Florida regulator proposes scrapping 100% collateral requirements for foreign reinsurers

The Florida Office of Insurance Regulation (Office) today held a public hearing to ask for input on a draft rule that would implement 2007 legislation giving the insurance commissioner discretion to allow unaccredited reinsurance companies to conduct business in Florida without having to post 100% collateral.

In early 2007, the Florida Legislature passed a law that gives the insurance commissioner the ability to establish lower collateral requirements for foreign reinsurers that are highly rated and financially sound.

The office is exploring whether this may lead to more reinsurance capacity to increase the supply of insurance in the Florida market.

"It is important for Florida that highly capitalised, well-regulated foreign reinsurers be allowed to conduct business with Florida insurers without requiring them to post millions of dollars in collateral," said Insurance Commissioner Kevin McCarty.

"It will lead to increased capital and competition in our state, and it will help to stabilise and potentially reduce property insurance rates."

When an insurance company buys reinsurance from a reinsurer authorised or accredited in Florida, the insurer gets a favourable accounting credit. US-licensed and Florida-accredited reinsurers do not have to post collateral under current law.

Reinsurance is insurance for insurance companies. In the property insurance market, it is purchased to cover catastrophic losses that exceed what the company could pay out on its own. The cost of reinsurance is one component included in the cost to the homeowner of a property insurance policy.

For an insurer to get favourable accounting credit for reinsurance purchased from an unaccredited reinsurer, even if the unaccredited reinsurer is worth billions of dollars and is well regulated, the reinsurer has traditionally been required to post collateral for the full amount of the risk transferred. This collateral requirement is a barrier to investment by foreign reinsurers in the Florida market.

Following review of comments from today’s public hearing, the rule will next be presented to the Florida Cabinet for final approval. No date has yet been set for that presentation.