Regulators seen lowering collateral requirements for foreign reinsurers

A general trend towards US insurance regulators lowering collateral requirements for foreign reinsurance companies is emerging, which will benefit the reinsurers and their bondholders, according to a report by rating agency Moody’s.

The report, authored by Moody’s vice president and senior credit officer Kevin Lee, said that the state of Florida’s decision to lower Bermudian reinsurer XL Re’s collateral requirements last Friday was part of an emerging trend by US regulators at the state and national level top lower collateral requirements for foreign reinsurers operating in the US.

It added that while more collateral provides additional security to policyholders and reinsurance buyers, that enhanced security comes at the expense of liquidity to the reinsurers’ unsecured creditors, making this latest news an incremental positive for reinsurers’ bondholders. This also comes as a welcome development to reinsurers as the cost of posting collateral via letters of credit and standby credit has doubled to quadrupled in some cases as banks have become more selective with their capacity.

Foreign reinsurers writing business in the US typically have to post 100% collateral so that clients can receive full regulatory credit for reinsurance. Moody’s said that according to regulatory filings, non-US reinsurers put up $23bn in letters of credit as of year-end 2009, versus total industry market capitalisation of $115bn, excluding Berkshire Hathaway and ACE.

So far, Florida regulators have agreed to lower collateral requirements for XL Re and Hannover Re based on a sliding scale, and more negotiations are in progress. Moody’s noted that other state regulators are following suit, with New York in particular circulating draft amendments similar to Florida’s rules.

On a national level, Moody’s said the National Association of Insurance Commissioners, the body representing US state insurance regulators, has been trying to extend the concept of reduced collateral requirements on a sliding-scale basis to all states by pushing a federal legislative approach.

The report adds that both the House and Senate versions of the US federal financial regulatory reform legislation contain reinsurance reform provisions that would make it easier for US insurers and their reinsurers to comply with state laws regulating reinsurance credit, though the provisions will not directly reduce reinsurance collateral requirements.