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Reinsurance Collateral Requirements Changed: Introducing the “Certified Reinsurer”

​Although the topic of reinsurance collateral has been heavily debated for more than a decade, the National Association of Insurance Commissioners (NAIC) made significant progress in moving this initiative forward at its November 2011 National meeting. The goal was to reduce the collateral requirements of non-U.S. reinsurers from qualifying jurisdictions that are well capitalized and well regulated.

So What’s Changed?

This new approach gives more power to the individual states.  The new approach calls for the concept of a certified reinsurer. A non-U.S. reinsurer may be categorized as a certified reinsurer if he/she:

  • Is licensed as an insurer or reinsurer in a qualified jurisdiction.
  • Maintains minimum capital and surplus, determined by the commissioner pursuant to regulation.
  • Maintains financial strength ratings from two or more rating agencies.
  • Agrees to submit to state jurisdiction.
  • Submits financial information for regulatory review.
  • Satisfies other requirements established by the regulators.

In addition to the above, the regulator will also consider business practices of the reinsurer, its reputation for prompt payment, and any regulatory actions against the reinsurer.

What Is a Qualified Jurisdiction?

In order to determine whether the domiciliary jurisdiction of a non-U.S. assuming reinsurer is eligible to be recognized as a qualified jurisdiction, the commissioner will go evaluate the appropriateness and effectiveness of the reinsurance supervisory system of the jurisdiction, both initially and on an ongoing basis. A jurisdiction may not be recognized as a qualified jurisdiction if the commissioner has determined that the jurisdiction does not adequately and promptly enforce final U.S. judgments and arbitration awards. The NAIC will publish a list of qualified jurisdictions. If a state approves a jurisdiction not on the NAIC list, it must prove justification.

Assigned Rating

The commissioner will assign a rating to each certified reinsurer, taking into account the financial strength ratings that have been assigned by rating agencies, and will publish a list of certified reinsurers and their ratings. The ratings range from 1 to 5, 1 being the highest rated and 5 being the lowest or most vulnerable.

Required Collateral

Based on the ratings assigned by the commissioner to the certified reinsurer, the following collateral requirements will be in effect:

 Rating​ S & P Rating​ Security %​
Secure — 1​ AAA​ 0%​
Secure — 2​ ​AA+   AA- ​10%
Secure — 3​ A+   A-​ ​20%
Secure — 4​ BBB+   BBB-​ 75%​
​Vulnerable — 5​ BB+ or lower​ ​100%

If the ceding company enters liquidation or rehabilitation, it must post 100 percent collateral. Also, if the ceding company resists any U.S. judgment, it must also post 100 percent collateral for all payables.

Blank Changes Effective for 2012 Annual Statement

The concept of the certified reinsurer is prospective only, so new line descriptions are necessary for Schedule F, Part 3 for the certified reinsurer category. Part 3 also requires that you have the Certified Reinsurer ID Number (CRIN), to obtain credit. Schedule F, Part 6 includes a new page for Provision for Overdue Reinsurance ceded to certified reinsurers. Also of note, ratings upgrades apply prospectively. Ratings downgrades apply to the entire reinsurance recoverable balance. The same reinsurer could have balances reported in unauthorized and certified categories.

The individual states must adopt this new approach. Nearly a dozen already have, and more are sure to follow. Check with your local department to see if your state has adopted this Model Law change. 

Contact Us

Jeff Dertz

312-980-3224