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Collateralized Reinsurance
Alterra Reinsurance Limited: Reinsurance Supported by Collateral
Collateralized reinsurance from Alterra Reinsurance offers US ceding companies enhanced protection for their reinsurance recoverables compared to reinsurance recoverables due from US reinsurance companies.
This briefing note has been prepared, in Q & A format, to provide guidance to US ceding companies contemplating the purchase of reinsurance protection from unauthorized reinsurers, such as Alterra Reinsurance Limited.
Q: Can Alterra Reinsurance write reinsurance of US ceding companies?
A: Yes, US cedants can buy reinsurance from a reinsurer, such as Alterra Reinsurance, that is not licensed in the US. Provided that the reinsurer posts collateral to secure payment of claims, the US cedant can take statutory reserve credit for the reinsurance.
- FACT: Collateralized reinsurance from Bermuda and other non-US reinsurers is very common, resulting in $146 billion of collateral posted in favor of US ceding companies as of 2008, according to the Reinsurance Association of America
Q: What is the collateral?
A: Letters of Credit or Reinsurance Trusts are the typical forms of collateral permitted under US insurance laws. Trusts are commonly referred to as “Reg 114 trusts” after the applicable New York Regulation 114.
A Letter of Credit is an undertaking by a bank to make a payment up to a specific amount to a named beneficiary (i.e., a US cedant) within a specified time, against the presentation of certain documents by the beneficiary. Strict rules under US insurance laws regarding the use and form of standby Letters of Credit as collateral ensure that funds are readily available to a US cedant in the event a reinsurer is unable financially to pay the US cedant’s reinsurance claim(s). The law requires that the Letters of Credit be “clean, unconditional, irrevocable and evergreen.” Letters of Credit provided by Alterra Reinsurance comply with these requirements, ensuring that they provide accessible and secure payment backstops for its US cedants.
A Reinsurance Trust is set up as a consequence of a US cedant entering into a Reinsurance Trust Agreement with an unlicensed reinsurer, such as Alterra Reisnurance Limited, and a trustee. The trustee holds a portfolio of the reinsurer’s US cash and highly rated US securities (that must comply with applicable US state insurance regulations) in a Trust Account for the benefit of the US cedant. The US cedant may withdraw funds from the Trust Account without the consent of the reinsurer, whereas the reinsurer is prohibited from making any withdrawal without the approval of the US cedant. Reinsurance Trusts and Letters of Credit each provide US cedants with a high degree of security and readily available funds. Alterra Reinsurance typically considers using a Reinsurance Trust when its collateral obligations in respect of a US cedant amount to $10 million or more. Alterra Reinsurance’s principal trustee is Mellon Bank.
Q: Do other US cedants of Alterra Reinsurance Limited share the collateral issued to my company?
A: No, the Letter of Credit or Reinsurance Trust specifically and only secures Alterra’s payment obligations under the reinsurance agreement between Alterra Reinsurance and your company.
Q: Who pays my company if I need to collect under the Letter of Credit?
A: The bank or banks issuing the Letter of Credit. The Letter of Credit is issued by “qualified US financial institutions” that are approved by the National Association of Insurance Commissioners and/or state insurance department, as required by law.
Q: How much collateral is posted?
A: 100% of Alterra Reinsurance’s obligations under the reinsurance contract. US insurance laws and regulations effectively require that Alterra Reinsurance post collateral in the amount equivalent to the unearned premium and outstanding losses, including IBNR, as recorded by the US cedant for the business ceded to Alterra Reinsurance under the collateralized reinsurance contract. The IBNR mirrors the IBNR calculated by the US cedant. See example below (000’s omitted):
| 12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | 12/31/10 | |
| Written Premium | $100,000 | |||||
|---|---|---|---|---|---|---|
| Earned Premium | $12,500 | $87,500 | $100,000 | $100,000 | $100,000 | $100,000 |
| Unearned Premium | $87,500 | $12,500 | $0 | $0 | $0 | $0 |
| Paid Losses | $5,000 | $10,000 | $20,000 | $35,000 | $55,000 | $70,000 |
| Case Loss Reserves | $2,000 | $15,000 | $21,000 | $20,000 | $11,000 | $0 |
| IBNR Reserves | $1,750 | $36,250 | $29,000 | $15,000 | $4,000 | $0 |
| Ultimate Loss Ratio | 70.0% | 70.0% | 70.0% | 70.0% | 70.0% | 70.0% |
| Total Liabilities | $91,250 | $63,750 | $50,000 | $35,000 | $15,000 | $0 |
| LOC Amount | $91,250 | $63,750 | $50,000 | $35,000 | $15,000 | $0 |
Q: How long will the collateral be there for my company?
A: The collateral stays in place until all claims under the reinsurance agreement have been paid by Alterra. The amount of collateral is typically adjusted quarterly or annually to match the US Cedants regulatory requirements.
- FACT: In their capital analyses of US insurers, state insurance regulators and rating agencies, including Standard & Poor’s, give full credit for reinsurance recoverable from non-admitted reinsurers, provided the reinsurance recoverable is fully collateralized.
