Two insurer groups have told Florida regulators they oppose a proposed rule that would eliminate the collateral required of foreign reinsurers, saying it would be harmful to the fiscal strength of primary carriers.

The comments from the Indianapolis-based National Association of Mutual Insurance Companies and American Insurance Association in Washington have been sent to the Florida Office of Insurance Regulation.

OIR spokesman Ed Domansky said a half dozen comments on the rule have also come in from U.S. and foreign reinsurers from Bermuda and London as well as primary insurers. Foreign reinsurers generally offered support, but suggested some revisions, he said.

He said OIR will be reviewing all comment and will make a presentation to the Financial Services Commission in the governor's cabinet on Dec.18 and this will be followed by a public hearing. There will also be additional time for comment submissions and final action is unlikely until February or March, Mr. Domansky explained.

Florida Insurance Commissioner Kevin McCarty, who proposed the rule last month, was empowered by the Florida Legislature earlier this year to establish lower collateral requirements for foreign reinsurers that are highly rated and financially sound.

Currently, foreign and unlicensed insurers must post 100 percent of their gross liabilities to U.S. companies as collateral.

Florida regulators propose to let foreign reinsurers operate in the state if they are found to be fiscally sound by major rating agencies, and satisfy other safeguards. New York has advanced a similar proposal.

Foreign reinsurers for years have lobbied the National Association of Insurance Commissioners to eliminate the rule, but the NAIC, while currently considering changes, has left the requirement in place.

Lloyd's of London has been particularly outspoken, calling the present rule an unfair trade barrier that drives up the cost of reinsurance while restricting market capacity.

Liz Reynolds, NAMIC's Southeast state affairs manager, wrote that the proposed rule “could lead to a weakened solvency position for U.S. primary insurers. The current full-collateral system for credit for reinsurance is simple and has served the industry well, providing security for U.S.-based companies to know funds are available to pay claims.”

NAMIC's announcement of its comments noted that its members underwrite approximately 31 percent of the Florida property-casualty insurance market.

Ms. Reynolds challenged OIR's explanation that the intent of the rule is to increase the state's catastrophe reinsurance capacity and stabilize or reduce rates.

The NAMIC representative said the rule would not mean more reinsurers would be willing to participate in the Florida market, and would not translate to more reinsurers willing to assume catastrophe risk in any form.

NAMIC suggested that no alien reinsurers would be willing to make specific and concrete representations about price, capacity or the nature of risks that will be assumed–despite the amount of collateral required.

“It is critical to note that any weaknesses in a relaxed collateral regime will be revealed only in the wake of catastrophes or events leading to large number of claims,” Ms. Reynolds said.

“We cannot rule out additional situations involving slow- or no-pay reinsurers downstream of serious weather or other events,” she added. “That would only worsen the already strained marketplace in Florida, and it is not reasonable to expect the guaranty fund system to step up when such a situation can be avoided by continuing to require 100 percent collateral.”

Ms. Reynolds urged the OIR to withdraw the draft rule and said the agency should “focus attention on protecting insurer solvency rather than impairing it.”

“Absent a compelling demonstration that departure from the current full-collateral regime is of utility to Florida primary reinsurers, we find little reason to espouse the concepts that are fundamental to what is proposed,” Ms. Reynolds wrote. “In any event, Florida should not develop a plan separate from what may become uniform for states via development of a National Association of Insurance Commissioners' model.”

Ron LaFace Jr., a lobbyist for the AIA, wrote a seven-page letter that included, among other points, an assertion that rating agencies are “notoriously late with their rating downgrades,” adding that the rule would make collection of reinsurance recoverables “more problematic and time consuming.”

Insurers, he said, may be less willing to purchase reinsurance from unauthorized reinsurers without collateral, thus reducing capacity.

He argued also that collateral rules do not restrain trade and are pro-competitive, permitting foreign insurers the choice to compete in the U.S. market by either creating a subsidiary or by foregoing U.S. regulation and posting collateral.

Article updated Dec.12, 9:22 a.m.

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Insurers Hit Florida Reinsurance Collateral Rule

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