New Jersey and Indiana have enacted legislation granting their insurance commissioners discretion to reduce the amount of collateral required from un¬authorized and unaccredited reinsurers in order for domestic cedents to receive full financial statement credit for reinsurance.

To be eligible for reduced collateral, both states require such reinsurers to have surplus in excess of $250,000,000; however there are several distinctions between the New Jersey and Indiana enactments.

New Jersey

New Jersey’s Reinsurance and Surplus Lines Stimulus and Enhancement Act (A2670/ S2010, enacted as P.L.2011, c.29, the “NJ Act”) was enacted March 22, 2011 in an effort to grow New Jersey’s economy and create jobs. Accordingly, to be eligible for reduced collateral, reinsurance must be negotiated at least in part by a reinsurance intermediary or representative of the reinsurer acting in New Jersey. In addition, in determining whether credit should be allowed, the Commissioner is required to consider the reinsurer’s and its affiliates’ use of New Jersey professional service providers, along with other factors, which largely relate to the reinsurer’s solvency and the adequacy of the reinsurer’s domiciliary regulator.

The New Jersey Department of Business and Insurance is expected to issue regulations providing additional standards, as the only eligibility requirements imposed by the NJ Act are that the reinsurer maintain $250,000,000 in surplus and that the reinsurance be negotiated at least in part by a New Jersey intermediary. We anticipate that those regulations will include specific credit rating requirements as a condition to lower collateral postings.

Reduced collateral is available under the NJ Act for reinsurance contracts entered into or renewed on or after March 22, 2011, with the exception of life reinsurance contracts, which are not eligible for reduced collateral until the earlier of March 22, 2013 or the date upon which the NAIC implements principles-based standards for life insurance reserving.

Indiana

For eligibility under Indiana’s HB 1486 (enacted as PL 11, 2011, the “IN Act”), effective April 6, 2011, reinsurers must meet a number of requirements in addition to maintaining surplus or equivalent in excess of $250,000,000. For example, such reinsurers must agree to be subject to the jurisdiction of U.S. courts and must submit an application and annual filings to the Commissioner. In determining whether credit should be allowed, the Commissioner is required to consider certain factors enumerated in the IN Act relating to the reinsurer’s financial strength and the adequacy of its domiciliary regulator. Like New York, Indiana restricts the level to which collateral may be reduced based upon the financial strength ratings of the reinsurer. In addition, the Commissioner is required to publish a list of alien jurisdictions whose reinsurers may be approved for reduced collateral and to monitor such jurisdictions on an ongoing basis.

With this change, New Jersey and Indiana become the third and fourth states to relax their reinsurance collateral requirements. As the NAIC has endorsed such reduced collateral requirements in its Reinsurance Regulatory Modernization Framework and is considering amending its Model Credit for Reinsurance Law and Regulation in a similar manner, it is likely that other states will soon follow suit.