Florida Recruits First Reinsurer Under Relaxed Collateral Rules

Florida insurance officials have reached an agreement with the first foreign reinsurer to operate under collateral requirements that were reduced in 2008 in an attempt to attract new reinsurers to the state.

The Florida Office of Insurance Regulation said it has reached an agreement with Hannover Ruckversicherung AG (Hannover Re) to qualify as the state’s first reinsurer to capitalize on the terms. Hannover Re already participates in the Florida market by reinsuring Florida property insurance as well as reinsuring other lines.

In September 2008, the Florida Cabinet approved a rule based on 2007 legislation allowing the OIR to lower collateral requirements for foreign reinsurers that are highly-rated and financially sound. Prior to this development, in Florida and other states, non-United States based reinsurance companies generally were required to post 100 percent collateral while United States insurers posted no collateral.

The 2007 law and rule allow reinsurers that qualify based on their financial capabilities to operate in Florida with reduced collateral; the Florida companies can still receive full accounting credit for having reinsurance.

The collateral requirement has been cited as a barrier for foreign insurers to invest in Florida. Backers of the lower requirements believe loosening of these restrictions will potentially attract foreign reinsurers to reinsure more Florida catastrophe risk by lowering the cost, at least incrementally.

“Reaching an agreement with one of the world’s largest reinsurers is a significant accomplishment,” said Insurance Commissioner Kevin McCarty. “Modernizing insurance regulations to attract additional capital is good for competition, and good for the Florida insurance marketplace. Florida is the first state to take advantage of this concept, which will make our state a national leader in attracting international reinsurance capital.”

Hannover Re is domiciled in Germany, and through the application process, Hannover Re reported $4.6 billion in capital and surplus. It also has secured a financial rating indicating financial strength from at least two nationally recognized statistical rating organizations and has presented information to the OIR substantiating its financial stability. Reuters News Agency reports indicate that Hannover Re is the fourth largest reinsurance group in the world.

The National Association of Insurance Commissioners and other member states have already taken action to change accounting procedures to allow accounting credit for financially stable foreign reinsurers, in contrast to the historical practice of relying on United States domiciled reinsurers. The agreement between the Florida OIR and Hannover Re is the first of its kind, although other states are actively considering adopting similar provisions. Currently, over 90 percent of reinsurance for Florida property insurance is provided by reinsurance companies located in foreign countries.

Reinsurance continues to be an important part of the property insurance market in the United States. In 2005, Hurricanes Katrina, Wilma and Rita caused an estimated $72.7 billion in insured losses; reinsurers paid roughly 61 percent of this total cost.

Source: Florida Office of Insurance Regulation