Bermuda is set to benefit from becoming the first offshore financial centre to be granted ‘conditional qualified jurisdiction’ status by the National Association of Insurance Commissioners (NAIC), according to an article written by Appleby lawyers Timothy Faries and Brad Adderley.

“The designation of Bermuda as a ‘qualified jurisdiction’ will represent a significant benefit to Bermuda reinsurers in the US insurance market with greater efficiency and less cost in conducting reinsurance business across the insurance markets, while also emphasising US confidence in the BMA as an insurance supervisor,” they have written.

The NAIC granted this status to Bermuda last December, as reported in this newspaper.

Mr Faries and Mr Adderley pointed out that as a result, reinsurers licensed in Bermuda will be eligible to be certified for reduced reinsurance collateral requirements in US jurisdictions that have adopted the revised Credit for Reinsurance Model Law and Regulations (Reinsurance Models). The NAIC is the US standard-setting and regulatory support organisation created and governed by the chief insurance regulators from each US State, the District of Columbia and five US territories. They noted that the only other jurisdictions to be afforded such status are Germany, Switzerland and the United Kingdom.

“Recognising the value of the NAIC’s endorsement, the Bermuda Monetary Authority (BMA) was the first insurance supervisor to accept the NAIC’s invitation to participate in an expedited review of its regulatory framework.

“Currently, 18 US states (including Connecticut, Florida, New York and Pennsylvania), representing 53 percent of direct insurance premiums, have adopted the Reinsurance Models. An additional five US states are expected to adopt the Reinsurance Models in 2014, bringing the total of direct insurance premiums of adopting US states to 75 percent of the US total,” they said.

They explained that the reinsurance models, which are part of the NAIC’s effort to modernise reinsurance regulation in the US, allow highly rated non-US reinsurers to maintain reduced collateral requirements while reinsuring US cedents. Certification takes place on a state-by-state basis but a non-US reinsurer will only be certified if it is licensed and domiciled in a qualified jurisdiction.

According to the New Appleman Insurance Law Practice Guide, credit for reinsurance laws constitute a key component of the regulation of reinsurance in the United States.

It states: “These laws determine the circumstances in which a ceding insurer can take financial statement credit for reinsurance recoverables as an asset and as a reduction of its unearned premium and loss reserves on account of reinsurance ceded.

“Where an insurer can take credit for reinsurance, it can increase its ‘surplus’ and thus expand its allowed capacity to write new insurance business. In order to qualify for financial statement credit, most states require that the reinsurer be licensed or accredited in the same state where the direct insurer does business, or that the reinsurer be domiciled and licensed in a state that employs substantially similar credit for reinsurance standards to those imposed by the direct insurer’s state of domicile.

“Most states also allow credit for reinsurance ceded to a non-United States reinsurer that maintains a trust fund in the US for the protection of its US ceding insurers.”