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. Adopted on September 19, 2011, the revisions track the July 26 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 timeline for final NAIC adoption of these revisions had not yet been published as of this writing.

Under the revisions, a reinsurer may apply for certification by a state's insurance regulator, with that state assigning the reinsurer one of six possible ratings 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:  

Secure-1: 0% collateral required

Secure-2: 10% collateral required

Secure-3: 20% collateral required

Secure-4: 50% collateral required

Secure-5: 75% collateral required

Vulnerable-6: 100% collateral required  

Notably, this scale includes a tier at the Secure-4 level requiring 50% collateral. Earlier Task Force proposals in connection with the NAIC's 2008 Reinsurance Regulatory Modernization Framework, as well as New York's recently amended Regulation 20, included five tiers, with required collateral jumping from 20% for a Secure-3 rating to 75% for Secure-4.  

To be eligible for certification under the revised Models, the reinsurer must (in addition to any other requirements the commissioner may impose):

  • 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
  • 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. If a reinsurer receives certification from an NAIC accredited state, another state may defer to that certification and the attendant state rating. Such deference is not required, however, which theoretically could lead to a reinsurer operating in the United States with different ratings (and different collateral requirements) for various states.  

Although not the sole factor to be considered, financial strength ratings issued by approved rating agencies play a significant 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, consistent with the following table.

Click here to see table

Thus, 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.  

Other key elements of the revisions include:  

  • The reinsurer's reputation for prompt payment of reinsurance claims is among ten specified factors to be considered by the commissioner (in addition to other information he/she may deem relevant). The Model Regulation requires the commissioner to increase the required collateral by at least one rating level if undisputed, overdue reinsurance recoverables owed by the reinsurer exceed specified thresholds.
  • For certain lines of business, a one-year deferral period for the posting of security for catastrophe recoverables.
  • Affiliated reinsurance transactions receive the same opportunity for reduced collateral.
  • The parties to a reinsurance agreement may agree to stricter collateral requirements.
  • The new provisions apply only to reinsurance contracts entered into or renewed on or after the effective date of the reinsurer's certification. However, any contract entered into before the effective date of the certification that is amended after the effective date of certification, or any new reinsurance contract, covering any risk for which collateral was provided previously, is subject to the new provisions only with respect to losses incurred and reserves reported from and after the effective date of the amendment or new contract.  

Although the certified reinsurer revisions address the longstanding complaint of non-U.S. reinsurers that collateral requirements in the United States make for an uneven playing field, they do not preclude any of the previously established means for reinsurance credit. Thus, for example, a ceding insurer transacting with an alien reinsurer may take full reinsurance credit if the reinsurer posts full collateral by way of funds held by or on behalf of the ceding insurer, including funds held in trust for the ceding insurer's benefit, in the form of cash, securities listed by the Securities Valuation Office of the NAIC and qualifying as admitted assets, or clean, irrevocable, unconditional letters of credit.  

The Task Force's adoption of the revisions included a "Preface to Credit for Reinsurance Models." (It is not clear from the Financial Condition (E) Committee Meeting Summary Report whether the Committee also adopted the Preface.) The Preface indicates that the NAIC considers the revisions to be consistent with Dodd-Frank's Nonadmitted and Reinsurance Reform Act preemption of extraterritorial application of state credit for reinsurance law, as well as the discretion allowed domiciliary states to reform reinsurance collateral requirements on an individual basis. The Preface also states that the federal legislation does not prohibit the states from acting together, through the NAIC, to achieve other reinsurance modernization goals. Accordingly, the NAIC views the revised Models as part of a larger, ongoing effort to modernize U.S. reinsurance regulation, and it will continue efforts to implement other aspects of the 2008 Reinsurance Regulatory Modernization Framework Proposal. With regard to collateral requirements specifically, it will consider forming a new group to provide review of reinsurance collateral reduction applications and related assistance to the states and will continue to work on requirements for NAIC review and approval of qualified jurisdictions. It also intends to reexamine the required collateral amounts within two years after the effective date of the revisions to the Models.