The NAIC’s Financial Condition (E) Committee has adopted revisions to the NAIC’s Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model Regulation (#786). At the heart of the revisions is the addition of a ratings-based framework allowing a ceding insurer to take full statutory reinsurance credit for reinsurance ceded to a “certified” reinsurer, without the reinsurer posting full collateral as security for its payment obligations. Adopted on September 19, 2011, the revisions track the July 26, 2011 drafts exposed by the Reinsurance (E) Task Force, with certain additional amendments to the Model Regulation made by both the Task Force and the Committee during their respective meetings on September 19. The revisions were scheduled to be considered by the NAIC Executive Committee and Plenary during the Fall National Meeting in early November.

Under the revisions, a reinsurer may apply for certification by a state’s insurance regulator, with that state then assigning one of six possible ratings to the reinsurer upon certification. The assigned rating determines the minimum level of collateral required to be posted by the certified reinsurer for the ceding insurer to take full reinsurance credit, as follows:

Click here to see table

To be eligible for certification under the revised Models, the reinsurer must:

  • Be domiciled and licensed in a qualified jurisdiction,
  • Maintain minimum capital and surplus of $250,000,000,
  • Maintain financial strength ratings from at least two approved rating agencies,
  • Agree to submit to the state’s jurisdiction, and
  • Agree to prescribed information filing requirements.

In determining whether a reinsurer is domiciled in a qualified jurisdiction, a state may independently assess non- U.S. jurisdictions in accordance with the Model Regulation’s standards or defer to a list published by the NAIC. U.S. jurisdictions that meet the requirements for NAIC accreditation are recognized as qualified jurisdictions. Although not the sole factor to be considered, financial strength ratings issued by approved rating agencies play a major role in the reinsurer’s state certification. The lowest financial strength rating from an approved agency will establish the maximum possible state rating for the certified reinsurer, in accordance with a table in the regulation that sets forth the maximum state ratings corresponding to the various possible agency ratings. (For example, a reinsurer with a rating of A+ from Best and A1 from Moody’s would be eligible for no higher than a Secure-3 state rating.) You will find a more extensive summary and analysis of these revisions in a Special Focus article at ReinsuranceFocus.com.