A proposal to admit letters of credit (L/Cs) as suitable assets for certain types of reinsurance business is expected to make trades between US and European reinsurers easier. c The US' National Association of Insurance Commissioners (NAIC) Reinsurance Taskforce has recommended that L/Cs should be allowed as an acceptable asset in a multi-beneficiary reinsurance trust fund.

This would allow an L/C to be accepted as an asset to be deposited by one party, for the benefit of several other parties (multi-beneficiaries), into an account (trust fund) managed by a third party. In reinsurance, such an agreement is typically established to permit a licensed company to take credit from an unlicensed or unaccredited reinsurer for certain types of reinsurance up to the value of the assets in trust.

L/Cs already used

In other types of reinsurance L/Cs are already used in a similar way. In the US a ceding company cannot take credit for reinsurance ceded to an unlicensed or unaccredited reinsurer unless the reinsurer posts security, which often takes the form of a L/C. The L/C is designed to provide the cedent with a remedy if the reinsurer, due to insolvency or some other reason, fails to pay its obligations when due.

The amendment recommended by the NAIC would permit multiple beneficiary trust funds to be funded, in whole or in part, with clean, irrevocable, unconditional and evergreen L/Cs rather than require such trust funds to consist only of cash, certificates of deposit and certain other investments.

After lengthy discussions, the NAIC task force is now agreed that L/Cs should be allowed but said it needed more time to review the proposal in further detail prior to its adoption. The recommendation may be adopted by the NAIC plenary meeting in June.

The International Underwriting Association (IUA), the London-based association that represents international commercial insurers and reinsurers, has welcomed the NAIC's recommendation.

Trans-Atlantic opportunities

IUA said that the net effect of the change would be to offer greater flexibility for European reinsurers operating in the US and could attract other reinsurance business to the US market.

The IUA also said that it views the proposal as a necessary parallel step to the IUA's work with other associations in developing a single EU reinsurance 'passport' and, ultimately, a position where reinsurers regulated in the US are free to trade within the European Economic Area, and vice versa, on the basis of home state supervision.

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