Comments Due By December 14 on NAIC Contingency Planning for Consumer Protection Collateral

The National Association of Insurance Commissioners’ (“NAIC”) Financial Condition Committee (“Committee”) is in process of considering and developing contingency regulatory plans ” . . . to continue to protect U. S. consumers and U. S. ceding insurance companies from potential adverse impact resulting from (U.S. Trade Representative) covered agreement negotiations.”

The Committee has discussed three possible methods for addressing this charge, as well as one additional long-term consideration for the NAIC to consider separately.   

To read the methods memorandum, click here.  Comments are due to the NAIC on the proposal by December 14.

In considering each of the methods discussed, it is generally agreed that U.S. regulators have utilized consumer protection collateral to help mitigate 1) credit risk; 2) the risk if the home jurisdiction of the ceding company’s reinsurer fails to enforce U.S. judgments or arbitration awards; and 3) the risk if the reinsurer, regardless of their overall financial position, fails to comply with the contractual terms and obligations of the reinsurance agreement, or fails to promptly pay its claims. 

The NAIC notes that, under the revised Credit for Reinsurance Models (Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model Regulation (#786), the regulators’ evaluation of collateral for a certified reinsurer considers the possibility of using regulator judgment outside of a credit rating given failure by a reinsurer to make payment to a ceding company can have a material impact on the financial condition of the ceding company. With that as a backdrop, the Committee considered key points from the three possible methods, but it noted that it would likely require a combination of the methods to address the increased risk to policyholders if consumer protection collateral was reduced to zero (the latter described as “simply a worst case scenario not based upon any actual discussion that may occurring relative to a covered agreement”). 

Historically, state insurance regulators have required foreign reinsurers to hold 100 percent collateral within the U.S. for the risks they assume from U.S. insurers.  Inasmuch as reinsurers are ultimately providing insurance to other insurance companies that are directly protecting American policyholders, requiring consumer protection collateral in the U.S. is intended to ensure claims-paying capital is available and reachable by U.S. firms and regulators should it be needed, particularly in the wake of a natural disaster.  Foreign reinsurers’ regulators and politicians have objected to their companies having to post consumer protection collateral in the U.S. as such capital is unavailable for other purposes, including investment opportunities. 

To read more on the issue, click here.

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