The New York Insurance Department (the”NYID”) has recently adopted a change in its regulation of multi-beneficiary reinsurance trusts (“MBTs”) to accommodate non-U.S. reinsurers in run-off. As a result, the NYID may now permit such a reinsurer to reduce the surplus maintained in its MBT to an amount below the previously required minimum of $20 million.
Non-U.S. reinsurers are permitted to obtain accredited or approved reinsurer status in the various states by establishing an MBT for the benefit of U.S. cedents as an alternative to individual collateralization. Heretofore, all of the states have required that these reinsurers maintain a minimum surplus of $20 million. That level of surplus becomes problematic when the reinsurer goes into run-off and its covered reinsurance liabilities diminish and become disproportionally small when compared to that surplus amount.
The NYID has recently amended Regulation 20 to permit a reduction in the minimum surplus to less than $20 million if: (i) the reinsurer has permanently discontinued underwriting new business secured by the trust for at least three full years; and (ii) the Superintendent finds, based on an assessment of the risk, that the MBT surplus is adequate for the protection of U.S. ceding insurers, policyholders and claimants in light of reasonably foreseeable adverse loss development. However, the minimum surplus may not be reduced to an amount less than 30 percent of the reinsurer’s covered reinsurance liabilities.
This change will allow adjustment of MBT surplus in light of covered reinsurance liabilities, ease the potential cash-flow strain on the reinsurer and enhance the reinsurer’s ability to manage liquidity.
New York’s action is only the first step in solving the problem that these companies face. In order to fully address the problem, other states must follow New York’s lead. The NAIC is currently in the process of amending its Model Law on Credit for Reinsurance and is considering following New York’s action. Nationwide action is important if the reinsurer wishes to maintain its accredited/approved status in the other states where its cedents are domiciled.
Stewart Keir, a Financial and Regulatory Specialist in the New York office of Locke Lord, assisted Tawa Management, Ltd., a U.K. run-off manager, in its efforts to modify the New York regulation and the NAIC Model Law.