This blog updates our September 24, 2008 posting.

The NAIC Financial Condition (E) Committee voted to adopt the reinsurance modernization and collateral proposal (the “Proposal”), which was approved by the Reinsurance Task Force earlier this week.

The level of collateral required to be posted for national reinsurers and port of entry ("POE") reinsurers would be evaluated on a legal entity basis based on its financial strength as follows: tier (1) – 0% collateral; tier (2) – 10% collateral; tier (3) – 20% collateral, tier (4) - 75 % collateral and rating 5 – 100% collateral. However, as U.S. state law protects policyholders and ensures stability of the U.S. financial system, national reinsurers would not have to post collateral if they are rated in tier (3) or above by their home state supervisor.

Additionally, the Proposal would create the NAIC Reinsurance Supervision Review Department ("RSRD") to evaluate which foreign regulatory regimes are functionally equivalent to that of the United States – a process leading to mutual recognition between domestic and foreign jurisdictions with similar regulatory regimes. A reinsurer must be licensed by a non-U.S. jurisdiction recommended as eligible for recognition by the RSRD in order to be certified as a POE reinsurer. The current NAIC Credit for Reinsurance Model Act would remain in force with respect to reinsurers that choose not to become either national or POE reinsurers.

The NAIC executive committee is expected to consider the proposal in Texas during the NAIC’s winter meeting this December.

Click here for a copy of the NAIC’s press release