Florida Reconsiders Collateral Mandate For Foreign Reinsurers

Florida has become the second state after New York to unilaterally consider dropping the automatic, hefty 100 percent of liabilities collateral requirement imposed on foreign reinsurers in an effort to lower entry barriers and bolster Florida's insurance marketplace.

"Allowing foreign reinsurers to conduct business with Florida insurers without requiring them to post millions of dollars in collateral will lead to increased capital and competition in our state," said Insurance Commissioner Kevin McCarty in a Nov. 28 statement issued in the wake of a workshop a couple of days earlier on his proposed new rule. "These factors will help to stabilize and potentially reduce property insurance rates."

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

Reinsurers would be required to have surplus in excess of $100 million and have a secure financial strength rating from at least two 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 other requirements, that the reinsurer come from a jurisdiction that will provide information concerning its domestic reinsurers and has satisfactory solvency regulation. Reinsurers would have to provide a list of all disputed and overdue reinsurance claims involving U.S. ceding insurers.

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

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

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

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

If an insurer buys reinsurance from a reinsurer that is authorized or accredited in Florida, the insurer gets a favorable accounting credit. U.S.-licensed and Florida-accredited reinsurers do not have to post collateral under current law, the OIR noted.

The OIR statement mentioned that for an insurer to get favorable accounting credit for reinsurance purchased from an unaccredited reinsurer--even if the unaccredited reinsurer is worth billions of dollars and regulated by a European country--the reinsurer has traditionally been required to post collateral for the full amount of the risk transferred.

"This collateral requirement is a barrier to investment by foreign reinsurers in the Florida market. In Florida, the majority of the residential property risk is reinsured by non-U.S. insurance companies already," said the OIR.

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

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

"Allowing foreign reinsurers to conduct business with Florida insurers without requiring them to post millions of dollars in collateral will lead to increased capital and competition in our state."

Florida Insurance Commissioner Kevin McCarty