New York To End Reinsurance Collateral Rule

New York Insurance Superintendent Eric Dinallo, breaking away from other states' regulators, said today he planned to do away with collateral requirements for foreign reinsurers with good financial ratings.

The proposed regulation, which some insurance groups called risky and radical, would go into effect in July of 2008. Under the new rule the highest rated U.S. and non-U.S. reinsurance companies not authorized or accredited to do business in New York will be treated the same as New York reinsurance companies.

Discussions about a change in the requirement for non-accredited insurers to post collateral have been underway for years at the National Association of Insurance Commissioners. Earlier this year, an NAIC task force considered a Reinsurance Evaluation Office proposal to establish a system for a reinsurer's collateral to be based on its financial strength. That initiative has not gone forward.

Mr. Dinallo said in a statement that “There is a growing need for reinsurance in the New York to deal with risks from terrorism and from natural catastrophes such as hurricanes. We cannot afford to maintain outdated and unnecessary standards for the international market for reinsurance.”

New York's current regulation, he said requires a strongly capitalized non-New York reinsurer to tie up capital by posting collateral while not imposing a similar burden on a “weaker” New York reinsurer.

Currently, any U.S. or non-U.S. reinsurance company not authorized or accredited to operate in New York or other states must post collateral equal to 100 percent of its share of policyholder claims.

Under the new regulation, high rated reinsurers would no longer have to post any collateral. Companies that are not as strong would have to post collateral on a sliding scale from 10 percent to 100 percent. This would apply to both U.S. and non-U.S. reinsurers not authorized or accredited in New York.

According to the New York Insurance Department, foreign reinsurers had an estimated $120 billion in collateral posted in the United States in 2005, on which they pay about $500 million a year in transaction costs.

Mr. Dinallo stated that adoption of the New York regulation will reduce this transactional cost and increase reinsurance capacity. It will also bring New York in line with global insurance markets and worldwide accounting standards governing reinsurance contracts. Most jurisdictions do not require collateral from non-domestic reinsurers for their insurers to get credit.

Mr. Dinallo said that the regulation would not prevent “insurance companies from negotiating their own collateral requirements or from choosing to do business with reinsurers who are willing to put up collateral, if that is what the insurance company prefers.”

In reaction, Mike Koziol, assistant vice president and counsel for the Property Casualty Insurers Association of America said Mr. Dinallo's action “is radical and PCI is extremely concerned.”

The big worry, he said, is the solvency of primary insurers who deal with reinsurers qualified by New York. He wondered how other states would treat such companies when “everyone else in their state has to have 100 percent collateral.”

He said there is no proof that ending collateral requirements will increase capacity and there were no companies on record saying they would reduce rates as a result.

Steve Bennett, American Insurance Association assistant general counsel, said the New York proposal is unnecessary “and potentially very risky. It would threaten and impair the solvency of U.S. insurers and ultimately add costs to U.S. policyholders.”

Basing solvency on rating agencies is a questionable move, he said, noting the fiscal troubles that have hit previously triple-A rated firms involved with the subprime mortgage market.

He said the European Union “Passport” regulation only allows reinsurers to operate without collateral if they have opened a local subsidiary.

Walter Bell, NAIC president and Alabama insurance commissioner, reacted with a statement saying the group recognized that New York operates as a sovereign regulatory authority adding, “We applaud the New York Department for its leadership and innovation in this first initiative of reinsurance modernization. We look forward to working with them in the ongoing national dialogue to modernize U.S reinsurance regulation,”

He mentioned that the NAIC Reinsurance Task Force is meeting on the topic next month in Atlanta.

The proposed New York regulation, for dealings with domestic reinsurers that now do not have to provide collateral, imposes principles-based credit risk management on the primary insurers. These ceding companies would now have full responsibility for credit risk management and compliance.

The department said it will be circulating a working draft of the proposed regulation to the insurance industry and consumers and will take comments.

Also under the proposed regulation, any unauthorized or unaccredited reinsurer:

o With a triple-A credit rating from two rating agencies would have to post no collateral. Those with a double-A or equivalent rating would have to post collateral equal to 10 percent of claims, single-A, 20 percent, triple-B, 50 percent. Reinsurers with a rating below triple-B would still be required to post 100 percent.

o Would be required to maintain a policyholders surplus or equivalent in excess of $250 million and accept required contract terms, including consent to the jurisdiction of U.S. courts for disputes.

o Must have a primary regulator that has a memorandum of understanding with the New York Insurance Department that addresses information sharing and considers such matters as regulatory equivalency and enforceability of judgments.

o Must be domiciled in a country that allows U.S. reinsurers access to its market on similar terms.

o Will be required to post 100 percent collateral upon the entry of an order of rehabilitation, liquidation or conservation against the ceding insurance company.

In addition, insurance companies ceding risk to reinsurers have responsibility for vetting those reinsurers and developing risk management plans for their reinsurance placements.

The Superintendent of Insurance would retain final authority over any particular transaction.