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California Lawmakers Approve Sweeping Reinsurance Collateral Legislation

Source: BestWeek

Posted on 23 Aug 2012 by Neilson

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California reinsuranceThe California State Assembly has signed off on legislation that would greatly expand the insurance commissioner's authority over the state's reinsurance market. The bill is designed to bring California law in line with the Dodd-Frank financial reform act and a recently passed National Association of Insurance Commissioners model law.

The bill, SB 1216, sailed through both chambers of the State Assembly, receiving unanimous support among lawmakers from both political parties. It will now head to Gov. Jerry Brown, a Democrat, for approval.

Should the bill be signed into law, the California insurance commissioner would have the authority to certify reinsurers wanting to do business in the state based on a series of criteria.

The criteria used by the commissioner when making certification decisions would include:

Reinsurers may be certified if they hold a license to transact insurance in another state that has been accredited by the NAIC. (The commissioner may withdraw recognition of another jurisdiction's certification or rating with written notice to the certified reinsurer).

Certified reinsurers must maintain minimum capital and surplus of at least $250 million.

They must maintain financial strength ratings from at least two recognized rating agencies, including A.M. Best.

They must submit to the commissioner's jurisdiction and oversight authority.

They must adhere to information filing requirements determined by the commissioner.

They must also comply with any other requirements deemed relevant by the commissioner.

The bill would also allow the highest rated reinsurers to post no collateral, while the lowest-rated reinsurers would have to provide 100% collateral.

While the bill includes a sunset clause that would have the law expire on Jan. 1, 2016, current Insurance Commissioner Dave Jones said in a statement it would give his office the ability to protect consumers, while at the same time taking into account changes in the global reinsurance market.

I am pleased that the State Legislature has passed this important bill, Jones said. Globalization has resulted in many changes to the business practices of insurance and SB 1216 will ensure that the insurance commissioner and the Department of Insurance have the authority and regulatory tools needed to protect consumers in response to the changing business practices in the area of reinsurance. I urge Gov. Brown to sign this bill that will enable the Department of Insurance to continue to protect California consumers to the best of our ability."

The NAIC voted to adopt an amended version of the proposed Credit for Reinsurance Model Law at its November meeting in National Harbor, Md., which at the time was hailed by regulators as the culmination of an issue that has been before the organization for the past decade.

If adopted by the states, the model law would allow reinsurance companies based outside the United States to post lower levels of collateral than the current requirement of 100% if they meet certain requirements, including obtaining certain A.M. Best ratings. Florida, New York and New Jersey already have laws on the books that allow for lower collateral levels to be posted, and Illinois, Indiana and Louisiana are looking into the issue.

For example, the Florida Office of Insurance Regulation has approved 20 non-U.S.-based reinsurers to post reduced collateral while doing business in the state.

However, U.S. insurers have argued allowing foreign-based reinsurers to post collateral could create the potential for those companies to introduce unnecessary risks into an otherwise successful system.

In August, Deirdre Manna, vice president industry, regulatory and political affairs of the Property Casualty Insurers Association of America said the NAIC's model law needed to include additional protections for U.S.-based primary insurers.