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Proposed Florida Rule to Waive Reinsurers’ Collateral Requirements is ‘an Experiment’ that will Threaten Solvency, NAMIC Tells OIR

INDIANAPOLIS (April 29, 2008) – A proposed rule to allow alien reinsurers to pay reduced collateral amounts would likely create hardships for Florida insurance consumers and companies, according to the National Association of Mutual Insurance Companies (NAMIC). NAMIC testified against a proposed rule by the Florida Office of Insurance Regulation that would allow a reduction in the amount of collateral required of alien reinsurers.

“We believe very strongly that a relaxed collateral requirement will increase insolvency risk without a correlating benefit,” said Liz Reynolds, NAMIC’s Southeast state affairs manager. “In other words, potential pain with no gain.”

The OIR has said the intent of the rule is to increase catastrophe reinsurance capacity in Florida and stabilize or reduce rates. But Reynolds said it would likely have the opposite effect.

“What you are proposing is an experiment that eventually will make solvency regulation more difficult and may greatly aggravate the problems already being experienced by Florida insurance consumers and companies,” she said. “Unfortunately, that folly may only be revealed after catastrophes or events leading to a large number of claims, when it will be too late to rectify the situation.”

As Reynolds explained, the financial condition of a reinsurer may weaken abruptly and to such an extent that remedial amounts of collateral cannot be posted in a reasonable time period.

“Adverse circumstances, particularly the occurrence of a major weather catastrophe in a highly developed area as so much of Florida represents, magnify the financial stresses on reinsurers, whether B-rated or even A-rated, and, we believe on the solvency system,” she said. “Any financial entity under stress will be less able to forward more collateral. And where collateral is absent or late, the broader solvency system weakens for all.”

Reynolds added “it’s ironic that the OIR desires a regulatory stranglehold on the primary market, yet believes relaxing the solvency requirements on a portion of the reinsurance market you already are less able to monitor could be a solution to the risk management stresses of the Florida insurance marketplace.”

For further information, contact
Nancy Grover
Director - Media Relations
(202) 628-1558 Tel
(202) 628-1601 Fax
ngrover@namic.org