The NAIC Reinsurance Task Force (“RTF”) has released draft “Reinsurance Collateral Reduction and Accreditation Recommendations” (“RTF Recommendations”), on which the NAIC RTF is seeking comments by 16 September 2010.

The NAIC RTF is seeking to achieve harmony among various state regulatory initiatives that involve reductions in reinsurance collateral requirements. In addition, the NAIC RTF will consider any changes that might be necessary to the NAIC Credit for Reinsurance Model Law and Credit for Reinsurance Model Regulation.

These draft recommendations follow upon the adoption by NAIC in 2009 of the draft “Reinsurance Regulatory Modernization Act of 2009”, which the NAIC agreed to submit to the US Congress but which has not yet progressed at the federal level. The draft legislation, in turn, had followed upon the Reinsurance Regulatory Modernization Framework Proposal, which was adopted by the NAIC at the end of 2008.

The RTF Recommendations are driven to a significant extent by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), as well as various proposals in certain states for changes to their credit for reinsurance requirements. Under the Dodd-Frank Act, beginning 21 July 2011, all states will be required to recognize credit for reinsurance if it is allowed by the cedent’s domiciliary state and such state is NAIC-accredited or has financial solvency requirements substantially similar to those necessary for accreditation. Additionally, the laws of the cedent’s domiciliary state will preempt extraterritorial application of most laws regarding reinsurance from other states. The power to regulate reinsurer solvency will be primarily vested in the reinsurer’s domiciliary state if such state is NAIC-accredited or has financial solvency requirements substantially similar to those necessary for accreditation.

Even prior to the passage of the Dodd-Frank Act, Florida had revised its credit for reinsurance laws and regulations in 2008 to allow its P&C insurers to receive credit for reinsurance from a non-admitted reinsurer posting less than 100% collateral if the reinsurer meets certain criteria, including having more than $100 million in surplus and meeting certain ratings requirements. A non-admitted reinsurer has to post collateral on a sliding scale (0%, 10%, 20%, 75% or 100%) depending on its ratings. Since the passage of the Dodd-Frank Act, other states like New Jersey and New York are considering similar changes to their credit for reinsurance laws and regulations.

The RTF Recommendations set forth required elements that states will need to address and incorporate when modifying reinsurance collateral requirements in their credit for reinsurance laws and regulations in order to maintain NAIC accreditation. For instance, the RTF Recommendations would require a reinsurer to possess a minimum capital and surplus of $250 million in order to be eligible to post reduced collateral. The states would also have to evaluate non-US reinsurance supervisory systems or use a list of jurisdictions prepared by NAIC for purposes of identifying the non-US jurisdictions from which reinsurers could qualify for posting reduced collateral. Moreover, the states would have to demonstrate that they maintain an acceptable level of prudential supervision.