N.Y. Proposal Prompts States to Rethink Regulation of Reinsurers

October 25, 2007

As the reinsurance industry increasingly moves offshore, U.S. insurance regulators are rethinking current rules that require only non-U.S. reinsurers to post collateral equal to the full amount of their liabilities to U.S. insurers.

Foreign reinsurers have long fought against the rule, which British insurance market Lloyd’s of London has called “outdated and anticompetitive.”

New York Insurance Superintendent Eric Dinallo recently said his state will drop the collateral rule for the best-capitalized foreign reinsurers and adopt a sliding scale for others. Although New York is the first state that says it will drop the restriction, the main assocoation of state regulators has called for the change, and other states are likely to follow New York’s lead, industry experts say.

The proposed New York change, which could take effect next year after a public comment period, “will help attract more capital to the New York reinsurance market, which should help lower costs and benefit consumers and businesses purchasing insurance,” Dinallo said in a statement.

Dinallo cited a growing need for terrorism and natural catastrophe reinsurance in New York. He estimated that foreign reinsurers had around $120 billion (euro84.7 billion) in collateral posted in the Unites States in 2005, costing them $500 million (euro353 million) a year in transaction expenses. The rule change would free up that money to cover risk, he said.

Andrew Barile, principal of Andrew Barile Consulting Corp. of Rancho Santa Fe, California, said it was just a matter of time until the change is adopted in more states.

“The reinsurance industry is global, and we have to take that into consideration, no matter how big our egos are,” Barile said.

He noted that a flood of international capital is coming into the reinsurance business, with potential new entrants from China and Dubai reinforcing the dominance of foreign reinsurers.

Florida, which has experienced an insurance crisis as insurers cut back in the state after two record storm years in 2004 and 2005, has sought to bring more reinsurance capacity into the market by doubling the size of its own, state-funded reinsurance pool. A spokesman for Florida’s office of insurance regulation said that the state also will give strong, well-regulated foreign reinsurers more lenient treatment regarding reserves.

State insurance regulators largely favor dropping or relaxing the rule in the expectation of bringing more capital to the market to help cover risks from hurricanes, earthquakes and terrorism, especially as some U.S. insurers have begun cutting back their exposure in catastrophe-prone areas.

The National Association of Insurance Commissioners has come out strongly in favor of following New York’s model, putting regulators at odds with a major association representing U.S. insurance companies, which are the primary customers for reinsurance coverage.

In a recent paper, Steven Bennett, assistant general counsel of the American Insurance Association, an insurance trade group, said the rule should stay in place because it “plays a critical role in securing U.S. ceding insurer solvency and in persuading reinsurers to pay recoverables due in a prompt and appropriate manner.”

The AIA and others representing property/casualty insurers have argued against changing the rule.

According to the Insurance Information Institute, an industry trade group, six of the top 10 reinsurers worldwide are headquartered outside the U.S., with Swiss Reinsurance topping the list.

According to the Reinsurance Association of America, foreign-owned reinsurers collected 84.5 percent of reinsurance premiums paid by U.S. insurers in 2006, a slight decrease from the year before. In 2006, the total of net reinsurance recoverables owed to U.S. ceding insurers was $242 billion. Of that, $114 billion, or 47 percent, was recoverable from foreign-owned reinsurers.

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Lavonne Kuykendall is a correspondent of Dow Jones Newswires.

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