Proposed Florida Rule Regarding Credit for Reinsurance

Issue Discussed: Security

Submitted by Paul R. Monsees

Date Promulgated: April 4, 2008

Issue Discussed: Summary of Florida Office of Insurance Regulation proposed rule regarding ceding insurers taking credit for reinsurance

The Florida Office of Insurance Regulation has proposed a new rule regarding credit for reinsurance. The rule would implement authority granted to the Insurance Commissioner in Section 624.610 of the Florida Insurance Code to permit a ceding insurer to take credit for reinsurance provided by certain reinsurers who have not posted 100% collateral. The proposed rule, Credit for Reinsurance from Eligible Reinsurers, was published on April 4, 2008 after a November 2007 workshop and a public comment period. A public hearing was then held on April 29, 2008 for the presentation of further comments on the proposed rule.

The Florida rule would permit a ceding insurer to take certain credit for reinsurance provided by an eligible reinsurer from an eligible jurisdiction. The amount of permitted credit would depend upon the financial strength rating of the eligible reinsurer and other factors.

In order for a ceding insurer to take credit, the reinsurer must be approved by an order of the Insurance Commissioner to be an “eligible reinsurer.” The applicant to the Commissioner requesting a finding of reinsurer eligibility must submit:

(1) the audited financial statements submitted to the reinsurer’s domiciliary regulator for the lesser of the last three years or from inception of the reinsurer’s business, which financial statements must be prepared pursuant to or include a reconciliation to GAAP or U.S. Statutory Accounting Principles;

(2) proof that the reinsurer submits to the jurisdiction of U.S. courts, appoints an agent in Florida to accept service of process, commits to post 100% collateral for Florida liabilities if it resists enforcement of a valid and final U.S. court judgment, and a list of the reinsurer’s disputed or overdue recoverables; and

(3) a certificate of good standing from the reinsurer’s domiciliary regulator.

In addition, an eligible reinsurer must hold surplus in excess of $100 million, must be authorized in its domiciliary jurisdiction to assume the reinsurance which the ceding insurer seeks to take credit for and must be domiciled in an “eligible jurisdiction.” Eligible reinsurers must also make annual filings with the Office of Insurance Regulation to include updated financial statements and updated lists of disputed or overdue reinsurance.

In determining whether a reinsurer is domiciled in an “eligible jurisdiction,” the Commissioner must find, among other things, that:

(1) the reinsurer’s jurisdiction “has a satisfactory structure and authority with regard to solvency regulation, acceptable financial and operating standards for reinsurers … acceptable transparent financial reports filed in accordance with generally accepted accounting principles, and verifiable evidence of adequate and prompt enforcement of valid U.S. judgments or arbitration awards”;

(2) that other reinsurers from the jurisdiction have a satisfactory history of performance; and

(3) that for non-U.S. jurisdictions, the jurisdiction allows U.S. reinsurers access to their markets on terms and conditions at least as favorable as Florida law provides to unaccredited non-U.S. assuming insurers.

If the Commissioner has made a finding that the reinsurer is eligible and is from an eligible jurisdiction, the ceding insurer may take certain credit for reinsurance provided by that reinsurer if the reinsurer maintains “on a stand-alone basis separate from its parent or affiliated entities” a secure financial strength rating from at least two of Standard & Poors, Moody’s Investors Service, Fitch Ratings, A.M. Best Company or any other rating agency which is recognized by the Office of Insurance Regulation.

Based on the strength of the financial rating, there is a sliding scale between 100-50% for the percentage credit that may be taken. For example, S&P and Fitch AAA ratings would warrant 100% credit while Best and Fitch ratings of B+ and BBB would warrant only 50% credit. However, if the financial strength rating would dictate taking credit for less than 100% of the reinsurance provided, the ceding insurer may still take credit for 100% of the liability ceded to the eligible reinsurer if the reinsurer maintains a trust fund in the United States which covers a certain percentage of the ceded liabilities. For example, if the reinsurer’s financial strength ratings from A.M. Best and S&P were A-, the ceding insurer would be entitled to 80% credit. The ceding insurer could take 100% credit if the reinsurer maintained a trust balance of at least 20% of the ceded liabilities.

There are additional provisions of the Proposed Rule such as a one-year deferral of the requirement to post collateral for certain lines of business if a liability was caused by a named hurricane.

There have been industry comments both for and against the proposed move away from collateral requirements. Some have expressed concern that an absence of collateral will make reinsurance recoverable collection more difficult and could adversely impact Florida insurer solvency. There was also a suggestion that the risk of a downgrade of the reinsurer’s financial strength rating falls on the Florida insurer who would potentially lose credit for reinsurance whereas there is no impact on the reinsurer. There was also a concern that the Florida rule would be more favorable to foreign reinsurers than other jurisdictions are to U.S. reinsurers. These opponents cited to a recent EU Directive that authorizes EU countries to eliminate collateral requirements for EU reinsurers and permits member countries to require U.S. and non-EU reinsurers to post collateral.

Groups in favor of the proposed rule suggested modifications to strengthen its effectiveness such as permitting reinsurer audited financial statements to comply with International Financial Reporting Standards rather than GAAP and by expanding the types of accounts that could be included in the $100 million surplus requirement.

The proposed rule is not yet in final form.

* Paul R. Monsees is a partner in the Insurance and Reinsurance Litigation Practice Group in the Washington, D.C. office of Foley & Lardner LLP.