As a general matter, non-US reinsurers must post 100% collateral for reinsurance assumed from a US ceding company in order for the ceding company to receive credit for reinsurance  on its statutory financial statements. In recent years, various US states have amended their credit  for reinsurance requirements to allow “certified” non-US reinsurers to post less than 100%  collateral while still allowing US ceding companies to receive full credit for reinsurance ceded to  such reinsurers. However, the revised reinsurance collateral requirements have not been adopted  across all the states, and states that have adopted such changes have not done so uniformly. As a  result, the US federal government may adopt a more active role on this issue.

State developments

Insurance is regulated almost exclusively at the state level in the United States, and each state  has its own laws and regulations including regarding credit for reinsurance. States’ insurance laws  and regulations are usually similar on most issues as they tend to be based on or are similar to  the “model” laws and regulations of the US National Association of Insurance Commissioners (NAIC),  which is the association of insurance regulators from the US states and territories. However, NAIC  model laws and regulations do not apply in a state unless adopted, and a state may make changes to  the NAIC models when adopting them.

With respect to reduced collateral requirements for certain non-US reinsurers, the NAIC considered  the issue for   many years before adopting revisions in 2011 to the NAIC Credit for Reinsurance  Model Law and Regulation. Under the revised models, non-US reinsurers from “qualified  jurisdictions” that are rated by recognized rating agencies and meet other criteria can apply to  become “certified reinsurers” and be eligible to post less than 100% collateral for reinsurance  assumed from US ceding companies (75%, 50%, 20%, 10% or 0% collateral depending on the reinsurer’s financial strength ratings). The  revised NAIC models have already been adopted by 23 states (representing more than 60% of US direct  insurance premiums), and five more states are expected to adopt them in 2015.

The NAIC has approved Bermuda, France, Germany, Ireland, Japan, Switzerland and United Kingdom as  qualified jurisdictions as of January 1, 2015, such that reinsurers from those jurisdictions can  apply to become certified. Separately, the NAIC (through its working groups) is continuing to make  progress on “passporting” to allow non-US reinsurers that become certified in one US state to  obtain certification from other states under a faster and less complex process than applying for  certification in each state.

Federal developments

Although insurance is regulated almost exclusively by the US states, the US federal government  plays a role in certain aspects of insurance regulation. Specifically with respect to reinsurance, the Nonadmitted and Reinsurance Reform Act (NRRA) within the Dodd-Frank Wall Street  Reform and Consumer Protection Act (Dodd-Frank Act) prohibits a US state from denying credit for  reinsurance to a US ceding company if credit is allowed by that company’s state of domicile  (provided it is an NAIC-accredited state). Prior to NRRA, a ceding company licensed in various  states had to comply with credit for reinsurance requirements for all those states even if the requirements  were different or more onerous than those of its state of domicile. Moreover, under NRRA, only a US  reinsurer’s state of domicile may regulate the reinsurer’s financial solvency, provided that the  state of domicile is NAIC-accredited or has solvency requirements similar to those required for NAIC accreditation.

The Dodd-Frank Act also created the Federal Insurance Office (FIO) of the US Department of the Treasury. Instead of being an insurance regulator, FIO’s role is  to advise the US federal government on insurance regulation matters, monitor the US insurance  sector, and represent the United States in international insurance matters. As part of its mandate,  on December 31, 2014, FIO issued its report regarding the global reinsurance market and that  market’s relationship with the domestic US insurance industry (Report).

The Report includes a detailed description of the global reinsurance market and players, the role  and importance of reinsurance for the US insurance industry, regulation of reinsurance in the  United States, and current regulatory proposals and ongoing market changes for reinsurance. The  United States remains the world’s largest single country insurance market, and the Report notes  that a majority of unaffiliated reinsurance purchased by US insurers is obtained from non-US  reinsurers.

The Report describes changes to reinsurance collateral requirements based on the revised NAIC  Credit for Reinsurance Model Law and Regulation. However, the Report stresses that changes have not  been adopted yet  by all the states or have not been adopted or implemented uniformly in those  states that have made the changes. The Report identifies this as a significant issue for the US  insurance industry. Non-US reinsurers have long argued that reinsurance collateral requirements  imposed by state regulators restrict the ability to manage risk globally, restrict reinsurance capacity in the  United States generally, and thus increase insurance costs for US consumers.

At this time, the US Treasury, together with the US Trade Representative, is considering whether to conclude “covered agreements” with one or more foreign  governments, authorities and/or regulatory entities providing for uniform reinsurance collateral  standards when US insurers reinsure risks with non-US reinsurers regulated by those foreign  signatories to such agreements. Such a move is generally opposed by the NAIC and most state  insurance regulators in favor of ongoing state reinsurance collateral changes. However, it is an  approach that is favored by many non- US reinsurers and non-US regulators. If the United States enters into such covered agreements,  state laws that are inconsistent with the covered agreements would likely  be superseded. This  would be a further “federalization” of insurance regulation in the United States.