Florida Eyes Reduction in Collateral Requirement for Some Reinsurers

Gov. Crist and state officials suggest the change would free up more capacity but others question that theory

Insurance trade organizations believe a move by Florida Gov. Charlie Crist to reduce collateral requirements for foreign reinsurers in the state’s insurance market will adversely affect Florida consumers; Florida Insurance Commissioner Kevin McCarty believes the opposite.

While stopping short of promising rate reductions, McCarty said, “Theoretically it would affect price. It should make a difference in availability. Greater availability should affect price.”

But Paul Walther, chief executive officer of Orlando-based Reinsurance Directions Inc., believes collateral is a non-issue to reinsurers. He thinks insurers might be more inclined to buy reinsurance from a reinsurer that posts collateral.

“I understand where the governor is coming from, but it’s short-sighted to believe that reducing collateral will have any difference on capacity,” Walther said.

In December, Crist and the state Cabinet preliminarily approved the rule change that would lift a competitive disadvantage faced by foreign companies selling backup coverage to property insurers.

New York officials are considering a similar change in that state’s collateral requirements

The Florida Legislature passed a law last year that gives McCarty the ability to establish lower collateral requirements for foreign reinsurers that are highly rated and financially sound.

According to OIR spokesman Ed Domansky, Crist’s approval simply enables the process to move forward and paves the way for follow-up public hearings, which he said might take place as late as April.

Foreign reinsurance companies say current Florida rules make it harder for them to compete in the market because they must put up 100 percent collateral to conduct business in Florida, which is not required for domestic companies.

Domestic insurers oppose the rule change and are lobbying against it.

“We see absolutely no need for it — the system is working well as it is. We also disagree with OIR that reducing the collateral requirements could either increase reinsurance capacity or lower rates. There’s just no real evidence that either would occur,” said a spokesperson for the American Insurance Association.

In a letter of rebuttal AIA sent to the OIR, the organization contends that the majority of current Florida cessions to reinsurers are written on a collateralized basis so it is extremely difficult to make the argument that collateral somehow works as an impediment to entry into the reinsurance market, or that removing collateral requirements will somehow increase reinsurance capacity.

AIA added, “There is actually the potential that eliminating or reducing collateral may reduce capacity if insurers believe that recoverables are more risky without collateral because insurers may be less willing to purchase reinsurance from unauthorized reinsurers without collateral. In any event, nothing suggests that collateral limits capacity in the market or that eliminating collateral would increase capacity.”

Mike Koziol, assistant vice president for the Property Casualty Insurers Association of America, agreed with AIA’s stance: “The rule is not in the best interests of Florida consumers and insurers.”

Koziol questioned the ultimate financial benefit for Florida citizens. Capital will move to where it brings the best return. Presuming collateral reduction frees up reinsurance capital, collateral might just as easily go to a different state, a different line of business, or for that matter, a different country, he said.

Crist often has criticized insurance companies for raising rates even though the Legislature this year passed a new law that was expected to reduce them.

“Some of these U.S. companies have not been very good to Florida,” Crist said. “Expanding competition I think is a very good thing.”

McCarty said the OIR will proceed very cautiously. “We’re not extending this very broadly. We’re looking at companies that are well known names and have established reputations that have had relationships with Florida companies,” he said.

Koziol said the most significant concern is that a ceding company with a reinsurer that has posted reduced collateral will seek increased collateral from that reinsurer at a time when the reinsurer is experiencing financial difficulty.

AIA said insurers domiciled in Florida would potentially face serious compliance problems if they sought to take statutory annual statement reinsurance credit in other states.

In turn, Florida domiciled insurers would be at a serious competitive disadvantage in other states and would be harmed in their ability to spread risk and transact business throughout the country, according to the AIA.

Collateral or the absence of it will have no bearing on price or competition, according to Walther, but he says there is a legitimate risk that the cash won’t be there when needed if there is no collateral.

“There should be contract provisions in place where reinsurance companies must have pre-funding for exposure and be prepared to fork it over when needed,” Walther said. “They should have the ability to respond immediately to disaster when the need for cash is immediate.”

There are all kinds of exposures coming out of the woodwork in Florida — some with very long tails, Walther said.

“If a foreign reinsurer is not licensed in Florida, why shouldn’t they continue to put up collateral?” he asked.

“As a Florida consumer, I want to be sure my insurance company can live up to their obligations. As an insurer, I would want to be sure I can reclaim 100 cents on the dollar for reinsurance I bought. In the issue of security versus capacity, my security is paramount.”

Topics Florida Carriers Reinsurance