Are we near the end of collateral requirements for non-US reinsurers in the US? Simon Twigden and Caroline Bell ask whether recent moves will turn out to be a false dawn.

On 8 December 2008, the National Association of Insurance Commissioners (NAIC) adopted the Reinsurance Regulatory Modernization Framework Proposal. The Proposal amends outdated and cumbersome rules under which non-US reinsurers had to post 100% collateral for their US acceptances (i.e. their US reinsurance business).

This requirement was imposed regardless of the financial strength of the non-US reinsurer or the regulatory environment where the reinsurer was licensed. In sharp contrast, full credit could be taken by US cedants for their reinsurance transactions with US accredited reinsurers, whatever their rating and financial strength.

Although the Proposal should significantly reduce collateral requirements for unlicensed reinsurers, it does not level the playing field for ‘alien’ reinsurers writing reinsurance business in the US.

Currently, the primary reinsurance regulatory mechanism in the US is the regulation of credit given to ceding companies for reinsurance. The regulation of credit provided to ceding companies on their financial statements indirectly regulates foreign and domestic reinsurers, as ceding companies in effect only buy reinsurance that would provide them with financial statement credit. A significant part of this regulatory practice was the requirement that non-US licensed reinsurers had to post collateral for 100% of the reinsurance obligations for ceding companies to receive credit. The collateral must cover all gross liabilities to US cedents, including paid losses, adjustment expenses and reserves, unearned premium reserves, known losses, IBNR and contingent commissions. Conservative estimates calculate that the annual cost of meeting the US collateral requirements was in excess of $500m in 2007.


The overriding concern of the US regulator is the need to protect policyholders in case of insolvency: the collateral provides a shortcut to the reinsurance collectibles for the regulator, or the receiver. But reinsurance is a global business and why should US reinsurance regulation discriminate according to geography rather than financial strength? Shouldn’t there be a level playing field internationally? Indeed, foreign reinsurers have a better payment record than US domestic insurers according to the NAIC Reinsurance Collateral White Paper 2006.

Furthermore, the collateral rules fail to acknowledge the standing of well established and reputable international reinsurers, and of the regulators who supervise them. Since 1999, Lloyd’s and the European company market have been lobbying hard for the requirements to be tailored to achieve open markets on fair terms.

The Reinsurance Regulatory Modernization Framework Proposal creates two new classes of reinsurers in the United States – ‘national’ reinsurers and ‘port of entry’ (POE) reinsurers. Critically, and in order to purportedly eradicate the 100% collateral requirement presently imposed on foreign reinsurers, the Proposal establishes a sliding scale rating system for assessing collateral obligations. Yet, pursuant to the Proposal, national reinsurers rated “Secure-3 or above” would not have to post any collateral. In contrast, POE reinsurers (i.e. non-US reinsurers) with the exact same rating are subject to scaled percentage collateral obligations. The more lenient collateral requirements for national reinsurers rated Secure-3 and above are justified, in part, to “ensure the integrity and stability of the U.S. financial system”. How is this consistent with the original goal to “consider approaches that account for a reinsurer’s financial strength regardless of domicile”? Is it not objectionable that the Proposal continues to discriminate against foreign reinsurers, since all foreign reinsurers would still have to post at least 60 percent collateral, but only domestic reinsurers falling into the lowest scale would have to post any collateral? So the question remains open whether this is substantive progress or a false dawn.

Simon Twigden is Head of Litigation and Caroline Bell is Professional Support Lawyer, at Addleshaw Goddard, London.