Reinsurance Focus

Rhode Island recently amended its Credit for Reinsurance Act to include two provisions regarding credits for reinsurance relating to the insolvency of the ceding insurer. Specifically, the first provision states that no credit is allowed “unless the reinsurance is payable by the assuming company on the basis of liability of the ceding company under the contractor contracts reinsured without diminution because of the insolvency of the ceding company.” Additionally, the second provision states that no credit is allowed “unless the reinsurance agreement provides that payments by the assuming company shall be made directly to the ceding company or to its liquidator, receiver, or statutory successor” or directly to the insured. Finally, the amendments state that no assuming company “may pay or settle, or agree to pay or settle, any policy claim, or portion of a claim, directly to or with a policyholder of any ceding company if an order of rehabilitation or liquidation has been entered against the ceding company.” These changes appear to be to bring Rhode Island’s statute closer to the model act promulgated by the National Association of Insurance Commissioners.

R.I. HB 6179 (enacted June 17, 2015) and R.I. SB 939.

This post written by Zach Ludens.

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On September 1, 2015, Texas Senate Bill 900 went into effect after passing both the Texas House and Senate this past summer. The bill amends the operation of the Texas Windstorm Insurance Association (“TWIA”), a state backed insurer of last resort. The TWIA was created in 1971 to fill in coverage gaps for windstorm and hail protection when private insurance became too expensive or when private insurance simply failed to provide coverage. The goal of the TWIA is to make coverage affordable for residential and commercial properties in areas prone to claims, most notably in certain coastal counties.

Senate Bill 900 makes a few important changes to the association. The insurer’s board of directors will now encompass three members from the insurance industry, three members from coastal Texas counties, and three members from inland Texas. It requires that the insurer maintain “available loss funding” to cover a once in a 100 year storm disaster. It also clarifies the purchasing requirements of reinsurance and alternative risk financing, both used in order to limit payout risk. Finally, Senate Bill 900 allows for the appointment of an administrator to run the insurer.

Texas Senate Bill 900 (2015)

This post written by Matthew Burrows, a law clerk at Carlton Fields Jorden Burt in Washington, DC.

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The NAIC’s Reinsurance Task Force has been active of late, exposing six different drafts for comment.

Certified Reinsurers

The Reinsurance Financial Analysis (E) Working Group (ReFAWG) developed the Uniform Application Checklist for Certified Reinsurers to help ensure that a reinsurer’s application for certification is complete under the requirements of the Credit for Reinsurance Models. The Checklist also facilitates the “passporting” process, whereby a state has the discretion to defer to another state’s certification and rating of a reinsurer. This latest draft of the Checklist makes changes to the section addressing “Disputed and/or Overdue Reinsurance Claims/Business Practices.” In February 2015, ReFAWG instructed staff to prepare this now-exposed memorandum outlining the group’s responsibilities relating to certified reinsurers and the passporting process.

The comment deadline for these two items is September 15, 2015.

Credit for Reinsurance – XXX/AXXX

Having been charged with creating a new model regulation to establish requirements regarding the reinsurance of XXX/AXXX life insurance policies, the Reinsurance (E) Task Force exposed the draft Non-Universal Life and Universal Life With Secondary Guarantees Credit for Reinsurance Model Regulation. The Task Force also exposed two options for revisions to the Credit for Reinsurance Model Law (#785) to authorize adoption of this new model regulation, Option 1 and Option 2. Key topics that emerged in the drafting of the new model regulation are discussed in an exposed memorandum from its drafting group.

The comment deadline for these four items is September 30, 2015.

This post written by Anthony Cicchetti.

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Governor Greg Abbott of Texas has recently signed into law amendments to the Texas Insurance Code broadening the authority of captives.  This law is effective as of September 1, 2015.

There are three amendments in this law:

1. Section 964.052 increases the types of risks that pools can now write to include reinsurance pools composed only of other captives and affiliated captive insurance companies.
2. Section 964.063 provides that captives can, with the permission of the Commissioner, pay dividends or make distributions to “holders of an equity interest in the captive insurance company.”  Further, the Commissioner is required to issue rules implementing this section.
3. Section 964.072 sets forth the two requirements that must be satisfied before a captive can participate in a reinsurance pool pursuant to Section 964.052, the pool is composed only of captive insurance companies; and the captive is sufficiently capitalized in order to meet the pool’s financial obligations.

It is clear that Texas is inviting companies to form their captives in Texas. Tex. SB No. 667 (eff. Sept. 1, 2015).

This post written by Barry Weissman.

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A superior court in New Hampshire has entered two orders – one concerning Arrowood Surplus Lines Insurance Company, the other concerning Providence Washington Insurance Company – approving commutations regarding The Home Insurance Company. Separate motions – one for Arrowood, the other for Providence Washington – were brought by New Hampshire’s Insurance Commissioner as Home’s liquidator regarding liabilities ceded from Home to Arrowood and Providence Washington to Home. Home has been in liquidation since 2003. In the Matter of the Liquidation of the Home Insurance Co., No. 03-E-0106 (N.H. Super. Ct. June 15, 2015).

This post written by Zach Ludens.

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A Texas appeals court affirmed a summary judgment that rejected an attempt by two insurers to recover more than $1.1 million for taxes, penalties, and interest on certain reinsurance agreements. Argonaut Insurance Company and Argonaut Great Central Insurance Company (jointly “Argonaut”) provided insurance to two self-funded government risk pools formed on behalf of Texas counties and school districts. These risk pools provided various insurance products to their membership. As part of a reinsurance arrangement with these risk pools, Argonaut agreed to provide indemnity for losses accumulated under member insurance policies in return for member premium payments. Argonaut considered these premium payments non-taxable “reinsurance income,” but the Texas Comptroller rejected this classification finding that “for premiums to qualify as paid for reinsurance, the transaction must occur between two licensed insurance companies.”

On appeal, all parties agreed that the main issue centered on “whether the premiums received by Argonaut from [the risk pools] are premiums received from another insurer for reinsurance.” Argonaut argued that the agreements with the risk pools have reinsurance characteristics, a factor that outweighs whether or not the risk pools are licensed insurance companies. The court found that while a risk pool “is expressly authorized to purchase reinsurance, it is also expressly declared not to be insurance or an insurer” under Texas insurance and tax codes. For these reasons, the court affirmed the trial court’s grant of summary judgment for the Texas Comptroller. Argonaut Ins. Co. et al. v. Hegar et al., No. 03-13-00619-CV (Tex. Ct. App. June 24, 2015).

This post written by Matthew Burrows, a law clerk at Carlton Fields Jorden Burt in Washington, DC.

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Plaintiffs alleged that AXA Equitable Life Insurance Company violated New York insurance law prohibiting misrepresentations by insurers of their financial condition, because AXA had not disclosed “shadow transactions” in its filings with the New York Department of Financial Services (“NYDFS”). NYDFS defines “shadow insurance” as the use of captive reinsurers in foreign jurisdictions with lower reserve requirements to do an “end-run around higher reserve requirements.” Plaintiffs contended that AXA was not as financially sound as it had represented because in failing to disclose “shadow transactions,” AXA received higher ratings from rating agencies and was able to post fewer reserves thus selling a product that had undisclosed risks and created an “increased risk to the insurance system as a whole. . . .”

The court denied class certification and granted AXA’s motion to dismiss for lack of Article III standing. Plaintiffs did not allege that their premiums were higher because of the alleged “shadow transactions” nor that they had relied upon AXA’s representations in filings with the NYDFS. Violation of rights created by state law (as opposed to federal law), standing alone, does not allege an “injury” sufficient to establish Article III standing. Plaintiffs needed to have established that at least one of them had suffered an “invasion of a legally protected interest which is . . . concrete and particularized” and “actual or imminent, not conjectural or hypothetical.” The Court also explained that since plaintiffs never alleged that they would not have purchased the policies had the disclosures been made or that they had suffered any financial harm because of the misrepresentations, the alleged risk of harm was only in the future and was a very tenuous risk at that. Jonathan Ross v. AXA Equitable Life Insurance Co., Case No. 14-CV-2904 (USDC S.D.N.Y. July 21, 2015).

This post written by Barry Weissman.

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Louisiana and North Dakota amended their surplus lines statutes in line with the Nonadmitted and Reinsurance Reform Act of 2010 (the “NRRA”), which was included in the Dodd-Frank Wall Street Reform and Consumer Protection Act (“DFA”), signed into law in July 2010. Under the North Dakota amendment (HB 1146), definitions of “reciprocal state” were removed from the statute, and portions of the statute applying to taxes on out-of-state surplus lines insurance were removed. Under the Louisiana amendment (HB 259), portions of its statute were removed that dealt with collecting premiums based on risks located in Louisiana but insured by out of state surplus lines insurers.  The Louisiana bill repeals the authority for the Louisiana Insurance Commissioner to enter into NIMA, the Nonadmitted Insurance Multi-state Agreement compact, as to which we have posted, reducing the efficacy of the compact in achieving the premium tax provisions of the DFA.

This post written by Zach Ludens.

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A federal district court in New Hampshire has held that a service of suit clause contained in reinsurance contracts waives the reinsurers’ rights to remove a litigation brought against them in state court by the Insurance Commissioner of the State of New Hampshire, in his capacity as liquidator for the Home Insurance Company. The liquidator had filed the action in state court to collect reinsurance under the contracts. The reinsurers removed the case to federal court and the liquidator moved to remand, citing the reinsurance contracts’ service of suit clause which states that the reinsurer “will submit to the jurisdiction of any court of competent jurisdiction within the United States” and will “abide by the final decision of any such Court.”

The liquidator argued the clause was a mandatory forum selection clause requiring litigation in the forum chosen by the insured, and thereby constituted a waiver by the reinsurers of their right to remove. The reinsurers contended that the clause was a permissive forum selection clause which constituted merely a consent to jurisdiction and did not mandate litigation in any particular forum. The court agreed with the liquidator and granted the motion to remand, finding the clause mandated exclusive jurisdiction in the New Hampshire state court. The court denied, however, the liquidator’s request for costs and expenses, finding the removal was “not objectively unreasonable.” Sevigny v. British Aviation Insurance Co., Case No. 15-cv-127 (USDC D.N.H. June 16, 2015).

This post written by Renee Schimkat.

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In this Special Focus, Richard Euliss discusses the recent increased interest by the IRS in auditing small captive insurers.

This post written by Richard Euliss.

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