Effective 1 January 2011, the Superintendent of Insurance of the State of New York promulgated a revised regulation that could have significant effect on the amount of collateral unauthorized assuming reinsurers are required to post so that their ceding insurers can take credit for the reinsurance. Under the revised regulation, it is possible in some circumstances that a highly-rated alien insurer would not be required to post any collateral.

As with most states, New York regulates whether and how a ceding insurer can take credit on its financial statements for ceded reinsurance. New York had long required that, in order for a ceding company to take full credit for a cession to an unauthorized reinsurer (either an alien reinsurer from outside the US or one domiciled in a US jurisdiction other than New York), the unauthorized reinsurer was required to post collateral in the full amount of the credit the ceding insurer wished to take. Such collateral is usually posted by letter of credit or through a trust. The 1 January revision to Regulation 20 (11 NYCRR 125) provides a way for unauthorized reinsurers to achieve a reduction in the amount of collateral required to be posted – potentially down to zero.

The revision to Regulation 20 applies to reinsurance contracts entered into or renewed on or after 1 January 2011. The assuming reinsurer can apply to the Superintendent for one of five ratings that would be used for determining the minimum collateral that the reinsurer would need to post. The ratings are set out in the chart below:

Please click here to view the chart.

The maximum rating a reinsurer can receive is tied to the lowest financial strength rating the reinsurer receives from Best, S&P, Moody’s or Fitch. The determination of a security rating under Regulation 20, however, lies in the discretion of the Superintendent and goes beyond the financial strength rating. The reinsurer must submit an application to the Superintendent along with a US$10,000 nonrefundable application fee. (The rating must be renewed annually by submission of an application with a US$5,000 nonrefundable renewal fee.) The revised regulation provides that when setting a rating the superintendent may also consider factors such as, inter alia, the reinsurer’s “business practices in dealing with its ceding insurers,” “regulatory actions against the [reinsurer],” and “any other information deemed relevant by the superintendent.” The regulation also requires that the reinsurance contract between the ceding insurer and the reinsurer contain certain provisions, including one that would require the reinsurer to fund the entire amount for which the ceding insurer has taken credit if the ceding insurer enters any insolvency proceedings.

Shortly after the revision to the regulation became effective, Hannover Re became the first reinsurer to obtain a security rating, qualifying to post 20 percent of loss reserves rather than the previous 100 percent required. More recently, XL Insurance and XL Re also qualified to post collateral at 20 percent.

The full text of the regulation with the revised collateral provisions can be found on the New York Insurance Department’s website.