An unusually combative (although friendly) seminar on reinsurance collateral in New York on April 11 and 12 aired some hotly contested issues. Presented under the auspices of the American Conference Institute (ACI), and co-chaired by Wiley Rein partner Larry Mirel, former Commissioner of Insurance, Securities and Banking for the District of Columbia, and Stephen Schwab of DLA Piper, the seminar explored in depth the proposed change in collateral requirements for non-admitted reinsurers doing business in the U.S. that is being considered by the National Association of Insurance Commissioners (NAIC).

Under current laws adopted in every state, ceding companies are allowed to treat reinsurance as an asset on their books only if the reinsurance is purchased from a company licensed in at least one U.S. jurisdiction or if the non-admitted reinsurer (not based in the U.S.) has posted collateral in a U.S. bank equal to its U.S. risks. For years major non-admitted reinsurers, such as Hannover Re, Munich Re and Lloyd's, have complained that the 100% collateral requirement for non-U.S. reinsurers is unfair, unnecessary and protectionist, favoring U.S. reinsurers over their foreign competitors. U.S. reinsurers and some major U.S. ceding companies have countered that the collateral protects American insureds and that there is no evidence that non-U.S. reinsurers, who provide most of the reinsurance available in the U.S., have been disadvantaged by the requirement.

The NAIC is currently looking at a proposal that would set up a Reinsurance Valuation Office (REO) to judge the financial strength of non-admitted reinsurers, their record of paying claims in a timely manner and the quality of regulation in their home jurisdictions (for the most part European countries and Bermuda). Ceding companies would be able to claim credit for reinsurance purchased from companies deemed qualified by the REO even though such reinsurers posted less than 100% collateral (and for highly qualified reinsurers, no collateral at all).

The audience heard the views of U.S. and non-U.S. regulators, including Director Michael McRaith of Illinois and Commissioner Thomas Hampton of the District of Columbia, as well as Supervisor of Insurance for Bermuda, Jeremy Cox. The State of Florida has recently enacted a law based on the REO proposal, and Claude Mueller of the Florida Department discussed that law and plans for its implementation. Debra Hall of Swiss Re, Axel Freiboth of Hannover Re and Sandra Blundetto of U.S. Re, spoke about how their respective companies view the proposal, and there were presentations by insurance trade group representatives, Fitch, Moody's and other financial rating agencies, NAIC staff members, and lawyers with substantial insurance practices.

Boiling down the arguments, the audience heard:

  • The current system works well and does not need to be changed. It "ain't broke."
  • The current system makes no sense and never did. No other country with a major insurance market requires collateral, and the European Union is getting ready to prohibit its members from requiring collateral.
  • Reinsurers have an excellent record of paying claims, especially when compared with ceding companies, and most of the problems that have occurred are with U.S. reinsurers that are not required to post collateral, not with non-U.S. reinsurers that are.

In summing up the session, Mr. Mirel told the participants that they usually attend such seminars to hear the answers to significant legal issues. In this case what they were exposed to were the questions. The answers are still being worked on, and Mr. Mirel invited the audience to follow the ongoing debate through new eyes.