Accounting for Reinsurance

We have previously reported on the NAIC’s strategy of assisting the states in the implementation of the Covered Agreement through revisions to the Credit for Reinsurance Model Law and the Credit for Reinsurance Model Regulation (“the Models”). The Reinsurance Task Force of the Financial (E) Committee exposed drafts of proposed revisions to the Models on June 21. By the NAIC’s Summer National Meeting in Boston early this month, the Reinsurance Task Force had received eighteen comment letters on the exposure drafts from regulators, trade associations, insurance/reinsurance companies, and other interested parties. The meeting package for the Task Force’s August meeting included pertinent written materials. The Task Force heard limited oral statements at its meeting and proceeded to move the Model exposure drafts to the next step. According to the summary of this meeting, revised exposure drafts are anticipated in mid-September, with another comment period, followed by possible final consideration at the NAIC’s Fall National Meeting in November of this year.

The written comments did not contain significant opposition to the Model revisions, but did contain some constructive suggestions for changes to the exposure drafts at both conceptual and detailed wording levels. The major themes of the written comments include:

1. Desire for uniformity – Perhaps the most widely voiced comment was a desire for uniformity in the implementation of the Covered Agreement. This principle found expression in three topics:
   • Primacy of the Model Law – Several commentators suggested that significant substantive requirements be contained in the Model Law rather than in the Model Regulation, in order to foster a greater likelihood that the overall requirements would remain uniform, with minimal substantive variation from state to state.
   • Regulatory discretion – Several commentators suggested that although it is customary to reserve discretion to individual state insurance commissioners to make customizations or other changes to a model, that such individual discretion is not desirable in situations, such as this, in which uniformity of treatment is an important goal. In particular, comments called out the discretion of individual state commissioners to impose additional requirements for states to qualify as Reciprocal Jurisdictions, and discretion in determining certain requirements for non-EU reinsurers.
   • Certified Reinsurers – One commentator implicitly questioned the future utility of the Certified Reinsurer status, and the potential interplay between that concept and the new Reciprocal Jurisdiction concept. If there is a lack of uniformity in this area, such differences might have a significant impact on the broader reinsurance market.
2. Equal treatment – Concern was voiced that there should be equal treatment for EU and non-EU domiciled reinsurers, including US domiciled reinsurers. Some commenters suggested that the current exposure drafts would permit different treatment for reinsurers with different domiciles. One commentator suggested recognizing as a Reciprocal Jurisdiction U.S. states that meet certain NAIC accreditation requirements.
3. Solvency – The exposure drafts provide authority for state commissioners to deal with additional collateral issues with respect to reinsurers subject to rehabilitation or liquidation proceedings. A number of comments suggested that, when applicable, such considerations should be exercised by the appropriate rehabilitation or insolvency proceeding court instead of a state commissioner.
4. Effective date – Several commentators noted ambiguity in the effective date provisions of the revised Models and a desire to coordinate the effective date of the Model revisions with the effective date of the Covered Agreement’s reinsurance collateral provisions.

Perhaps the most interesting issue in discussion is whether and the extent to which to permit individual state insurance commissioners discretion in the implementation of the revised Models, in particular in determining the requirements for finding a particular jurisdiction to be a Reciprocal Jurisdiction. While it is customary, given the state-based system of insurance regulation, to afford individual state commissioners discretion in the implementation of Model Laws and Model Regulations, there appears to be a strong desire, if not a need, for more strict uniformity in the implementation of the Covered Agreement, and in the regulation of reinsurance activity throughout the broader market. It will be interesting to see how these somewhat competing interests are resolved.

Overall, it appears that this process is “on track” compared to the expectations of the NAIC stated earlier this year, with very good consensus emerging as to not only the broad lines of the amendments to the Models, but also of the wording of such amendments.

This post written by Rollie Goss.
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