Insurers and reinsurers navigating the increasingly complex rules on reciprocity for collateral requirements should consider recent guidance from the leading U.S. standard-setting body. On June 17, 2021, the Reinsurance Financial Analysis Working Group (ReFAWG) of the National Association of Insurance Commissioners (NAIC) issued a draft of the ReFAWG Review Process for Passporting Certified and Reciprocal Jurisdiction Reinsurers (available here). The guidance implements legal reforms occurring over the past decade intended to ease collateral requirements in reinsurance arrangements across borders. The draft is open for public comment until July 19, 2021.
The reforms addressed in the ReFAWG guidance include the 2011 amendments to the NAIC’s Credit for Reinsurance Model Law (the Model Law) that allow for “certified” reinsurers and the 2019 Model Law amendments providing for “reciprocal” jurisdictions. (The 2019 amendments were intended to conform to the reinsurance collateral provisions of the Covered Agreements that the United States entered into with the European Union in 2017 and the United Kingdom in 2018.)
Prior to 2011, non-U.S. reinsurers were required under state insurance laws, generally, to post collateral equal to at least 100 percent of reserves in order for a U.S. ceding company to claim balance sheet credit for the reinsurance. This collateral requirement applied regardless of the financial strength of the reinsurer or the treatment of a U.S. reinsurer in the offshore jurisdiction in the reverse scenario (i.e., where an offshore ceding company is obtaining reinsurance from a U.S. reinsurer). Both the 2011 and 2019 reforms were motivated in part by the goal of relaxing collateral requirements in cases where U.S. ceding companies obtain reinsurance from offshore reinsurers deemed financially strong or based in countries with reciprocal rules.
The ReFAWG guidance sets forth the procedural and informational requirements for (i) a reinsurer to become a “Certified Reinsurer” or a “Reciprocal Jurisdiction Reinsurer” in a “Lead State” and (ii) such a reinsurer to “Passport” into other states. (These terms are summarized below.)
- A Certified Reinsurer (arising out of the 2011 Model Law amendments) is a reinsurer unlicensed in the United States but meeting certain regulatory and solvency standards entitling it not to have to post 100 percent collateral in all circumstances. A Certified Reinsurer must satisfy standards based on both its own financial strength and the rigor of its home jurisdiction’s regulatory regime (a jurisdiction meeting these criteria of regulatory sophistication is referred to as a Qualified Jurisdiction). Certified Reinsurers fall into one of a series of categories (“secure-1,” “secure-2,” etc.), with each category associated with an amount of collateral that reinsurers in that category are required to post. For example, a “secure-1” reinsurer, the strongest category, is required to post no collateral; a “secure-2” reinsurer must post collateral at least equal to 10 percent of required reserves; “secure-3,” 20 percent; and so on.
- A Reciprocal Jurisdiction Reinsurer is a reinsurer based in a jurisdiction meeting the following criteria (i.e., a Reciprocal Jurisdiction):
- A jurisdiction that is subject to an in-force Covered Agreement with the United States (i.e., the European Union and the United Kingdom currently) or
- A U.S. jurisdiction that meets the NAIC’s accreditation requirements or
- A Qualified Jurisdiction that has been determined by the state insurance commissioner to meet all applicable requirements to be a Reciprocal Jurisdiction
- “Passporting” refers to the process under which a state has the discretion to defer to the determination by another state that a reinsurer is a Certified Reinsurer or a Reciprocal Jurisdiction Reinsurer.
- To Passport between states as a Certified Reinsurer, a reinsurer would apply to an initial state, referred to as the Lead State. The Lead State would then analyze the reinsurer and notify ReFAWG of the application. After consultation between the Lead State and ReFAWG, ReFAWG would make its recommendation concerning both the certified status of the reinsurer and its rating. The Lead State would then make a final determination, upon which the Lead State would notify ReFAWG, and the Certified Reinsurer would be eligible to apply for Passporting into other states.
- A similar Passporting process is in place with respect to Reciprocal Jurisdiction Reinsurers. If an NAIC-accredited jurisdiction has determined that certain specified conditions have been met, the commissioner in another state has the discretion to defer to that jurisdiction’s determination and thus to excuse such reinsurer from collateral requirements.
The draft guidance contains additional details concerning the kinds of disclosures that reinsurers must provide to regulators and ReFAWG in order to attain status as a Certified Reinsurer or a Reciprocal Jurisdiction Reinsurer. The guidance also summarizes the criteria for status as a Certified Reinsurer or a Reciprocal Jurisdiction Reinsurer based on the Model Law amendments. In addition, the draft discusses the interaction between the two categories, recognizing that certain reinsurers may be considered Certified Reinsurers for purposes of in-force business and Reciprocal Jurisdiction Reinsurers with respect to new reinsurance agreements. The draft provides some guidance on navigating these distinctions. The guidance also summarizes the state insurance commissioner’s obligation to publish lists of Qualified Jurisdictions, Reciprocal Jurisdictions and Reciprocal Jurisdiction Reinsurers.