Walking a fine line: a Best's Review survey found insurers and reinsurers alike fear the end of the alien reinsurers' collateral requirement.

Should they, or shouldn't they? More than 200 insurance people worldwide responded to a Best's Review survey on a proposal by the National Association of Insurance Commissioners to end the long-held requirement that alien reinsurers deposit 100% collateral in the United States for their U.S. liabilities. A majority of respondents (42.1%) said they thought the NAIC should maintain the status quo. An NAIC task force currently is drafting a proposal that would place both domestic and foreign reinsurers on a system based on financial strength ratings.

Most respondents felt a reduced or eliminated collateral requirement for alien reinsurers would improve their business, while a slightly smaller number felt it would cause damage. Fifteen respondents thought it would reduce costs of reinsurance business transactions and provide greater Financial flexibility; only two respondents thought it would increase reinsurance-related costs. Eleven respondents thought it would increase competition. Several respondents said it would increase their attention and reliance on Financial ratings and rating agencies; several others felt it would increase the overall credit quality of reinsurers. Some others felt it would increase capacity.

Respondents were fairly split on whether this would be a good thing for the industry or a bad thing; while 72 respondents thought reducing or eliminating the collateral requirement would be detrimental to the industry, 75 respondents said it would be an improvement. Several others felt there would be little or temporary change. Those in favor of a reduced or eliminated requirement cited increased competition, additional capacity and a more level playing field. Detractors noted the likelihood of increased insolvencies and consolidations among smaller players, less capacity and more difficulties in collecting reinsurance.

Out of 169 respondents to possible advantages of the proposed collateral requirement, 103 said it would provide solvency protection for U.S. companies, using such terms as "security," "protection," "safety net," "comfort," "peace of mind," "stability," "confidence," "certainty" and "guarantee." Fourteen respondents said the advantages were few to "none." Several respondents did say the collateral requirement would ease dealings with foreign accounting and regulatory systems.

As far as the disadvantages, respondents felt the collateral requirement would increase costs for reinsurers, create "nightmarish" administrative inefficiencies, reduce foreign competition, create a trade barrier for companies wishing to enter the United States and ultimately reduce the number of available reinsurers worldwide.

If the collateral requirement is reduced or eliminated, how will the change affect your business?

"Relaxing this guideline would be opening Pandora's box to carpetbaggers rushing in to make a fast buck, and that always hurts the industry greatly over time."

--Insurance company

"Alien reinsurers will have a cost advantage over domestic reinsurers, especially those in tax-advantaged domiciles. The U.S. reinsurance business will move off-shore ultimately."

--Reinsurer

"Will increase my business dramatically--I buy bad debt in the insurance business. Go crazy NAIC!!"

--Insurance bankruptcy consultant

If the collateral requirement is reduced or eliminated, what do you think will be the overall effect on the insurance industry?.

"There will be tears in some situations, but life will go on. The more sophisticated carriers will react in sophisticated ways. Others will probably think that the NAIC actually defines how they should run their business...."

--Insurance company

"Chaotic; I would exit the insurance business."

--Insurance company

"I'm very much torn by this. I think my business will see lower rates, but as a country we are lowering protections for our insurance industry, which in the long run may mean job losses to U.S. insurance companies. In other words, what is good for my company may not be good for my country. I prefer to do what is right for my country."

-- Risk manager

What do you think are the advantages of the collateral requirement?

"It reduces the risk of fly-by-night operators."

--Attorney

"It provides reinsurers willing to subject themselves to an excessively and arbitrarily regulated U.S. market a competitive advantage."

--Insurance company

"Reduces need to try to decipher foreign accounting systems to reasonably evaluate potential reinsurers' ability to pay future claims."

--Insurance company

What do you think are the disadvantages of the collateral requirement?

"May be viewed internationally as an obsolete regulatory approach. Much of the rest of the world seems to be moving away from this method."

-- Trade association

"Reinsurance is a global business and U.S. domiciled reinsurers have an unfair advantage."

--Insurance company

"The collateral requirements are a protectionist trade barrier that reduces capacity and competition."

--Agency, brokerage or adviser organization

Among the survey respondents' backgrounds:

A property and casualty insurance guaranty association; journalists; risk managers; an insurance field inspector; a captive consultant; a commercial wholesale broker; a loan operations officer; a commercial bank; an inspection/underwriting report service; a surplus lines broker; an insured business entity; an actuary; an MGU; a state regulator; an agent; a wholesale broker; a supplier; an equity research entity; a domestic fully licensed U.S. reinsurer; an investment banker; a reinsurance intermediary; an insurance bankruptcy consultant; and an insurance department financial analyst.

Reinsurance/Capital Markets

What do you think the NAIC should do about
the alien reinsurers collateral requirement?

Maintain the requirement to              42.1%
post 100% collateral for all
alien reinsurers

Reduce or eliminate the collateral       31.7%
requirement based on a rating of
each reinsurer's financial
strength

Eliminate the collateral                 14.5%
requirement

Other                                     6.8%

Reduce the collateral requirement           5%
uniformly for all alien reinsurers

Several respondents said the NAIC should require collateral for
all alien reinsurers, except :

* "Those with very, very, high financial strength ratings;" and
foreign reinsurers with a licensed domiciled U.S. subsidiary
in 40 or more states.

* At least one respondent wants current collateral requirements
for alien reinsurers increased.

* Another would like the same collateral requirements imposed
on all domestic reinsurers.

Note: Table made from bar graph.

In which part of the insurance industry do you work?

Other                                    27.7%

Agency, brokerage or
adviser organization                     33.3%

Insurance company                        39%

Responses to our survey came from across the industry;
insurers, reinsurers, trade associations, individual brokers/
agents, lawyers, financial institutions, consultants, journalists,
risk management professionals, field inspectors, underwriters,
actuaries, commercial insureds and regulators.

Note: Table made from pie chart.