Collateral charges debate dovetails with reinsurance regulation work.

A group studying a possible reduction in collateral charges for nonadmitted reinsurers is ramping up its efforts to overhaul reinsurance regulation in the United States.

Regulators on the Reinsurance Task Force, which is part of the National Association of Insurance Commissioners, said their charge to create a Reinsurance Evaluation Office should be given equal bearing with efforts to modernize reinsurance regulation.

"We can assure everyone we're not totally forgetting about collateral; it's just that we need to ask ourselves what is the most efficient way to do that,' said Georgia Insurance Commissioner John Oxendine, who chairs the task force. "We don't want to put the cart before the horse"

The purpose of the REO would be to evaluate both operating integrity and financial strength as gleaned from Nationally Recognized Statistical Rating Organizations. Based on the outcome of that evaluation, the REO would base collateral requirements on a scale of REO-1 to REO6.

In a recent review of the issue, A.M. Best Co. said it found only a handful of U.S. property/casualty companies will see a material negative impact on their Best's Capital Adequacy Ratio if collateral for reinsurance recoverables was changed. This review was conducted by recalculating each individual company's BCAR after removing all credit for collateral currently included in the capital model.

Of the 895 property/casualty ratings assigned by A.M. Best within the United States, only 45 organizations, or 5% of the U.S. property/casualty ratings, would see a material change in their BCAR score. Those companies that have the greatest chance of seeing a material impact from the proposal have ceded leverage of greater than 2.0 or have sizable recoveries from unrated foreign reinsurers.

Jeff Alton, vice president, financial regulation and capital analysis for CNA Insurance Cos., said ceding companies might feel more comfortable with the absence of collateral if an earlier proposal for a collateral pooling mechanism were to be combined with the current REO proposal.

"So if one REO company were to go insolvent, the companies could look to some guaranty fund (type) payment;' Alton said.

Martin Carus of American International Group Inc. said with any negotiation, all sides walk away with something. With the REO proposal, he said, "What do the ceding companies get?"

Others said with no change to the current requirement for all non-U.S. reinsurers to post 100% collateral, the United States might be at a disadvantage in the global economy.

Stories written by Senior Associate Editor Eleanor Barrett