On 18 September 2011 the long process toward the NAIC amendment of their credit for reinsurance models, Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model Regulation (#786), reached its next-to-last step, with the NAIC Reinsurance Task Force making its final last minute amendments and approving them after several years of deliberation. The amendments provide for reduced collateral requirements for credit for reinsurance. That same day, the parent committee of the NAIC Reinsurance Task Force, the E Committee, adopted the amended models by a vote of 9 to 2. The final step is for the NAIC Plenary to adopt the amendments at the Fall NAIC meeting to be held during the first week of November. Then the activity is likely to turn to state legislatures in 2012 to see which additional states adopt legislation to implement the amended model law.

One of the last minute amendments proposed by New York and adopted by the Task Force and E Committee was somewhat of a surprise and controversial. The amendment to Section 8(A)(5) was as follows:

Credit for reinsurance under this section shall apply only to reinsurance contracts entered into or renewed on or after the effective date of the certification of the assuming insurer. Any reinsurance contract entered into prior to the effective date of the certification of the assuming insurer that is subsequently amended after the effective date of the certification of the assuming insurer, or a new reinsurance contract, covering any risk for which collateral was provided previously, shall only be subject to this section with respect to losses incurred and reserves reported from and after the effective date of the amendment or new contract.

This language could severely limit the ability of parties to make use of the new collateral scheme for in-force business that is already reinsured and has existing collateral. In proposing the amendment, New York said it was intended to tighten up the wording to make clear that the new scheme would apply only prospectively and specifically noted the regulators’ desire to limit affiliate retrocessions currently in place with substantial collateral that could “fall off a cliff ” overnight if permitted on in-force risks. However, many participants in the life reinsurance industry in particular felt surprised by this last minute addition (after years of deliberation and debate) and that the Task Force was not considering the unique nature of the life reinsurance sector and its long-term risks.

Many states base their credit for reinsurance statutes and regulations directly on the NAIC models or have a framework in place that is substantially similar to that of the NAIC models. NAIC models are not recognized as law in any of the states, but the models are influential as accreditation standards. If the proposed amendments are adopted by the NAIC, states may choose to amend their laws and regulations to conform to the models. However, since the proposed amendments to the NAIC models establish a floor for collateral requirements, states that choose to maintain their current stricter requirements will still meet the accreditation standard. We will have to wait until the November NAIC meeting and the legislative efforts in individual states in 2012 to see how this long and winding road to US reinsurance collateral reform ends.