The vote by the National Association of Insurance Commissioners’ (NAIC) reinsurance taskforce in favour of scrapping the US full collateral requirements was announced in June this year with NAIC members voting unanimously to explore a ratings based approach to collateral requirements for both US and non-US reinsurers. Although much will need to be done before the current system can be replaced, almost all market commentators (bar one or two US insurance company trade organisations) appear to view the NAIC's motion as encouraging news.

From the perspective of non-US based reinsurers, the current collateral requirements were increasingly seen as unfair and it appears as if political pressure from the WTO, the EU as well as pressure from trade groups (particularly Lloyd’s of London) has had the desired result. In addition, some have suggested that the NAIC’s actions are being driven by fears that if they don't act they will be viewed as incapable of addressing international issues and thus that inaction will increase support for federal regulation. However, the US ceding associations (such as the American Insurance Association) remain opposed to change and it is unclear as to whether change can be made without at least some level of US cedant support.

It also remains to be seen what will be the exact form of "rating" to be used as a reference, as the NAIC is proposing to use its own rating system, rather than an “off the shelf” rating of a third party agency such as S&P or A. M. Best. Clearly, the proof of the pudding will be in the exact form of rating and whether there is a level playing field across all regulatory jurisdictions.

No doubt full consideration of the implications for the proposed amendments to the US collateral requirements will commence in earnest after the World Cup. As at the time of writing, the World Cup finals are drawing to a close. The England versus Portugal game was probably Bermuda’s most closely watched and “vocal” World Cup match. The reason behind this is the fact that Bermuda’s population has approximately equal numbers of persons of Portuguese decent and English decent. Despite the result Anglo/Portuguese relations remain cordial.

This Viewpoint item appeared in issue 107 of JTW News - July - August 2006

Author: Mike Morrison - KPMG