The Cayman International Reinsurance Companies Association (CIRCA) has asked US insurance regulators to reconsider a proposed risk-based capital charge for reinsurance recapture.
The association argued that any charge should reflect the risk associated with individual reinsurers rather than the jurisdiction where they are domiciled.
In a 23 September letter to the National Association of Insurance Commissioners’ Life Risk-Based Capital (E) Working Group, CIRCA responded to a proposal referred by the Financial Condition (E) Committee on 27 July.
The referral calls for a recapture factor on ceded reserves and modified coinsurance balances outside reciprocal jurisdictions.
It also calls for a separate change to recoverability requirements for reinsurers with lower financial strength ratings.
CIRCA said a risk-based capital framework should consider both the potential impact of a recapture event and the likelihood of one occurring.
The association argued that reciprocal status does not measure the counterparty risk of an individual reinsurer or distinguish between companies with different levels of capitalisation.
“Jurisdictional status cannot serve as a proxy for the likelihood of recapture,” CIRCA chair of the board Faramarz Romer wrote.
“Recapture risk exists across all reinsurers in varying degrees, and a charge that does not reflect that variation is not risk-based.”
CIRCA proposed modifying the factor-based approach by using stress and cash-flow testing to identify transactions with material collateral deficiencies and recapture risks.
It also called for collateral treatment to account for assets legally available to the ceding insurer, including funds withheld and modified coinsurance balances.
The association cited figures presented by Bridgeway Analytics to the RBC Model Governance Task Force in August.
The figures showed about US$2.85 trillion in life reserve credit and modified coinsurance balances, of which roughly $135 billion, or 4.7%, was associated with nonreciprocal jurisdictions.
CIRCA said the figures show an exposure that warrants analysis but do not establish whether the exposure is material or how much additional capital would be required.
“If a recapture factor is ultimately developed, it should capitalise demonstrated residual risk, and reflect the assuming reinsurer’s financial strength, capitalisation and ability to meet its obligations, rather than the jurisdiction in which the reinsurer is domiciled,” Romer wrote.
In a separate letter to Financial Condition (E) Committee chair Nathan Houdek, CIRCA questioned the process that led to the referral.
The association said additional risk-based capital had been selected as the regulatory response before a public technical process had determined whether a material capital deficiency exists, whether existing protections are inadequate or whether additional capital is appropriate.
“Exposing implementation of a decision is not the same as exposing the decision itself,” Romer wrote.
CIRCA has asked the committee to reopen the issue and establish a public forum to examine the evidence.
It also wants the work coordinated with the NAIC’s RBC Model Governance initiative and said the year-end 2027 implementation target should follow the analysis rather than drive it.
Cayman Islands remains under review for NAIC qualified jurisdiction status (QJS).
The NAIC’s Mutual Recognition of Jurisdictions (E) Working Group has received Cayman’s application and opened a 60-day public comment period covering Cayman, South Korea and Guernsey.
The NAIC’s current QJS list includes Bermuda, France, Germany, Ireland, Japan, Switzerland and the United Kingdom.
