Reinsurer becomes the first to qualify as an eligible reinsurer under new collateral terms

Florida’s insurance regulator has made an agreement with Hannover Re allowing the company to submit less collateral in recognition of its commitments in the state.

It is part of a new system that encourages foreign reinsurance companies to join Florida’s marketplace by reducing collateral requirements. The plan was first promoted by the Florida Legislature as a result of the 2007 Property Insurance Special Session.

Hannover Re already participates in the Florida market through reinsurance lines including property. Hannover Re said: "We welcome the agreement with the Florida Office of Insurance Regulation. Hithero as a non-US reinsurer we had to post collateral amounting to 100% of our liabilities. The new agreement allows us to reduce the collateral requirements to 20%, which positions us on more equal terms with domestic reinsurers. We expect that other states in the USA will follow this example."

Insurance Commissioner Kevin McCarty said: "Reaching an agreement with one of the world’s largest reinsurers is a significant accomplishment.

"Modernising 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 presented information to the Florida Office of Insurance Regulation (FLOIR) to demonstrate its financial stability including ratings information and details of its $4.6bn capital and surplus. Hannover Re is the fourth largest reinsurance group in the world, according to AM Best’s Global Top 40.

The Florida regulator said there are no other pending applications, but that it would welcome applications from other companies.

The National Association of Insurance Commissioners and other member states have 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 Office and Hannover Re is the first of its kind, although other states are actively considering adopting similar provisions.

In September 2008, the Florida Cabinet approved a rule based on the 2007 legislation allowing FLOIR to establish 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; the loosening of these restrictions will potentially attract foreign reinsurers to reinsure more Florida catastrophe risk by lowering the cost, at least incrementally. Moreover, the changes to collateral requirements may encourage future investments and commitments to write catastrophe business in Florida.

Currently, over 90 percent of reinsurance for Florida property insurance is provided by reinsurance companies located in foreign countries. In 2005, Hurricanes Katrina, Wilma and Rita caused an estimated $72.7bn in insured losses; reinsurers paid roughly 61% of this total cost.