US insurance regulators are faced with disagreement amongst industry players as to whether letters of credit (L/Cs) should be used as collateral by captive insurers.

The debate surrounds interim measures the regulators are trying to push through while the industry awaits a more thorough overhaul of the so-called primary security requirement (PSR).

Disagreement

The PSR is the minimum level to which an insurer must collateralise a captive with admissible assets.

Some industry players argue that only the safest and most liquid assets should be used as collateral in the PSR while their opponents want a broader range of assets to be admitted.

Centre of debate

At the centre of this debate are L/Cs, with state regulators and industry divided on whether these assets are admissible and satisfy PSR requirements.

Even the Modified Recommendations published by regulators seeking views on the interim measures concede that the use of L/Cs is "an open question" and question to what extent "clean, irrevocable, unconditional 'evergreen' L/Cs should be allowed as primary security".

Opposing view

The argument is summed up one L/C opponent, the Connecticut Insurance Department, whose spokesman says their inclusion would run counter to the spirit of the Modified Recommendations.

L/Cs "are not considered to be a marketable security and therefore do not meet statutory accounting standards," he says.

L/C support

The American Council for Life Insurers however supports the inclusion of L/Cs according to its chief actuary.

Paul Graham says there is legislation allowing the use of L/Cs as collateral in the reinsurance sector so, "there is no reason that, if the law allows 100% of the reserve credit to be collateralised by such L/Cs, that the new rules should preclude them from being considered a primary security."

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.