NAIC Credit for Reinsurance Model Law: Qualifying Reinsurers and Collateral

The NAIC Credit for Reinsurance Model Law, formally Model Law #785, sets the conditions a reinsurer must meet before a primary insurer can reduce the liabilities on its balance sheet to reflect risks it has ceded. Its companion, Model Regulation #786, fills in the operational detail: what collateral looks like, how trust accounts work, and which letters of credit qualify.¹ Together they create a tiered system in which the collateral a reinsurer must post depends on how it qualifies, ranging from 100% for unauthorized reinsurers down to zero for well-capitalized reinsurers domiciled in recognized reciprocal jurisdictions.

Although the NAIC itself has no legislative power, state adoption is effectively mandatory. The NAIC Financial Standards and Accreditation Program requires each state to enact laws substantially similar to both Model #785 and Model #786 as a condition of accreditation.² A state that falls out of compliance risks probation, suspension, or revocation of its accredited status, which gives the model law practical force nationwide.

How a Reinsurer Qualifies for Credit

The model law offers several routes. Each carries its own eligibility test and its own collateral consequence for the ceding insurer.

Licensed Reinsurers

The simplest path is a direct license in the ceding insurer’s home state. A licensed reinsurer sits inside that state’s full regulatory perimeter, including examinations, capital requirements, and ongoing financial reporting. Credit is available with no collateral because the state already supervises the reinsurer directly.³

Accredited Reinsurers

A reinsurer not licensed in the ceding state can instead apply for accreditation. The reinsurer must submit to the state’s regulatory authority, file an application, and maintain a policyholder surplus of at least $20 million.³ If the commissioner does not deny the application within 90 days, accreditation is granted. Accredited reinsurers also provide credit without collateral, though they remain subject to examination and must file proof of their financial condition.

Reinsurers in Substantially Similar States

A reinsurer domiciled and licensed in another U.S. state qualifies if that state’s regulatory standards are substantially similar to the NAIC model and the reinsurer maintains at least $20 million in policyholder surplus.³ The theory is simple: a reinsurer already subject to equivalent oversight doesn’t need duplicate supervision in every state where its ceding partners happen to sit.

Certified Reinsurers

In 2011, the NAIC overhauled the model law to introduce a middle ground. The “certified reinsurer” designation lets non-U.S. reinsurers post collateral proportional to their financial strength rather than a flat 100%.¹ A commissioner assigns each certified reinsurer a security rating informed by recognized agencies such as A.M. Best, Standard & Poor’s, or Moody’s. The rating sets the collateral percentage:³

Secure–1: 0% collateral
Secure–2: 10%
Secure–3: 20%
Secure–4: 50%
Secure–5: 75%
Vulnerable–6: 100%

A reinsurer rated Vulnerable–6 receives no collateral relief, so the certified route only pays off for entities that can demonstrate real financial strength.

If a certified reinsurer’s condition deteriorates, the commissioner can downgrade its rating and require it to meet the new collateral tier immediately.⁴ The regulation gives ceding insurers a three-month buffer: even after a downgrade or revocation, a domestic ceding insurer can continue claiming credit for three months unless the commissioner finds the reinsurance is at high risk of being uncollectible. Revocation without a prior hearing is limited to narrow situations, such as regulatory action by the reinsurer’s home jurisdiction or a voluntary surrender of license; otherwise notice and a hearing are required.

Reciprocal Jurisdiction Reinsurers

The 2019 amendments to Model #785 opened the broadest path. Reinsurers domiciled in recognized “reciprocal jurisdictions” can qualify for complete elimination of collateral.¹ The change grew out of two bilateral agreements the U.S. government signed: one with the European Union in 2017 and one with the United Kingdom in December 2018. Both committed the U.S. to eliminating collateral requirements for qualifying reinsurers from the other party’s territory, in exchange for reciprocal commitments on group supervision and information sharing.

The NAIC maintains the official list of recognized reciprocal jurisdictions:⁵

European Union member states, under the 2017 US-EU Covered Agreement
The United Kingdom, under the 2018 US-UK Covered Agreement
Bermuda, with a minimum 100% Enhanced Capital Requirement ratio
Japan, with a minimum 200% Solvency Margin Ratio
Switzerland, with a minimum 100% Swiss Solvency Test ratio
Any U.S. state meeting the NAIC Financial Standards and Accreditation Program requirements

Beyond its jurisdiction-specific solvency ratio, a reinsurer must maintain minimum capital and surplus set by regulation, promptly notify regulators if it falls below thresholds, pay final U.S. court judgments in a reasonable timeframe, and provide documentation on request.³

Collateral When the Reinsurer Is Unauthorized

A reinsurer that doesn’t qualify through any licensing path is treated as unauthorized. It can still back reinsurance agreements, but credit is available only to the extent the reinsurer posts collateral equal to 100% of its liabilities to the ceding insurer, including outstanding losses, incurred-but-not-reported claims, and unearned premiums.¹

Model Regulation #786 recognizes three forms of collateral:⁴

Clean, irrevocable, unconditional letters of credit issued or confirmed by a bank on the NAIC’s Qualified U.S. Financial Institutions list
Trust accounts holding assets for the sole benefit of the ceding company under a formal trust agreement
Funds withheld, where the ceding company retains premium owed to the reinsurer and holds it as security on its own books

Letters of credit must have a term of at least one year and include an evergreen clause preventing expiration without at least 30 days of advance written notice to the ceding insurer. The NAIC Securities Valuation Office maintains the list of banks and trust companies eligible to issue them; institutions apply to the SVO to be added.⁶

Trust accounts under Model #786 must be held at the trustee’s U.S. office, and the ceding insurer must be able to withdraw assets at any time on written notice to the trustee, with no ability for the reinsurer to block or delay the withdrawal.⁴ Trust assets must sit in negotiable form at fair market value, in permitted investments under the state’s code, and investments in entities affiliated with either party cannot exceed 5% of total trust investments.

Contract Terms Required for Credit

Regardless of path, the reinsurance contract itself must contain specific provisions, and a missing clause can disqualify the whole arrangement.

An insolvency clause is mandatory. The reinsurer must agree to continue paying its share of losses even if the ceding insurer becomes insolvent or enters receivership, with payments going directly to the liquidator or receiver without reduction.³ Without this clause, the credit is invalid.⁴

The reinsurer must also submit to the jurisdiction of any competent U.S. court, comply with the requirements to establish jurisdiction, and abide by any final decision including appeals.³ Non-U.S. reinsurers are typically required to designate a legal agent in the United States for service of process. Where a contract also contains an arbitration clause, the service-of-suit language should be drafted so the two don’t conflict.

The NAIC’s Form AR-1 consolidates several of these obligations. By executing it, the assuming reinsurer submits to the jurisdiction of the ceding insurer’s state, designates the commissioner as its agent for service of process, agrees to bear the cost of any examination, and commits to maintain and update at least quarterly a list of all insurers it reinsures in that state.⁷

What Happens When Credit Is Disallowed

The financial impact of a disallowed credit hits fast. Under SSAP No. 62R, the statutory accounting standard for property and casualty reinsurance, a ceding insurer that claims credit from an unauthorized reinsurer without adequate collateral must establish a liability that directly reduces its surplus.⁸ The same treatment applies when a certified reinsurer’s collateral falls short of what its rating requires: the ceding insurer books a provision for the deficiency, calculated separately from any overdue-reinsurance charge.

A contract that fails to transfer both underwriting risk and timing risk isn’t reinsurance under statutory accounting at all. It must be accounted for as a deposit, and the ceding insurer gets no reduction in loss reserves.⁸ Rules are stricter for affiliated reinsurance: a ceding insurer cannot take any credit for recoverables that are in dispute with an affiliate.

The surplus hit cascades. When the provision for reinsurance rises, surplus falls, and the risk-based capital ratio worsens. A large enough drop can push an insurer past regulatory action triggers, requiring a corrective action plan or, in extreme cases, giving regulators authority to take control of the company.

Reporting Reinsurance on the Annual Statement

Ceding insurers report reinsurance activity through Schedule F for property and title companies and Schedule S for life and health companies. These schedules break down recoverables by reinsurer, track overdue amounts, and calculate any provision for reinsurance that must be charged against surplus.

Schedule F requires detailed identification of each reinsurer, including alien insurer identification numbers for non-U.S. reinsurers, certified reinsurer identification numbers where applicable, and the domiciliary jurisdiction by postal code. For data year 2025 annual filings, the NAIC’s electronic filing directive sets a March 1, 2026 deadline for property companies’ Reinsurance Summary Supplemental Filing, Supplemental Schedule for Reinsurance Counterparty Reporting Exception, and Reinsurance Attestation Supplement, and an April 1, 2026 deadline for the life companies’ Supplemental Term and Universal Life Insurance Reinsurance Exhibit.⁹ Inaccurate reinsurer identification doesn’t just create filing headaches; it can prompt examiner follow-up on whether the credit claimed is properly supported.

1
National Association of Insurance Commissioners. NAIC Credit for Reinsurance Model Law and Regulation
2
National Association of Insurance Commissioners. Financial Regulation Standards and Accreditation Program
3
National Association of Insurance Commissioners. Credit for Reinsurance Model Law
4
National Association of Insurance Commissioners. Credit for Reinsurance Model Regulation
5
National Association of Insurance Commissioners. NAIC List of Reciprocal Jurisdictions
6
National Association of Insurance Commissioners. Securities Valuation Office
7
National Association of Insurance Commissioners. Form AR-1 Certificate of Assuming Insurer
8
National Association of Insurance Commissioners. SSAP No. 62R – Property and Casualty Reinsurance
9
National Association of Insurance Commissioners. NAIC General Electronic Filing Submission Directive – Data Year 2025 Annual Filings