NAIC Reinsurance Task Force Releases Framework Memorandum

The National Association of Insurance Commissioners (“NAIC”) Reinsurance Task Force recently released the memorandum below as part of its 2007 charge to consider the design of a revised United States reinsurance regulatory framework.

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FRAMEWORK MEMORANDUM

DATE: November 8, 2007
TO: Members of the Reinsurance (E) Task Force
FROM: Bryan Fuller, NAIC Staff
RE: Reinsurance Regulatory Modernization Proposal 

The Reinsurance Task Force has acknowledged that in light of the evolving international marketplace, the time is ripe to consider the question of whether a different type of regulatory framework for reinsurance in the U.S. is warranted and if so, how soon such a framework can be implemented.  The regulators believe that a reinsurance regulatory framework must be sufficiently flexible to accommodate the rapidly changing reinsurance environment while providing for appropriate levels of financial stability, solvency and predictability that are critical to a vigorous market and a strong and secure insurance regulatory system.

The framework will facilitate cross-border transactions and enhance competition within the U.S. market while ensuring that U.S. insurers and policyholders are adequately protected against the risk of insolvency.  As part of amending the reinsurance regulatory framework, the Reinsurance Task Force is proposing to modernize the U.S. reinsurance regulatory system along the following lines:

 Mutual Recognition
• A new NAIC entity called the Reinsurance Supervision Review Department (RSRD) would be established.  Assessing regulatory effectiveness through an “outcomes-oriented” approach, the RSRD would determine which non-U.S. jurisdictions are entitled to enter into mutual recognition agreements.

 Single State U.S. Regulator – U.S. Reinsurers
• To avoid inappropriate extraterritorial regulation, a domestic reinsurer may access the U.S. market upon certification by its state of domicile or another appropriate U.S. regulator.  Uniform minimum standards would be established for a company to qualify for certification, and for a state to qualify to be recognized as a reinsurer’s single state regulator.

 Single State U.S. Regulator – Non-U.S. Reinsurers
• A non-U.S. reinsurer from an RSRD-approved jurisdictions could be certified to access the U.S. market through one jurisdiction, referred to as the reinsurer’s “port of entry.”  Again, the process would be governed by uniform minimum standards.

The Financial Condition (E) Committee referred a charge to the Reinsurance Task Force on the overall framework of U.S. reinsurance regulation.  The “framework charge” would eventually involve direct coordination with technical experts from other working groups, and may evolve through discrete stages over time.

The Financial Condition (E) Committee charged the Reinsurance Task Force to consider the design of a revised U. S. reinsurance regulatory framework.  In keeping with the original timeline of the Reinsurance Task Force charges, the framework will be presented for adoption at the 2007 NAIC Winter National Meeting. The Task Force recognizes that the following issues require further discussion and analysis as this process continues:

Outstanding Issues

 Establish appropriate collateral levels from zero to 100% on a prospective basis.
o Runoff issues
o Treatment of downgrades
o Slow pay reinsurers

 How does the proposal address uniformity among the states?
     o What is the mechanism to ensure that states implement similar methodologies?
 What prevents inappropriate extraterritorial application of state law?
 Would the proposal apply to all entities and groups assuming reinsurance risk and to what extent the proposal applies to primary insurers assuming reinsurance risk?
     o Treatment of affiliated reinsurance transactions?
 What regulatory authority is retained by the ceding company’s domestic regulator?
 Requirements to qualify for and maintain status as a recognized Port of Entry state and as recognized single-state regulator for U.S. reinsurers.
 Reconciliation to U.S. GAAP or Statutory Accounting guidelines
 The potential that a reinsurer will use retrocessions as a loophole around collateral posting requirements.
 Definition of terms (e.g. “home state,” “host state,” and “port of entry state”)
 Determination of how mutual recognition agreements should be negotiated, enforced and terminated.
 Mutual recognition parties would determine that their counterparts apply appropriate legal standards and regulatory requirement.  Potential areas shall include but not be limited to:
     i.  Financial condition, including capitalization, investment and reserving requirements;
     ii. Licensing, including an assessment of the quality and competence of licensee ownership and management;
     iii. Periodic analysis and examination of the financial condition and operating practices of licensees; and 
     iv. Management of insurers within holding company systems.
v. Legal environment and regulation of market practices.
     a. Ability to implement Mutual Recognition