Ending Collateral Requirements for Non-U.S. Reinsurers – It’s Been a Long Time Coming

By | April 22, 2022

Financially strong EU and UK reinsurers will finally see the end of collateral requirements for business they write in the United States — changes that have been more than 20 years in the making.

Effective Oct. 1, 2022, reinsurers, which have “reciprocal reinsurer” status, no longer will have to post consumer protection collateral equal to 100% of the risk assumed from U.S. insurers. Such collateral includes letters of credit issued by authorized U.S. financial institutions.

Foreign regulators, politicians and reinsurers for many years have objected to the collateral requirement, arguing that it has put them at a competitive disadvantage because it reduces available capital, increases the cost of capital and ultimately results in higher premiums.

To qualify for these special reinsurance measures, the Lloyd’s Market Association explained that an assuming reinsurer must meet certain conditions:

  1. A reinsurer has at least €226 million (US$245.4 million) of own funds or capital and surplus
  2. A central fund contains at least €226 million
  3. A solvency ratio of 100% solvency capital requirement (SCR) under Solvency II
  4. The assuming reinsurer provides consent to the jurisdiction of the courts of the U.S. (Lloyd’s does this centrally).
  5. The assuming reinsurer consents to the host supervisory authority as agent for process of service (Lloyds does this centrally).

The change to the EU-U.S.-covered agreements was announced in 2017, while a separate UK-U.S. covered agreement was signed in 2018 after the UK decided to leave the European Union.

The National Association of Insurance Commissioners began considering some changes 2001 in the wake of the Sept. 11 terrorists attacks, when international interests submitted a proposal to establish a list of approved reinsurers. After all, non-U.S. reinsurers reportedly paid 64% of overall claims from 9/11, a figure that has been attributed to Dowling & Partners. According to Swiss Re, insured losses for 9/11 (inflated to 2021 dollars) totaled US$28.7 billion.

In February 2016, the U.S. government began negotiations with the EU, which concluded in January 2017. In October 2022, the rule changes are finally being enacted.

In exchange for the changes to the covered agreements, the EU and UK agreed to “not impose local presence requirements on U.S. firms operating in the EU, and effectively must defer to U.S. group capital regulation for U.S. entities of EU-based firms,” said the National Association of Insurance Commissioners.

The elimination of collateral requirements is prospective only and will apply to contracts written on or after Oct. 1, 2022. Contracts of U.S. reinsurance written on or after Oct. 1 will no longer be funded in the U.S. Credit for Reinsurance Trust funds, which will be closed to new business and will begin to be run off.

The LMA explained that contracts of U.S. reinsurance written prior to Oct. 1, 2022 will continue to be funded in the U.S. Credit for Reinsurance Trust Funds. “Collateral will not be eliminated for existing U.S. reinsurance contracts – existing collateral will continue to be adjusted on a quarterly basis as the Lloyd’s US Situs Credit for Reinsurance Trust funds run off.”

Further, the LMA said it is recommended that U.S. reinsurance contracts incepting on or after Oct. 1 make clear that the cedent is not a beneficiary of Lloyd’s U.S. Credit for Reinsurance Trust Funds and has no recourse to them.

The suggested wording is: “This agreement does not constitute an American Reinsurance Policy under the Lloyd’s U.S. Situs Credit for Reinsurance Trust Deed or the Lloyd’s American Credit for Reinsurance Joint Asset Trust Deed and the ceding insurer does not have recourse to those trust funds.”


Topics USA Reinsurance

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