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New York To End Reinsurance Collateral Rule

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New York Insurance Superintendent Eric Dinallo broke away from other states’ regulators and said today that he plans to do away with collateral requirements for foreign reinsurers with good financial ratings.

The proposed regulation, which some insurance groups oppose, would take effect in July 2008.

Under the proposed rule, the highest rated U.S. and non-U.S. reinsurance companies not authorized or accredited to do business in New York would 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 under way for years at the National Association of Insurance Commissioners, Kansas City, Mo.

Earlier this year, an NAIC task force considered the idea of creating a Reinsurance Evaluation Office. The REO would help set collateral requirements and rate collateral for all reinsurers. That initiative has not gone forward.

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 “We cannot afford to maintain outdated and unnecessary standards for the international market for reinsurance.”

New York’s current collateral regulation 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, Dinallo says.

Today, 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% 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 ranging from 10% to 100%. This rule 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.

Eliminating collateral requirements would reduce transaction costs, increase reinsurance capacity, and bring New York in line with global insurance markets and international reinsurance accounting standards, Dinallo says.

Most other jurisdictions do not require collateral from non-domestic reinsurers, Dinallo says.

Insurers still could negotiate their own collateral requirements or choose to do business with reinsurers that post collateral, Dinallo says.

The New York department will be circulating a working draft of the proposed regulation asking for comments.

NAIC President Walter Bell, Alabama insurance commissioner, has issued a statement stating that the group recognizes that New York operates as a sovereign regulatory authority.

“We applaud the New York department for its leadership and innovation in this first initiative of reinsurance modernization,” Bell says in the statement. “We look forward to working with them in the ongoing national dialogue to modernize U.S reinsurance regulation.”

Bell notes that the NAIC reinsurance task force will be addressing the topic of collateral in November, during a meeting in Atlanta.

Under the proposed regulation, any unauthorized or unaccredited reinsurer:

o With an AAA credit rating from two rating agencies would have to post no collateral. Those with an AA or equivalent rating would have to post collateral equal to 10% of claims, A, 20%; and BBB, 50%. Reinsurers with a rating below BBB would still be required to post collateral equal to 100% of claims.

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 matters such as information-sharing 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% 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 would have responsibility for vetting the reinsurers and developing risk management plans for reinsurance placements.

The superintendent of insurance would retain final authority over any particular transaction.


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