US Regulatory Update

For more than 20 years state laws and regulations have allowed insurance companies to take credit for reinsurance ceded to unauthorized reinsurers only when the reinsurer posted collateral equal to 100% of the expected loss reserves.  The rules were developed in response to a series of insolvencies in the 1980s and uncertainty about the ability of receivers to collect from reinsurers based overseas. 

Not surprisingly, international reinsurers have frequently complained that the collateral rules are protectionist.  They also argue that the rules make little sense in today’s world when some of the most financially sound and reliable reinsurers are found outside the United States.  Domestic US reinsurers, on the other hand, point out that they face numerous other regulatory requirements as the price for being licensed or accredited in the US, and unlike overseas reinsurers, they must participate in the state guaranty fund system.

The National Association of Insurance Commissioners (NAIC) has spent several years trying to address this issue and developed a Reinsurance Modernization Framework.  The framework includes provisions for “port-of-entry” status for overseas reinsurers whereby the certification of a reinsurer based on financial strength and reliability by a single state would allow the reinsurer to write business in any other state or territory.  The NAIC lobbied Congress to include this framework in the Dodd-Frank Act, but it did not do so.

Now several US states (Florida, New York, New Jersey, and Indiana) have moved forward on their own, adopting rules similar to the NAIC framework to allow for reduced collateral for unauthorized reinsurers.  Under the framework, an overseas reinsurer may apply to the state insurance department for a “regulatory rating.”   Each rating corresponds to a collateral level. 

Please click here to see table.

To determine the regulatory rating, the insurance department begins with the reinsurer’s published credit ratings.  The reinsurer must maintain at least two stand-alone credit ratings separate from its corporate parents or affiliates, and the regulatory rating may not be higher than the lowest corresponding published credit rating as set forth in the table below.

Please click here to see table.

Therefore, if a reinsurer maintains an AM Best rating of B++ and an S&P rating of A-, the highest regulatory rating possible would be Secure-4.  The insurance department is also required to consider a number of other financial strength and reliability factors in determining the regulatory rating and can further reduce the rating.  The reinsurer must also apply in every state where it writes business, and there is the potential for different states to grant different regulatory ratings to the same reinsurer.

The new framework also requires that the overseas reinsurer agree in the reinsurance contract to submit to the jurisdiction of any court in the US if there is a dispute under the contract. 

Several other states including Texas and Illinois are considering adopting similar rules.  Meanwhile, the NAIC exposed a draft revised Credit for Reinsurance Model Law based on the framework and will address the comments it has received at a meeting later this year.  If the NAIC adopts a revised model, the new rules are likely to pick up momentum in other states.