Client Alert

New York Proposes to Change Collateral Requirements for Certain Unlicensed Reinsurers

December 29, 2008

The New York Insurance Department proposed a rule on December 24 which would reduce or, in some cases, eliminate the requirement that unlicensed reinsurers post collateral in the full amount of reinsurance recoverables in order for licensed ceding insurers to take financial statement credit. The proposed rule adjusts the credit that the ceding insurer may take based upon the financial strength of the unlicensed reinsurer.

In order to qualify for the reduced credit, the reinsurer must:

• maintain a minimum net worth of $250 million;
• be authorized and meet the standards of solvency and capital adequacy in its home state or country; and
• have separate credit ratings from at least two recognized rating agencies.
  

Under the proposal, reinsurers with the highest ratings possible from two of five specified rating agencies, such as Moody's and A.M. Best, would not need to post any collateral if they meet the other requirements. Reinsurers with progressively lower ratings from two rating agencies would be required to secure increasingly higher percentages of the liabilities. For example, a reinsurer with the second highest rating would have to secure 10% of the liabilities, and a reinsurer with the third highest rating would be required to secure 20%. The proposal does not address the situation where the rating agency has placed a reinsurer on credit watch but has not changed the actual rating.

Moreover, for an unlicensed reinsurer organized outside the U.S. to qualify for the reduced credit under the proposal, the New York Superintendent of Insurance and the domiciliary regulator of the reinsurer must have executed a memorandum of understanding which specifies how the two regulators will cooperate in overseeing the activities of the reinsurer. The Memorandum of Understanding, similar to the ones the Department has already concluded with France and Bermuda, need not refer specifically to the particular reinsurer, but must set forth the general terms of cooperation between the regulators, including access to information about insurers and reinsurers domiciled in the respective countries. Also, the government of the reinsurer's domicile must allow U.S. reinsurers access to its market on terms and conditions that are at least as favorable as those provided in New York laws and regulations for unlicensed non-U.S. reinsurers.

The proposed rule also imposes requirements on the licensed ceding insurer which seeks to take credit for the reinsurance. The insurer would have to maintain audited financial statements for the reinsurer for the last three years, and maintain satisfactory evidence that the reinsurer meets the requirements of the rule. The reinsurance contract itself would have to contain an insolvency clause, a designation of a person in New York or the insurer’s domestic state for service of process, and a requirement that the reinsurer will notify the insurer of any changes in its license status or any change in its rating from a rating agency. The reinsurance contract would also have to contain a service of suit clause by which the reinsurer submits to the jurisdiction of U.S. federal or state courts applying either New York law or the law of the ceding insurer's domiciliary state.

Although the text of the proposed rule states that disputes under the contract "are to be ...resolved" in those courts, it is not believed that the Department intended to prohibit the use of arbitration as a dispute resolution mechanism, as long as the reinsurer were subject to the jurisdiction in the U.S. courts for remedies such as motions to confirm arbitration awards. Had the Department intended such a significant change in its longstanding policy allowing licensed insurers to arbitrate disputes under reinsurance contracts, both the proposed rule and its summary presumably would have expressed that change.

Another part of the proposal imposes new reinsurance management, reporting and diversification requirements on licensed insurers. Insurers would have to notify the New York Insurance Department if a reinsurance recoverable amount from a single reinsurer or group of affiliated reinsurers equals 50% or more of its surplus, and if 20% or more of its gross written premium is ceded to any one reinsurer or group of affiliated reinsurers.

The text of the proposed rule is at http://www.ins.state.ny.us/r_prop/pdf/rp20a10t.pdf. Although no public hearing on the proposal is scheduled, interested parties will have until February 6, 2009, to submit written comments on the proposal.