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US collateral reforms for reinsurers move a step closer


The International Underwriting Association of London (IUA) has welcomed the decision by US regulators to submit a Bill to Congress that would lighten collateral requirements currently imposed on non-US reinsurers writing business in America.

On 23rd September, the National Association of Insurance Commissioners (NAIC), which represents insurance regulators from the 50 states, the District of Columbia and the five US territories, unanimously agreed that the Reinsurance Regulatory Modernization Act should be proposed as a federal bill.

If passed, the Act would create two classes of reinsurers: national reinsurers and port of entry reinsurers. In order to transact reinsurance business in the US, national reinsurers would be licensed through a single home state, while non-US reinsurers would be certified through a single port of entry state.

In both cases, reinsurers would be required to have a minimum capital and surplus requirement of $250 million. How much collateral a reinsurer would be required to provide would then depend on what rating it is given by the relevant supervisor. These range from "secure 1" (the highest) to "vulnerable 5" (the lowest).

For non-US reinsurers, collateral will be calculated as a percentage of their potential liabilities in the US. No collateral at all will be required of port of entry reinsurers given a secure 1 rating. The other ratings will result in collateral requirements of 10%, 20%, 75% and 100% respectively.

Under the present system, all non-US reinsurers are required to provide collateral equivalent to 100%. 

The new regime, however, would still place non-US reinsurers in a less favourable position than their US counterparts. National reinsurers rated by their home state supervisors at level three and above will not be required to post any collateral. Those at level four will be required to post 75% collateral and those in the vulnerable tier 100%. 

The draft Act also includes a non-exhaustive list of factors to be taken into account in rating a reinsurer, including financial strength ratings from two or more rating agencies, the reinsurer's reputation for prompt payment of claims, any regulatory action against it and its participation in any solvent scheme of arrangement or similar procedure involving the US ceding insurers.
It also provides that the Port of Entry supervisor must receive prior notice of a reinsurer proposes to take part in a solvent scheme of arrangement.

Dave Matcham, Chief Executive of IUA called the NAIC decision "dramatic and emphatic".

"[The] vote is the end of a very long campaign and we hope that progress through the US Congress is much quicker. The NAIC framework is not the perfect solution but incorporates a number of important concepts which were unimaginable five years ago," said Matcham.

"The key for our members is to be able to operate in an efficient but robust regulatory environment. A single regulatory point of contact which is empowered to recognise non-US jurisdictions must be integral to the implementation of the new regime," he said.

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