Alien reinsurance collateral: divide sharpens.

The move to change the collateral rules as they apply to alien reinsurers has come one step closer to completion as the project now rests with a senior committee of the National Association of Insurance Commissioners.

At the NAIC's Fall National Meeting in St. Louis. the organization's Reinsurance Task Force agreed to draft, by year end. a proposal that would put all reinsurers--U.S. and foreign--under a system based on financial strength ratings.

While such a scheme would allow an easing of the requirement for nonadmitted reinsurers to post 100% collateral for reinsurance business written in the United States. a vast divide remains among the industry as to whether the action is fair and equitable.

The decision of the task force came at its Sept. 9 meeting, following a presentation of a report by a group of industry advocates. The interested parties group had been charged by commissioners at the NAIC's June meeting to craft a rating proposal such as the one included in the NAIC's 2005 Report of the Cob lateralization Roundtable.

But instead of drawing up a destination, the interested parties group handed in a road map.

"There is no consensus among the IPs in support of any rating proposal," the group reported. "Some interested persons continue to support the current regulatory structure and oppose any change to the existing statutory collateral requirements. Others support the reduction of collateral in certain circumstances but only as part of a comprehensive modernization of the U.S. reinsurance regulatory system;' the report states.

Massachusetts Insurance Commissioner Julianne Bowler, who chairs the task force, said her panel is determined to have a draft rating-based proposal ready for consideration in three months at the NAIC's Winter National Meeting in San Antonio.

"The interested parties report gave us good, specific comments that we can use as a sort of road map in drafting a rating proposal. It does a good job of identifying the issues." Bowler said.

Phil Carson. of the American Insurance Association. said he wasn't surprised at the lack of consensus within the interested parties group and commended the task force for taking the reins.

"It's time for them to step up and take leadership in this process." Carson said after the meeting. "There's been no consensus since 1999. They're on opposite sides of the table in terms of reinsurers and insurers, and you also have competition within the reinsurance market. Domestic reinsurers are already subject to full licensing and regulatory requirements, versus alien reinsurers who avoid the regulatory climate by posting collateral."

Some criticize the proposal, saying nonadmitted reinsurers seem to be doing very well despite the collateral requirement.

A recent report by the Washington-based Reinsurance Association of America. using NAIC data, found total premiums ceded to foreign reinsurers and claim amounts paid by them both were up significantly over 2004 figures, with the market share of foreign and foreign-controlled U.S. companies growing to 85.4% of the country's unaffiliated reinsurance premium in 2005.

"What do ceding companies gain by diminished collateral supporting legitimate claims;' said Bill Boyd of the National Association of Mutual Insurance Companies. "The answer is ... nothing's gained and security, in some degree, is lost."

Others note that the collateralization rule dates to the Great Depression, when some countries had no regulatory structure. Advocates for the change say that not only have overseas regulatory structures improved dramatically--surpassing U.S. standards in some case--but the idea of a single U.S. regulator to supervise alien reinsurers has some appeal on Capitol Hill. A push is on now to adopt the National Insurance Oct of 2006, which would allow insurers the option of chartering federally and would create federal-level insurance regulation.