XL Re gains special status in Florida
XL Re gains special status in Florida XL Re has achieved special status in Florida and now qualifies for lower collateral requirements.
The Bermuda-based company is only the second international reinsurer to be registered as an ‘eligible reinsurer’ by the Florida Office of Insurance Regulation. It comes after Florida passed a rule based on 2007 legislation allowing the Florida insurance regulator to establish lower collateral requirements for select foreign reinsurers that are highly rated and financially sound.
In its consent order, the Florida Office of Insurance Regulation (FLOIR) cited various reasons for granting approval to XL Re Ltd, including its secure financial strength ratings and its domiciliary regulatory jurisdiction.
Jamie Veghte, chief executive officer of XL’s Reinsurance Operations, said that Florida is “helping to lead the way in eliminating unnecessary collateral requirements on foreign reinsurers”.
Rating agency Moody’s says that the development in Florida is part of an emerging trend by US regulators at both the state and national level that has the potential to lower collateral requirements for foreign reinsurers when they operate in the US.
“While more collateral provides more security to policyholders and reinsurance buyers, that enhanced security comes at the expense of liquidity to the reinsurers’ unsecured creditors, making this latest news an incremental positive for reinsurers’ bondholders,” said Kevin Lee, vice president and senior credit officer at Moody’s.
Generally, when a non-US reinsurer does business in the US, it must post 100 percent collateral (e.g. cash, letters of credit) to secure its obligations for incurred losses so that its clients can receive full regulatory credit for reinsurance.
These requirements are substantial. According to US insurance regulatory filings, non-US reinsurers put up $23 billion worth of letters of credit as of year end 2009 (versus a $115 billion market capitalisation for the entire global reinsurance sector, excluding Berkshire Hathaway and ACE Limited).
Reinsurance therefore allows local insurance companies to benefit from lower regulatory capital requirements because of the reinsurance they have already purchased.
