Connecticut is the latest state to liberalize collateral requirements for foreign-based reinsurers, and California could be next on the list, after a similar bill passed that state’s Senate.
Connecticut Gov. Dannel Malloy on June 4 signed Public Act 139, a bill that aligns the state’s credit for reinsurance law to comport with a new model act and model regulation adopted by the NAIC last year.
Under the old model that existed across the states, foreign reinsurers had two ways to access the U.S. market. They could establish an American subsidiary, which could write “on-shore” coverage that would be treated as if were written by a domestic company. Or, alternatively, they could write coverage across the border, but they would be required to post 100% collateral for any obligations they took on.
The NAIC finally altered its recommended system for granting credit for reinsurance purchased by regulated companies after a lengthy and controversial debate that pitted many foreign reinsurers, who protested that the rules were protectionist, against domestic primary insurers, who insisted that the collateral was necessary to ensure that claims could be pressed against companies not subject to U.S. law.
Under the new Connecticut law – which is similar to bills already adopted in Florida, New York, New Jersey and Indiana – the state’s insurance commissioner could apply a sliding scale when evaluating reinsurance purchased by domiciled companies from alien reinsurers. The rules would consider both the reinsurer’s financial strength and the strength of the regulatory environment where it is based, with less collateral required from strong companies based in reliable jurisdictions.
Late last month, the California Senate passed a similar bill S.B. 1216, which has since moved to the state Assembly. In addition to reforming its reinsurance collateral system, California’s bill also aligns state law with provisions of the Dodd-Frank Act that prohibit states from applying local solvency regulations to reinsurers on an extraterritorial basis.
“I am pleased that the Senate has passed these bills which will ensure that the Insurance Commissioner and the Department of Insurance have the authority and regulatory tools needed to protect consumers,” California Insurance Commissioner Dave Jones said in a statement.