On December 7, 2008, the NAIC adopted a Reinsurance Regulatory Modernization Framework proposal that aims to effect singlestate regulation for reinsurers and eliminate the dichotomy between U.S. and non-U.S. reinsurers as the controlling factor in determining collateral requirements.
The framework contemplates the creation of 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. A Reinsurance Supervision Review Department (RSRD) in the NAIC would, among other functions, determine jurisdictions eligible to be recognized as POE states. A supervisory board of the RSRD would establish uniform standards for the U.S. supervising jurisdictions of national and POE reinsurers, as well as determine collateral reduction eligibility criteria. In conjunction with its adoption of the framework, the NAIC also approved the creation of the RSRD.
With regard to credit for reinsurance, the framework employs a ratings-based approach. The U.S. supervising jurisdiction would assign to each national reinsurer and POE reinsurer one of five ratings based substantially 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). 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 an 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
A national reinsurer rated Secure-3 or above would not be required to post collateral.
A more detailed summary of the NAIC’s Reinsurance Regulatory Modernization Framework proposal, and updates on its status, can be found on Jorden Burt’s Reinsurance Focus blog at http://www.reinsurancefocus.com/uploads/NAICreinsuranceproposalstatusmemo12.9.08.pdf.