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NAIC mulling ways to bring back offshore reinsurers

The NAIC is considering a new reinsurance framework thatcould create an incentive for offshore reinsurers to come back to the U.S.,according to a memo anddocuments slated to be discussed during a conference call Sept. 30.

The possible changes come as the NAIC, which sets standardsfor U.S. insurance regulation, prepares to "protect U.S. consumers andU.S. ceding insurance companies from potential adverse impact resulting fromcovered agreement negotiations," according to a memo from the NAIC'sFinancial Condition Committee to the association's Property and CasualtyRisk-Based Capital Working Group.

A covered agreement is a bilateral agreement between two ormore jurisdictions on insurance supervisory matters. The EU and the U.S. arecurrently negotiating a covered agreement on reinsurance collateral, groupsupervision and confidentiality.

If and when finalized, the agreement will have ramificationsfor the reinsurance collateral U.S. regulators demand of foreign reinsurers.The collateral, somewhat like a large security deposit, is seen as a consumerprotection against credit and financial risk as well as political system risk.

The Financial Condition Committee is considering threemethods to mitigate risk: expanding the certified reinsurance process; taking arisk-based capital approach to adding required capital for U.S. cedingcompanies; and even developing a new NAIC model that requires reinsurers tofile certain limited information with the association under a new filing.

If the NAIC develops a new model, one unidentified committeemember noted, it should be focused on developing a new regulatory framework inwhich reinsurers "are no longer treated the same as other licensedcompanies," the NAIC document states.

Under this approach, reinsurers would instead get some sortof new license that would relieve them from current reporting requirements,thus creating an incentive for these companies to bring business back onshore,according to the document.

The Financial Condition Committee noted that it would likelyrequire a combination of these methods to address the increased risk topolicyholders if consumer protection collateral was reduced to zero under acovered agreement. The committee added, parenthetically, that this potentialreduction is "simply a worst case scenario considered for purposes ofaddressing this charge and is not based upon any actual discussion that mayoccurring relative to a covered agreement."

At the NAIC summer national meeting in San Diego in lateAugust, some attendees at the committee's meeting lamented the fact that theU.S. had over the years lost considerable business to offshore countries likeBermuda. The NAIC first publicly broached the idea of revamping the reinsurance collateral system at thismeeting.