US insurance regulators vote to change collateral rules for foreign reinsurers

Current rules provide that all 'alien' reinsurers must provide collateral equivalent to 100% of their potential liabilities in the US. The requirement has been heavily criticised by European industry bodies such as Lloyd's of London and the International Underwriting Association (IUA), who say it is unduly restrictive and based on geography rather that solvency.

The IUA estimates that the blanket 100% rule has resulted in at least $50 billion being tied up in letters of credit, trust funds and other financial instruments to provide the necessary collateral.

The NAIC, which represents insurance regulators from the 50 states, the District of Columbia and the five US territories, has now adopted a framework that would base the amount of collateral on a sliding scale according to a reinsurer's financial strength.

Foreign reinsurers given the highest financial rating would have to provide collateral equal to 10% of gross liabilities. Only reinsurers categorised as financially 'vulnerable' could be required to provide up to 100% collateral.

The Reinsurance Regulatory Modernisation Framework Proposal would create two new classes of reinsurers, US-domiciled and non-US based 'port of entry' reinsurers. Non-US reinsurers from approved jurisdictions would be able to obtain certification from a port of entry state to provide reinsurance to the US market.

The framework would also modernise the regime for US reinsurers, setting up a regime of state-based reinsurance regulation and provision for a single licence that would be recognised across all US states.

A new body, the Reinsurance Supervision Review Department, would oversee the new regulatory landscape, evaluating the supervisory regimes of other countries and setting the standards to be met by states regulating reinsurers on a cross-border basis.

There is still some way to go before the changes come into force. Steven M Goldman, the chairman of the NAIC's Reinsurance Task Force, described the proposal as a "conceptual framework only".

“Now, we must focus on developing the specifics of this new regulatory regime and taking the appropriate legislative steps to make the proposal a reality,” he said.

Sean McGovern, Director and General Counsel at Lloyd's welcomed the move.

“We are pleased that the NAIC has adopted a new policy framework for the regulation of reinsurers. This has been a long time coming and is a major step forward," he said. "However, the focus must now switch to ensuring speedy and consistent implementation across all states. This is likely to require some form of federal legislation."