In the wake of New York Superintendent Eric Dinallo’s announcement that New York was changing the rules surrounding collateral requirements for foreign reinsurers, it was reported last week that several other U.S. states are contemplating similar changes.

As we previously discussed here, Dinallo’s proposal would end the current rule in New York whereby foreign reinsurers are required to post collateral equal to the full amount of their liabilities to U.S. insurers in order to conduct business in the state. The new system would base collateral requirements on a sliding scale, exempting well-capitalized foreign insurers from posting collateral while requiring less-capitalized reinsurers to post collateral ranging from 20% to 100% of their liabilities. The proposal was hailed by foreign reinsurers, who have long opposed the old rule. The change is designed to attract additional capital to the New York reinsurance market. Additional capacity is necessary to help cover risks posed by natural disasters and terrorism.

In light of New York’s rule change, a spokesman for the Florida Office of Insurance Regulation has stated that Florida will give strong, well-regulated foreign reinsurers more lenient treatment regarding reserves. Other state regulators are expected to follow New York’s lead to increase capacity in their own markets. The National Association of Insurance Commissioners has expressed its support for the New York model.

Not everyone is pleased with the move to relax collateral requirements for foreign reinsurers. The American Insurance Association (“AIA”), an insurance trade group, has argued that the current scheme should stay in place as it “plays a critical role in securing U.S. ceding insurance solvency and in persuading reinsurers to pay recoverables due in a prompt and appropriate manner.” However, the AIA may be fighting a losing battle, as press reports suggest that industry experts expect other states to follow New York’s lead. Whether these changes have their intended result remains to be seen.

We will continue to monitor developments on