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US: Reduced Collateral in California & NAIC Model Law

Reduction in collateral requirements in respect of US reinsurance contracts with California domiciled cedants and NAIC Model Law to become an accreditation standard.

Thu 15 Sep 2016

US Reduced Collateral in California

Lloyd’s has received approval from the California Department of Insurance to post reduced collateral in respect of reinsurance contracts with California domiciled cedants.

Lloyd’s secure financial strength rating means its collateral requirements will be reduced from 100% to 20% for US reinsurance contracts with California domiciled cedants. Lloyd’s approval applies to prospective business only (new/renewals), is effective immediately and can be used for policies incepting on or after 1 July 2016 with California domiciled cedants. This approval allows Lloyd’s syndicates to post reduced collateral where commercially acceptable and practical for the parties to the reinsurance contract, whilst still permitting cedants to take 100% credit for their Lloyd’s reinsurance.

Reinsurance contracts supported by reduced collateral requirements must be funded outside of Lloyd’s US trust funds arrangements (ie the Lloyd’s Credit for Reinsurance Trust Funds (“CRTFs”) and the Lloyd’s Credit for Reinsurance Joint Asset Trust Fund (“CRJATF”)). These contracts will be funded on a cedant and contract specific basis where alternative security may be agreed between the parties to permit the cedant to take credit for reinsurance under the California regulation.

This may take the form of letters of credit, funds withheld or cedant specific trusts. However, Lloyd’s syndicates may continue to fund reinsurance contracts issued to California cedants through the current CRTF arrangements, at 100% of gross liabilities where this is commercially preferable to the parties to the reinsurance.

Lloyd’s approval in California is the second occasion where Lloyd’s has been able to utilise the passporting application process set out under the NAIC’s Uniform Application Checklist process. The NAIC’s recognition of the UK as a Qualified Jurisdiction enables UK reinsurers to apply through this passporting process.

A market bulletin will be issued in due course setting out the key features and details of Lloyd’s reduced collateral approval.

NAIC Model Law

At the recent NAIC Summer 2016 National Meeting, it was agreed that the NAIC model law, which addresses Certified Reinsurer approval, will become an accreditation standard. Lloyd’s has long advocated for broader, harmonised reform of US reinsurance collateral rules, this important development means all states will need to adhere to the model law in order to be accredited by the NAIC. At present all states are accredited, to remain so they will need to have implemented the NAIC Model law legislation with effect from 1st January 2019.

There are currently 35 states that have enacted model law legislation and 25 of those have approved reinsurers (a list of these states is maintained on Guided by the commercial priorities of the market, Lloyd’s will now seek to accelerate the passporting application process to gain approval in additional states where reduced collateral is already permitted under their insurance code.

Further information

Please contact LITA if you require any further information:

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