S&P Comments on ‘Alien Reinsurer’ Collateral Requirements

February 13, 2006

Standard & Poor’s Ratings Services has published an article titled, “Credit FAQ: Hotly Debated Collateralization Rule Change May Affect Insurer/Reinsurer Capital Needs,” which examines several of the issues surrounding the pros and cons of the collateralization requirements for alien reinsurers.

S&P’s timely comment will further focus debate on the subject, which became a very sensitive issue following the Sept. 11 attacks. Lloyd’s in particular in the person of its Chairman Lord Peter Levene has repeatedly and sharply questioned the fairness of the collateralization requirements (See IJ Website, Nov. 29, 2005).

As S&P points out, alien reinsurers are required to collateralize 100 percent of their booked U.S. liabilities. Despite the slightly sinister designation, the companies aren’t from outer space. The term, as S&P notes, simply includes all insurers “not domiciled in the U.S. and do not have a U.S. operating subsidiary, but do business with U.S. primary companies.”

The debate focuses on charges from the reinsurers that “the collateralization requirement is anticompetitive and protectionist,” and that it “restricts capacity and inflates reinsurance costs.”

U.S. regulators on the other hand justify retaining the requirement as necessary to protect the interests of domestic ceding insurers, who “are concerned that removing the collateral requirement would reduce their oversight ability and enforcement clout,” observed S&P credit analyst Laline Carvalho.

S&P said the article explores “why U.S. regulators are reluctant to relax the collateralization requirement, whether the requirement adds to the cost of doing business in the U.S. for externally domiciled reinsurers, and whether the differences in regulatory effectiveness, financial disclosures, and accounting transparency in the home countries of alien reinsurers are factored into Standard & Poor’s rating process.”

The report is available to subscribers of RatingsDirect, S&P’s web-based credit research and analysis system, at: www.ratingsdirect.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-9823 or sending an e-mail to research_request@standardandpoors.com. Ratings information can also be found on S&P’s public Web site at: www.standardandpoors.com.

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