Regulatory Bodies | NAIC | Reinsurance Collateral
The NAIC adopted changes to its Credit for Reinsurance Model Act and Regulation in 2011 and 2014 to effectuate reinsurance regulatory modernization. The changes in the credit for reinsurance models were made as part of the NAIC Solvency Modernization Initiative and later influenced by the passage of the Dodd-Frank Wall Street Consumer Protection Act. The NAIC was motivated to make these reinsurance collateral changes because of the European Union’s adoption of Solvency II and subsequent negotiations between the EU and the U.S. surrounding U.S.-EU insurance regulatory “equivalence” or “mutual recognition.” The models are designed to help states achieve equal recognition by European regulators, and thus ensure equal treatment in European markets for companies based in those states. The NAIC requires the enactment of the revised models by Jan. 1, 2019, for states to meet the NAIC Financial Accreditation Standard.
The primary changes include graduated levels of collateral requirements for alien reinsurers instead of the previously mandatory collateral requirement of 100 percent to all alien companies. The process created is three-tiered: first, the NAIC must assess an alien jurisdiction and deem it a “qualified jurisdiction” – one that includes similar prudential laws and regulations to those provided in the U.S.; second, the state where the alien reinsurance company from the qualified jurisdiction wants to do business must evaluate the reinsurer, based on its annual financials to determine if it can be a “certified reinsurer”; and finally, the certified reinsurers are slotted into the various levels of collateral that must be held from 0 percent to 100 percent based on their individual credit ratings. The system created is similar for domestic reinsurers. States fully accredited by the NAIC are deemed qualified jurisdictions.
NAMIC Position
NAMIC supports the state regulation of insurance, and to minimize the need for a covered agreement that would preempt state laws, the association supports revisions to reinsurance collateral requirements provided they conform to the revised 2011 NAIC Credit for Reinsurance Model Law and Regulation.
