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US' Relaxed Collateral Requirements May Impact Arbitration
London & Bermuda Newsletter
New York took a stride toward relaxing collateral requirements at the end of 2008, but controversy still surrounds the potential effect on arbitration as a means for dispute resolution.
Few cedants are interested in buying reinsurance unless they can treat it as a credit in their financials. Balance sheet relief for US cedants currently arises only where the reinsurer is US-authorised or posts collateral locally in the amount of its policy obligations.
This has long been a source of grievance for international markets – particularly London and Bermuda. As has the state-by state basis of licensing, which requires overseas reinsurers to deal individually with each, depending upon the domicile of their cedants.
Last year, the National Association of Insurance Commissioners (NAIC) resolved to overhaul the collateral requirements for reinsurers not authorised in the US and to replace the state-by-state approach with a collegiate national regulator. The latter idea has obvious appeal for foreign reinsurers. However, the proposal is premised on reciprocity. For Europeans its fruition may have to await an EU or EEA wide single passporting rights to US reinsurers, rather than the state-by-state approach to “third country undertakings”.
In December, the New York State Insurance Department (NYSID) proposed an amendment to its supervisory rules regarding credit for reinsurances by unauthorised carriers. The collateral required for statutory credit would be reduced to a minimum of nil depending on the public rating by one of the major rating agencies.
There are several provisos aside from rating. Namely, the reinsurer must meet its home regulator’s solvency requirements, and be authorised by its home regulator in relation to the class of business to be reinsured in the US. The home regulator must have agreed to a memorandum of understanding (MOU) with the NYSID allowing access to its market at least as favourable as those provided in New York. There are also requirements on the cedant in terms of its audited financial statements, and requirements that the reinsurer notify the cedant of changes in its rating or authorisation.
The reinsurance contract itself must also meet certain requirements, which is where the controversy creeps in. In particular, it must include a jurisdiction clause which, on a natural reading, would appear to trump an agreement to submit disputes to arbitration. Since arbitration is such a popular mode of dispute resolution, many carriers and their advisers have been concerned at this. ARIAS US, the US branch of the Association Internationale de Droit des Assurances (AIDA) Reinsurance and Insurance Arbitration Society, published its letter to the NYSID on 5 February 2009. ARIAS US understands “it was NOT the Department’s intent in proposing this amendment to prohibit arbitration agreements”. Instead, the proposed clause is to act as a standard service of suit clause, which most US courts, and English courts, tend to regard as confined to the enforcement of arbitration awards. So service of suit clauses are generally facilitative of arbitration, rather than prohibitive.
The closing date for feedback was 6 February 2009. Sedgwick will report on the NYSID’s next steps.
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