NY Reinsurance Collateral Proposal
In October, 2007 Insurance Commissioner Eric Dinallo announced his plan to change the regulations relating to posting collateral for reinsurance companies in New York. Currently, any U.S. or non-U.S. reinsurance company that is not authorized or accredited to operate in New York must post collateral equal to 100 percent of its share of policyholder claims. Under the new regulation, well-capitalized reinsurance companies with the highest credit rating that are not authorized or accredited to do business in New York will be treated the same as authorized 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 percent to 100 percent. This applies to both U.S. and non-U.S. insurers not authorized or accredited in New York.
Commissioner Dinallo argues that adoption of this regulation will reduce the transactional cost and increase reinsurance capacity. He also feels that it will bring New York in line with global insurance markets and worldwide accounting standards governing insurance contracts.
The main components of the proposed regulation are as follows:
- Unauthorized or unaccredited reinsurers with a triple A credit rating from two rating companies 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.
- In addition to the credit rating, to qualify for the no or reduced collateral treatment, the reinsurer must (1) meet the standards of solvency, including standards for capital adequacy, established by its domestic regulator; (2) be authorized in its domiciliary jurisdiction to assume the specific kind of reinsurance it is offering; (3) maintain a policyholder's surplus or equivalent in excess of $250,000,000; (4) accept required contract terms, including consent to the jurisdiction of U.S. courts for disputes; (5) 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; (6) be domiciled in a country that allows U.S. reinsurers access to its market on similar terms.
- All unauthorized and unaccredited reinsurers will be required to post 100 percent collateral upon entry of an order of rehabilitation, liquidation, or conservation against the ceding insurance company.
- Collateral requirements will not change for authorized reinsurers; they will still not be required to post any collateral. However, new safeguards will be put in place to help ensure the ability of these reinsurers to cover claims and thus protect consumers.
- 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 will retain final authority over any particular transaction.
Florida Reinsurance Collateral Proposal
Florida Insurance Commissioner Kevin McCarty has proposed a rule to remove collateral requirements for foreign reinsurers who meet certain credit standards. In the 2007 Florida legislative session, the legislature passed a bill allowing the Insurance Commissioner to reduce collateral rates. This measure is similar to a proposal which has been proposed by New York Insurance Commissioner Eric Dinallo. Governor Charlie Crist has given preliminary approval to the proposal.
The key components of this legislation are:
- With respect to reinsurance contracts entered into or renewed on or after January 1, 2008, a ceding insurer may elect to take credit, as an asset or deduction from reserves, for reinsurance ceded to an eligible reinsurer, provided that the assuming insurer holds surplus in excess of $100 million and maintains, on a stand-alone basis separate from its parent or any affiliated entities, and a secure financial strength rating from at least two of the rating agencies.
- The Commissioner may, by order, determine that credit shall not be allowed to any insurer for reinsured risk pursuant to this rule if it appears to the Commissioner that granting of the credit to the insurer would not be in the public interest or serve the best interests of the insurer's solvency.
- An insurer may not take credit pursuant to this rule unless:
- The reinsurer has been determined, by order of the commissioner, to be an eligible reinsurer, pursuant to subsection 6 of this rule;
- the ceding insurer maintains satisfactory evidence that the unaccredited assuming insurer meets the standards of solvency, including standards for capital adequacy, established by its domestic regulator;
- all reinsurance contracts between the ceding insurer and the unaccredited assuming insurer:
- require the unaccredited assuming insurer to notify the ceding insurer and the Office in writing, within 30 days, of any change in domiciliary license status;
- require the unaccredited assuming insurer to notify the ceding insurer and the Office in writing, within 30 days, of any change in its rating status;
- provide that the reinsurance shall be payable by the assuming reinsurer on the basis of the liability of the ceding reinsurer under the contract reinsured without diminution because of the insolvency of the ceding insurer;
- require any unaccredited assuming insurer to designate a person in Florida as its true and lawful agent upon whom may be served any lawful process in a dispute, action, suit, or proceeding instituted by, or on behalf of, the ceding insurer; and
- include the following provisions:
- any dispute, suit, action or proceeding under the contract, or any dispute, suit, action or proceeding arising out of, directly, indirectly, or incidentally, or related to the contract or of the transactions and actions arising from performance of the contract are to be subject to the jurisdiction, and resolved in the courts, of the United States or any state thereof, and that the assuming insurer submits to the personal jurisdiction of such court; and
- Any dispute, suit, action or proceeding under the contract, or any dispute, suit, action or proceeding arising out of, directly, indirectly, or incidentally, or related to the contract or of the transactions and actions arising from performance of the contract are to be governed by and construed in accordance with the laws of the State of Florida.
NAIC Collateral Proposal
In the Winter meetings held in February, the Reinsurance Task Force voted unanimously to accept the Reinsurance Regulatory Modernization Framework Memo. The three basic principles of the framework are:
- establishing a new NAIC entity called the Reinsurance Supervision Review Department (RSRD) which will assess regulatory effectiveness through an "outcomes-oriented" approach and determine which non-U.S. jurisdictions are entitled to enter into mutual recognition agreements
- allowing a domestic reinsurer to access the U.S. market upon certification by its state of domicile or another appropriate U.S. regulator
- allowing a non-U.S. reinsurer from an RSRD-approved jurisdiction to be certified to access the U.S. market through one jurisdiction, referred to as the "port of entry."
The group discussed several outstanding issues that must be looked at further including:
- appropriate collateral levels from 0-100% on a prospective basis
- what ensures uniformity between states
- what prevents inappropriate extraterritorial applications of state law
- whether to facilitate or establish a security fund.
Both New York and Florida voted for this memorandum despite having their own state proposals. New York stated that it differs from the NAIC proposal on the issue of "port of entry" for non-U.S. regulators as it places the burden of certification on the ceding company while the NAIC governs by uniform minimum standards established by the Reinsurance Supervision Review Department.
California Fire Protection Surcharge
Governor Arnold Schwarzenegger has proposed a surcharge on all property insurance premiums sold in the state of California. This surcharge has been placed in the budget which was presented to the California legislature on January 10. The measure has stirred up controversy as legislators from urban areas are raising concerns about their constituents being forced to pay a fee to support fire protection for those who insist on living in more fire prone areas. Some Republican members in the legislature have expressed concerns that this is nothing more than a tax increase. The CA State Firefighters Union is supportive of this measure. California Insurance Commissioner Steve Poizner is opposed to this proposal and has said that it violates the state constitution.
State Gun Control Legislation
In 2004, Oklahoma passed legislation which prevents an employer from prohibiting employees from keeping guns locked in their parked cars on the employer's parking lot. That legislation went through the court process and was struck down by a federal judge in Tulsa, Oklahoma, in 2007. Alaska, Kansas, Kentucky, Minnesota, and Mississippi have also passed similar legislation. Arizona, Tennessee, Georgia, and Florida are currently considering similar legislation. The National Rifle Association (NRA) is the leading advocate of this legislation, while business owners are generally opposed.