The move towards reduced collateral requirements for alien reinsurers (non-U.S. companies that are not admitted in any U.S. jurisdiction) continues to gather momentum. As most people in the industry know, in 2011 the National Association of Insurance Commissioners (“NAIC”) adopted amendments to its credit for reinsurance statutes and regulations to create a system whereby alien reinsurers could get “certified” and become eligible to post reduced collateral in connection with their assumed U.S. business. The amendments marked a rather dramatic shift in policy from what had been the de facto default rule that alien reinsurers needed to post 100% collateral in order for U.S. ceding companies to be able to take credit for reinsurance on their financial statements. While several states were quick to adopt the new statutes and regulations, only two states, Florida and New York, implemented the procedures and actually certified reinsurers for reduced collateral. Connecticut and New Jersey began certifying reinsurers in 2013.

One of the main reasons for the slow implementation of the NAIC’s amendments was that in order for a state that had adopted these provisions to certify an alien reinsurer, the state first had to qualify a foreign jurisdiction (and more specifically the regulatory body governing insurance companies in that jurisdiction) as meeting certain fundamental regulatory requirements related to the solvency of insurance companies in that jurisdiction. This obstacle has now been overcome with the NAIC’s adoption of its Process for Developing and Maintaining the NAIC List of Qualified Jurisdictions (“Process”) on August 27, 2013, whereby it will serve as a clearing house for granting the regulatory authorities of foreign jurisdictions qualified status.

The NAIC then began an expedited review process and on December 18, 2013 announced that it had granted preliminary qualification to four jurisdictions: the Bermuda Monetary Authority; the German Federal Financial Supervisory Authority; the Swiss Financial Market Supervisory Authority; and the United Kingdom’s Prudential Regulation Authority of the Bank of England. The preliminary qualifications became effective January 1, 2014 and help pave the way for several other states to start certifying alien reinsurers for reduced collateral. While the qualification of these jurisdictions is only preliminary at this point, all are expected to receive full qualification in 2014. In addition, other foreign jurisdictions are expected to begin the qualification process.

It has been fairly widely reported that as of the NAIC’s adoption of the Process in August 2013, 18 states representing 53% of the written premium in the U.S. have adopted the reduced collateral provisions. There are notable exceptions, including Illinois and Texas. The NAIC is clearly committed to pushing this process along, which should help continue the momentum for this initiative. Things to look for as this process develops include the following:

  • Now that the NAIC has granted preliminary approval to four jurisdictions, how quickly will the states that have adopted these provisions begin to certify reinsurers? Early indications are that the states are ready to move forward. Missouri on January 17, 2014 and Pennsylvania on January 25, 2014 both announced that they have now approved two reinsurers under these procedures.
  • Will reciprocity be granted by other jurisdictions to companies once they are certified by one state? The NAIC model provisions include an optional reciprocity provision that a state can defer to another state’s certification of a particular reinsurer. There are some indications that a system is being established to co-ordinate this in practice, but it cannot yet be confirmed that such a system is in place.
  • How is the reinsurance market impacted in these states? This is the true test of the system and an issue that will be watched closely.
  • How quickly will other jurisdictions look to become approved as qualified jurisdictions?
  • How quickly will additional states adopt the new reduced collateral provisions? This remains to be seen and will likely be impacted by the above factors and how smoothly the process works in practice.