NAIC levels playing field for Bermuda, Japan, and Switzerland reinsurers’ collateral

The National Association of Insurance Commissioners (NAIC) of the U.S. in December 2019 approved changes to the Credit for Reinsurance Model Law and Regulation to bring models in line with provisions of covered agreements with the European Union and the UK in the treatment of qualifying jurisdictions such as Bermuda, Japan, and Switzerland.

This covers reinsurers domiciled in the European Union, Bermuda, Japan, and Switzerland, who will soon receive the advantage of collateral relief under proposed regulations – subject to state adoption (and pre-emption at a federal level).

The proposed changes stem from EU regulations, Solvency II, which the US signed an agreement to address in September 2017. The agreement negates reinsurance collateral requirements for EU reinsurers who meet Solvency II capital requirements; and for US reinsurers, relief is granted when they meet capital and surplus thresholds, meaning that maintaining a local presence or posting collateral is no longer required in qualifying jurisdictions.

In the past, reinsurers who were certified and domiciled in qualifying jurisdictions such as Bermuda, Japan, and Switzerland would have to post 10-20% collateral. While foreign insurers in the US could often have to hold 100% collateral for claims.

Now, with the NAIC pushing for legislation adoption across states, insurers based in reciprocal jurisdictions will have to post no additional collateral, subject to meeting all additional requirements. This proposed law now levels the playing field for insurers in EU and other jurisdictions, once signed by states.

Nevertheless, hurdles still exist as state adoption is a lengthy process and unless adopted within 5 years the EU could retaliate, thus putting US insurers at a disadvantage, and simultaneously, placing EU insurers at a disadvantage as well.

States also face censure if there are delays, with the Federal Insurance Office having the power to pre-empt and force adoption.

Currently, there are 42 U.S. states who have adopted the law with expectations that final state legislature enactment will now be delayed into 2020 for the remaining states.