On September 24, 2008, the Financial Condition (E) Committee of the NAIC, on the recommendation of the Reinsurance (E) Task Force, adopted a Reinsurance Regulatory Modernization Framework proposal that contemplates single-state regulation for reinsurers and eliminates the dichotomy between U.S. and non-U.S. reinsurers as the controlling factor in determining collateral requirements. The NAIC's Executive Committee and Plenary are expected to consider the proposal for formal approval in December 2008.
The Status Quo: Under the credit for reinsurance laws of the various states, a U.S.-domiciled insurer generally can take credit for reinsurance ceded to a reinsurer that (1) is licensed to transact insurance or reinsurance, or is accredited as a reinsurer, in the ceding company's state of domicile, or (2) is domiciled in, or has entered as a U.S. branch of an alien insurer through, a state that employs credit for reinsurance standards substantially similar to those of the ceding company's domiciliary jurisdiction. If a U.S.-domiciled insurer cedes to a reinsurer that does not fall into one of these two categories, reinsurance credit is allowed only (with certain limited exceptions) if and to the extent the reinsurer posts certain collateral as security for its payment obligations under the reinsurance contract.
The NAIC's Framework Proposal: Some of the key elements of the NAIC proposal adopted by the Financial Condition (E) Committee include:
- Establishment in the NAIC of a Reinsurance Supervision Review Department ("RSRD").
- Two new classes of reinsurers in the United States: national reinsurers and port of entry ("POE") reinsurers, each of which would be regulated by a single U.S. supervising jurisdiction.
- The RSRD's functions would include determination of jurisdictions eligible to be recognized as POE states. A supervisory board of the RSRD (consisting of state insurance regulators) would, among other things, establish uniform standards for the U.S. supervising jurisdictions of national and POE reinsurers and determine collateral reduction eligibility criteria.
- With regard to credit for reinsurance:
- The U.S. supervising jurisdiction for a national reinsurer or a POE reinsurer would assign the reinsurer one of five ratings based on the reinsurer's financial strength ratings (from S&P, Moody's, Fitch, A.M. Best, or other rating agency approved by the U.S. Securities and Exchange Commission), as well as additional factors that could result in a lower reinsurance rating being assigned by the supervising jurisdiction. A reinsurer's failure to maintain at least two financial strength ratings from SEC-approved rating agencies would result in a Vulnerable-5 rating.
- Subject to the exception described below for certain national reinsurers, the rating assigned by the reinsurer's supervising jurisdiction would determine the amount of reinsurance collateral required on a sliding scale, as follows:
Secure-1 - 0% collateral required
Secure-2 - 10% collateral required
Secure-3 - 20% collateral required
Secure-4 - 75% collateral required
Vulnerable -5 - 100% collateral required
In recognition of the regulatory requirements to which national reinsurers are subject, a national reinsurer rated Secure-3 or above would not be required to post collateral.
- All reinsurers would have the option to continue to operate under the regulatory framework now in place.
- The Reinsurance Task Force recommends federal enabling legislation to provide, among other things, for the granting of appropriate authority to the RSRD.
- Except for life reinsurance contracts, implementation of the proposal would apply to reinsurance contracts entered into or renewed after the effective date of the proposal (i.e., the effective date of the federal enabling legislation), with an appropriate implementation period to be developed. The proposal would apply to life reinsurance contracts upon the earlier of (i) 24 months from the effective date of the proposal, and (ii) the implementation of U.S. principles-based reserving standards for life insurance.
A more detailed summary of the NAIC's Reinsurance Regulatory Modernization Framework proposal can be found on Jorden Burt's reinsurance blog, Reinsurance Focus, by clicking here.