The NAIC explains how lots of jurisdictions will benefit from reduced collateral requirements—and reveals Ireland, France and Japan’s interest in the new model...
How did the process of reduced collateral requirements begin?
On 6 November 2011, the National Association of Insurance Commissioners (NAIC) adopted revisions to the Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model Regulation (#786).
These revisions serve to reduce reinsurance collateral requirements for non-US licensed reinsurers that are licensed and domiciled in qualified jurisdictions. Under the previous version of the Credit for Reinsurance Models, in order for US ceding insurers to receive reinsurance credit, the reinsurance was required to be ceded to US-licensed reinsurers or secured by collateral representing 100 percent of US liabilities for which the credit is recorded.
The revised models establish a certification process for non-US reinsurers—a certified reinsurer is eligible for collateral reduction with respect to contracts entered into or renewed subsequent to certification. Each state will have the authority to certify reinsurers, or a commissioner has the authority to recognise the certification issued by another NAIC-accredited state.
What are some examples of the evaluation criteria used?
Reinsurers are subject to certain criteria in order to be eligible for certification, as well as ongoing requirements in order to maintain certification. Examples of evaluation criteria include, but are not limited to, financial strength, timely claims payment history, and the requirement that a reinsurer be domiciled and licensed in a “qualified jurisdiction”.
A state will evaluate a reinsurer that applies for certification, and will assign a rating based on the evaluation. A certified reinsurer will be required to post collateral in an amount that corresponds with its assigned rating (generally, Standard & Poor’s ratings of “AAA” = 0 percent, “AA” = 10 percent, “A” = 20 percent, “A-” = 50 percent, “BBB+” = 75 percent, and “BBB” or below = 100 percent), in order for a US ceding insurer to be allowed full credit for the reinsurance ceded.
How did the NAIC come to the conclusion that Bermuda, Switzerland, Germany and the UK are suitable for reduced reinsurance collateral requirements?
At the 2013 Fall National Meeting in Washington DC, the NAIC approved four international supervisory authorities as Conditional Qualified Jurisdictions under the Process for Developing and Maintaining the NAIC List of Qualified Jurisdictions.
The four jurisdictions are the Bermuda Monetary Authority (BMA); the German Federal Financial Supervisory Authority (BaFin); the Swiss Financial Market Supervisory Authority (FINMA); and the UK’s Prudential Regulation Authority of the Bank of England (PRA).
These four jurisdictions were placed on the NAIC List of Qualified Jurisdictions effective 1 January. The NAIC will proceed with its full review of these four jurisdictions during 2014, upon which they will be approved for a five-year period.
Are there any other jurisdictions already on the NAIC List of Qualified Jurisdictions—and can you say which jurisdictions are in consideration?
Currently, 18 US states have adopted the revisions to the credit for reinsurance models, with about five additional states considering similar proposals.
These states are Alabama, California, Connecticut, Delaware, Florida, Georgia, Indiana, Iowa, Louisiana, Maine, Maryland, Missouri, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island and Virginia. Insurers domiciled in these 18 states write approximately 53 percent of the primary insurance premium in the US (the additional five states would raise this market share to approximately 75 percent).
Each state may evaluate the reinsurance supervisory system of a non-US jurisdiction in order to determine if it is a “qualified jurisdiction.” The NAIC has also drafted a process for developing and maintaining a list of qualified jurisdictions.
A state must consider the NAIC list in its determination of qualified jurisdictions. The list is not binding, but a state must thoroughly document the justifications for approving any jurisdiction not on the list.
The NAIC will begin discussions with other supervisory systems interested in being considered for inclusion on the NAIC List of Qualified Jurisdictions. To date, the NAIC has received enquiries with respect to Ireland, France and Japan.
How do you think that the US is modernising reinsurance? What else needs to be done?
The amendments to the NAIC Credit for Reinsurance Models are part of a larger effort to modernise reinsurance regulation in the US.
In 2007, in light of the evolving international marketplace, the NAIC determined that the timing was appropriate to consider whether a different type of regulatory framework for reinsurance in the US was warranted.
The Reinsurance Regulatory Modernisation Framework proposal was a conceptual framework that was developed by the reinsurance (E) task force during 2007 and 2008 in response to its charges to consider the current collateralisation requirements regarding unauthorised reinsurers, and to consider the design of a revised US reinsurance regulatory framework.
The reinsurance framework was intended to facilitate cross-border reinsurance transactions and enhance competition within the US market, while ensuring that US insurers and policyholders are adequately protected against the risk of insolvency.
The NAIC adopted the framework during its 2008 Winter National Meeting. The 2011 revisions to the Credit for Reinsurance Models were based on the 2008 framework and are intended to implement reinsurance collateral reduction within the state-based insurance regulatory system.
What is the association’s plan for the future?
The NAIC has committed to do the following: undertake a re-examination of the collateral amounts within two years from the effective date of the revisions to the models (eg, 6 November 2013); and revisit the issue of state uniformity in the adoption of the models within three years of the adoption of the new accreditation standard by the NAIC (eg, 9 April 2016).
