1 February 2011News

New York: in Florida's footsteps

First out of the blocks

The New York State Insurance Department (NYSID) has opted to follow the lead of the Sunshine State—by allowing foreign reinsurers to post signifi cantly reduced collateral in order to do business in the state. Hannover Re became the fi rst foreign reinsurer to take advantage of the reduced requirements, announcing its successful application on January 12 this year, an action that mirrors its move in February of last year when it became the fi rst foreign reinsurer to take advantage of Florida’s reduced limits. And on February 17, XL Group—XL Re and XL Insurance (Bermuda)—became the second foreign reinsurer to qualify for reduced collateral status in the state.

Addressing the move, Hannover Re CEO, Ulrich Wallin, indicated that New York’s actions were a positive step, making clear that the move “improves free access for international reinsurers to the US market”. XL CEO, Mike McGavick, echoed Wallin’s sentiments stating that “the elimination of unnecessary collateral requirements on foreign insurers and reinsurers is not only benefi cial for the individual companies but for the industry as a whole”. And it seems likely that others will follow in their footsteps as companies look to reduce collateral requirements in key US markets.

The case for New York

Asked why New York had opted to reduce its collateral requirements, NYSID superintendent James Wyrnn said: “It just does not make sense that for a BB-rated US licensed companyno collateral is required, but for an AAA-rated unauthorised alien company, 100 percent is needed. Under the new regulation, wellcapitalised reinsurance companies with the highest credit rating that are not authorised or accredited to do business in New York will be treated the same as authorised companies: they will no longer have to post any collateral. Companies that are not as strong will have to post collateral on a sliding scale from 10 to 100 percent. This shifts responsibility for credit risk management and compliance to ceding companies.”

The move “creates alternative credit for cessions to unauthorised reinsurers (both US and non-US) based on creditworthiness (lowest rating from two rating agencies) and other solvency factors; a minimum net worth of $250 million; a memorandum of understanding and reciprocity with any non- US jurisdiction; and required contract terms, including being subject to the laws of the US for attachment purposes.”

“We cannot afford to maintain outdated and unnecessary standards for the international market for reinsurance. This new regulation recognises the reality of global markets and frees up capital, which will increase capacity in the reinsurance market,” Wyrnn said.

Following the decisions of Florida and New York, it seems that New Jersey is likely to become the third US state to reduce its collateral limits for foreign reinsurers. And there may yet be more takers, with National Association of Insurance Commissioners guidelines helping to create a framework for interested states, and with those that cede significant reinsurancecoverage to overseas reinsurers most likely to be considering such a move.

Florida: a continuing draw

Meanwhile, Florida extended reduced collateral limits to a host of foreign reinsurers as the industry looks to benefi t from reduced collateral limits—Hannover Re (Germany), XL Re (Bermuda) and Hannover Insurance (Bermuda); being joined by Ace Tempest (Bermuda), Allied World (Bermuda), Hiscox (Bermuda), PartnerRe (Bermuda) and RenaissanceRe (Bermuda)—all having signed reduced collateral agreements with the state. Bermuda’s key role as a reinsurance partner for the Florida market is evident from the list of players, and it seems likely that other Bermuda players with a signifi cant market share in the state may also look to reduce their collateral requirements.

Asked about potential future uptake, the Florida Office of the Insurance Regulator (FLOIR) indicated that “the Offi ce is optimistic that additional reinsurers will continue to maximise the fl exibility awarded to qualifi ed companies through these reduced collateral agreements. The intent is to encourage additional investment in Florida’s property insurance market.”

It is evident that both states perceive the presence of foreign reinsurers as beneficial to their reinsurance markets, with international reinsurance helping to diversify risk into the global market, thereby creating a more competitive marketplace and reducing costs for the end customers. And with New Jersey looking likely to follow suit, more US states will likely consider the advantages of a less prescriptive approach to foreign reinsurers.