billion. Half of US reinsurance capacity is currently provided by EU reinsurers.

Has the Reinsurance Directive had the desired effect?

On 12 December 2006, the Financial Condition Committee of the NAIC (the National Association of Insurance Commissioners) adopted a proposal from the Reinsurance Task Force which recommended that the current system of credit for reinsurance in the US be amended to a broad-based risk and credit criteria. Under the new proposal, state insurance regulators would assign a rating to individual reinsurers and then collateral requirements, if required, would be based upon that rating. The overriding principle would be that the system should take account of financial strength of the reinsurer, not the domicile.

Next steps

The NAIC are committed to establishing a Reinsurance Evaluation Office to serve as the foundation for the risk-based evaluation process, which is expected to be refined by no later than September 2007. The NAIC are now considering “commercially reasonable means” for implementing the new regime.

As always, the devil may be in the detail, so EU reinsurers and market practitioners will continue to monitor the NAIC’s progress. This publication is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to a particular matter.