In the 30 years I've worked in Florida's insurance arena, I have seen regulation and legislative changes implemented with the single purpose of assuring greater liquidity and decreased insolvency of regulated carriers. Yet literally hundreds of property and liability companies have liquidated for a litany of issues, including inadequate access to reinsurance.
As the ability to maintain adequate surplus becomes more difficult, an increasing number of insurers are being forced to decrease premium writings, take on less risk, and raise additional capital. As a result, the number of private carriers is decreasing.
Even when carriers raise an adequate amount of surplus, they face another, equally important hurdle: Proper and adequate reinsurance. Given the specialty markets in Florida, quality reinsurance from quality reinsurance companies is as vital as surplus. Often, the only companies interested in Florida are non-U.S. reinsurers. In this tight market they can cherry-pick their clients, placing their capital with the most profitable, stable companies and lines of insurance.
Opening the Door to Ease Market Conditions
To improve capacity and draw more reinsurance providers into the state, in September 2008 the Florida Cabinet approved a rule based on 2007 legislation that allowed the Office of Insurance Regulation (OIR) to establish lower collateral requirements for non-U.S. reinsurers that are highly rated and financially sound. This criteria is found in Section 624.610(3)(e) of the Florida statutes. Requirements such as minimum surplus, ratings from national agencies, and non-financial criteria ensure that only top reinsurers qualify for this preferential treatment. In the past, non-U.S. reinsurance carriers were required to collateralize 100 percent of their risks with the carriers — a very high price to pay for an unknown result!
With these reduced collateral requirements, Florida has opened the door for companies to enter the reinsurance market and provide greatly needed relief to domestic insurers. Three have been approved thus far in 2011. The most recent, Bermuda-based reinsurer Montpelier Reinsurance Ltd., was authorized on March 17. In making the announcement, the OIR noted that, "This Consent Order makes Montpelier the ninth reinsurer to operate in Florida with similar terms." According to OIR, the other authorized reinsurers are: Hannover Ruckversicherung AG (Hannover Re–Germany); Hannover Re (Bermuda); XL Re Ltd.; Ace Tempest Reinsurance; Hiscox Insurance Co.; Partner Reinsurance Co.; Renaissance Reinsurance; and Tokio Millennium Re Ltd.
Florida was the first state to modify the collateral requirements; clearly, the other 49 states will look to us as a leader. (In January, New York authorized Hanover Re to write non-life reinsurance business with reduced collateral requirements. Hanover Re also was the first company to take advantage of the Florida rule in February 2010.)
NAIC Has Final Say
Despite the state statute, Florida must follow the final wording that the National Association of Insurance Commissioners (NAIC) and its reinsurance task force is currently developing in its revised collateral requirements. Florida must adhere to the NAIC's accreditation standards and to the Model Law on Credit for Reinsurance and its Credit for Reinsurance Model Regulation when the state submits its annual Financial Standards Self-Evaluation guide to NAIC staff for evaluation.
While Florida and the NAIC agree on many items, they differ in critical areas. Florida requires $100 million of surplus, a secure financial strength rating from two national rating organizations, and other criteria that must be maintained on a regular basis (though they are not specifically detailed).
The NAIC task force proposal requires $250 million of surplus, with percentage reductions in collateral based on two of the four primary national rating agencies. State insurance commissioners do have some discretion.
It is interesting to note that a foreign reinsurer would only be required to provide 20 percent collateral with $250 million of surplus and an "A" or "A-" rating. Furthermore, a "B++" or "B+" rating would yield a 75 percent collateral requirement.
More Work Needed in Florida
Whatever the task force ultimately recommends and NAIC adopts, Florida must work closely with the organization to assure that state accreditation criteria are compatible with the new NAIC rules. If the NAIC deems Florida's regulation inconsistent, Florida will find it difficult to insist that reinsurers that decreased their collateral based on state rules now raise those levels to NAIC standards.
While many of the largest national and international insurance associations, law firms, and insurance lobbyists overwhelmingly support collateral reduction, each is expressing concerns about the NAIC criteria. U.S. reinsurers must be heard as well. After all, any reduction of collateral for non-U.S. reinsurers will directly impact U.S. reinsurers, their potential business, and the premiums charged as a result of this "leveling of the playing field" with non-U.S. reinsurers.
The reliance of the NAIC on two rating agencies in determining something as significant and important as the amount of collateral being required is troubling. Whether they're top-rated, highly-regarded national agencies or not, the NAIC is placing to much reliance on carrier ratings. We've all seen how highly rated carriers have suddenly faced insolvency. While the $250 million surplus should eliminate some concerns, ratings are still just ratings.
One current proposal includes 25 percent collateral relief for a non-U.S. reinsurer rated only one level above that deemed marginal by these same agencies. Companies rated "A-" receive a 75 percent reduction in collateral when the very next level, "B++" drops to a 25 percent reduction. Objectivity in assigning ratings is a must.
Florida's OIR and elected officials must find innovative ways to lure insurance investment dollars, carriers and reinsurance companies. The thinly capitalized domestic carriers can no longer provide stability in this continually demanding and changing marketplace. While the regulator has attracted more carriers and additional reinsurers with the reduced collateral rule, much needs to be done for niche carriers.
Florida lawmakers are expected to pass legislation in 2011 that increases the minimum surplus requirements for certain lines of business. While this may be seen as providing greater security to policyholders, it certainly cannot be viewed as a method of expanding the marketplace with additional competitors.
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