Florida has become the second state after New York tounilaterally consider dropping the automatic, hefty 100 percent ofliabilities collateral requirement imposed on foreign reinsurers inan effort to lower entry barriers and bolster Florida's insurancemarketplace.

"Allowing foreign reinsurers to conduct business with Floridainsurers without requiring them to post millions of dollars incollateral will lead to increased capital and competition in ourstate," said Insurance Commissioner Kevin McCarty in a Nov. 28statement issued in the wake of a workshop a couple of days earlieron his proposed new rule. "These factors will help to stabilize andpotentially reduce property insurance rates."

Like the reinsurance regulation proposed in New York last monthby Insurance Superintendent Eric Dinallo (see NU, Oct. 29, page 6),Florida would forgo collateral for foreign and nonaccreditedinsurers, in part, if they were judged to have sound finances byfinancial rating firms.

Reinsurers would be required to have surplus in excess of $100million and have a secure financial strength rating from at leasttwo of four approved rating firms--those being A.M. Best Company,Fitch, Moody's and Standard & Poor's.

The intricate five-page rule also includes, among otherrequirements, that the reinsurer come from a jurisdiction that willprovide information concerning its domestic reinsurers and hassatisfactory solvency regulation. Reinsurers would have to providea list of all disputed and overdue reinsurance claims involvingU.S. ceding insurers.

Granting unaccredited reinsurance companies the ability toconduct business in Florida without having to post 100 percentcollateral would be discretionary with the commissioner.

In his statement, Mr. McCarty said he held his workshop on thenew rule as part of the Office of Insurance Regulation's"continuing effort to find alternative approaches to improveFlorida's property insurance market."

Mr. McCarty has been empowered by action of the FloridaLegislature, which earlier this year passed a law giving him theability to establish lower collateral requirements for foreignreinsurers that are highly rated and financially sound.

The OIR said it is exploring whether this may lead to morereinsurance capacity to increase the supply of insurance in theFlorida market.

If an insurer buys reinsurance from a reinsurer that isauthorized or accredited in Florida, the insurer gets a favorableaccounting credit. U.S.-licensed and Florida-accredited reinsurersdo not have to post collateral under current law, the OIRnoted.

The OIR statement mentioned that for an insurer to get favorableaccounting credit for reinsurance purchased from an unaccreditedreinsurer--even if the unaccredited reinsurer is worth billions ofdollars and regulated by a European country--the reinsurer hastraditionally been required to post collateral for the full amountof the risk transferred.

"This collateral requirement is a barrier to investment byforeign reinsurers in the Florida market. In Florida, the majorityof the residential property risk is reinsured by non-U.S. insurancecompanies already," said the OIR.

U.S. reinsurance and insurance interests have called the idea ofabandoning collateral requirements risky to the solvency of U.S.carriers. Insurance executives with large concerns have alsoobjected to the idea of having to deal with differing collateralrules in 50 states.

Efforts to establish a nationwide collateral standard by theNational Association of Insurance Commissioners is ongoing.Resolution has often appeared close at hand in the past couple ofyears, but the NAIC has yet to approve a final model law for allstate legislatures to adopt.

"Allowing foreign reinsurers to conduct business with Floridainsurers without requiring them to post millions of dollars incollateral will lead to increased capital and competition in ourstate."

Florida Insurance Commissioner Kevin McCarty