Reinsurance Focus

A Pennsylvania Court has approved the commutation, settlement and release agreement between Legion Insurance Company (In Liquidation) and Midwest Employers Casualty Company. Legion was judicially determined insolvent in 2003, and the Pennsylvania insurance commissioner was appointed as liquidator. Legion and Midwest previously litigated in separate proceedings coverage of over 43 separate reinsurance certificates issued by Midwest to Legion between 1994 and 2001. In approving the commutation, settlement and release agreement, the Pennsylvania court noted that no objections to approval had been presented. The court also granted leave for the liquidator to file the agreement and its supporting affidavit confidentially under seal. In re Legion Insurance Co. (In Liquidation), 1 LEG 2002 (Pa. Commw. Ct. Dec. 30, 2014) (order approving commutation & order granting leave to file under seal).

This post written by Michael Wolgin.

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At the November 17, 2014 meeting of the Valuation of Securities Task Force of the NAIC’s Financial Condition (E) Committee, a proposal was received from the North American CRO [Chief Risk Officers] Council to modify the capital treatment for catastrophe bonds held by life insurance companies, to encourage life insurance companies to purchase cat bonds.  A slide presentation accompanied the proposal.  The proposal contended that a revised RBC treatment for cat bonds might have the following benefits:

• property and casualty insurers would benefit from a larger and more stable source of capital, thereby reducing their cost of capital;
• life insurers would benefit from improved risk-adjusted asset returns as natural catastrophe risk and systemic investment risk are largely uncorrelated and, as a result, can provide a diversification benefit;
• a lower cost of capital for property and casualty insurers could improve the availability and affordability of insurance products, thereby benefiting property and casualty customers;
• life insurance customers would benefit from improved risk-adjusted returns; and
• regulators’ solvency concerns would diminish as greater diversification is introduced into the system.

The task force exposed this proposal for comment for a sixty day period expiring January 16, 2015.  It is not clear whether the Task Force will revisit this proposal at its March meeting.

This post written by Rollie Goss.

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On November 18, 2014, we reported on the Seventh Circuit’s decision in Pine Top Receivables of Illinois, LLC v. Banco de Seguros del Estado, in which Pine Top claimed that Banco de Seguros owed it $2,352,464.08 under certain reinsurance contracts.  The Seventh Circuit affirmed the trial court’s ruling denying Pine Top’s motion to compel arbitration, agreeing that Pine Top’s assigned rights under the reinsurance contracts were limited to the collections of certain debts and did not include the right to arbitrate.  The Seventh Circuit also had affirmed the trial court’s denial of a motion to strike Banco Seguros’s pleading for failure to post security, holding that such pre-judgment security is a form of attachment that violates the Foreign Sovereign Immunities Act.  On December 22, 2014, the Seventh Circuit denied Pine Top’s petition for rehearing and rehearing en banc, as no judge requested a vote on the petition, and the judges on the prior panel voted to deny rehearing.  Pine Top Receivables of Illinois, LLC v. Banco de Seguros del Estado, No. 13–1364 (7th Cir. Dec. 22, 2014).

This post written by Michael Wolgin.

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Section 107 of the Terrorism Risk Insurance Program Reauthorization Act of 2015 (the “Reauthorization Act”) requires the Secretary of the Treasury (“Secretary”) to conduct a study of the certification process required under in the Terrorism Risk Insurance Act of 2002, as amended (“TRIA”) and submit a report of the study results to Congress. To assist the Secretary in conducting the study and formulating the report, the Federal Insurance Office (“FIO”) issued a request for public comment, on the following items:

• The establishment of a reasonable timeline by which the Secretary must make an accurate determination on whether to certify an act as an act of terrorism;
• The impact that the length of any timeline proposed to be established may have on the insurance industry, policyholders, consumers, and taxpayers as a whole;
• The factors the Secretary would evaluate and monitor during the certification process, including the ability of the Secretary to obtain the required information regarding the amount of projected and incurred losses resulting from an act which the Secretary would need in determining whether to certify the act as an act of terrorism;
• The appropriateness, efficiency, and effectiveness of the consultation process required under section 102(1)(A) of TRIA and any recommendations on changes to the consultation process;
• The ability of the Secretary to provide guidance and updates to the public regarding any act that may reasonably be certified as an act of terrorism;
• The manner and extent to which the certification timeline and the Secretary’s ability to make an accurate determination on whether to certify an act as an act of terrorism may be influenced by domestic or international law enforcement processes; and,
• The implications for insurers or policyholders if one or more events are certified as acts of terrorism but the aggregate, calendar-year insured losses do not exceed the amount required for Treasury to make payments for insured losses.

The written comments should also include: 1) the data or rationale, including examples, supporting any opinions or conclusions; 2) approaches and options respecting improvement of the certification process, if any; and, 3) any specific legislative, administrative, or regulatory proposals for carrying out such approaches or options.
Comments are due on or before March 6, 2015 and may be submitted electronically through the Federal eRulemaking Portal at http://www.regulations.gov.

This post written by Kelly A. Cruz-Brown.

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As previously reported, the Terrorism Risk Insurance Act (“TRIA” or the “Program”) was re-authorized and signed into law on January 12, 2015 (the “Reauthorization Act”).

On February 4, 2015, the Department of Treasury (“Treasury”) issued Interim Guidance Concerning the Terrorism Risk Insurance Act Reauthorization of 2015 (the “Interim Guidance”), which may be relied upon until superseded by amended regulations or additional guidance, to address implementation of the TRIA Reauthorization. The Interim Guidance addresses documentation of TRIA coverage, disclosures, and new offers of coverage.

Documentation

Recognizing that insurers may require additional time to provide disclosures and offers of coverage that comply to with state insurance rate and form laws, the Interim Guidance establishes an April 13, 2015 deadline for insurers to provide required disclosures and coverage offers.

Disclosures

The Interim Guidance provides the following advice concerning insurer disclosures:

• National Association of Insurance Commissioner (NAIC) Model Disclosure Forms Nos. 1 and 2, as amended in 2015, are consistent with the disclosure requirements required under current TRIA regulations and the Reauthorization Act. Insurers may use these forms pursuant to Interim Section 50.17(c) of the Program regulations.
• Insurers are no longer required to provide to a policyholder certain disclosures at the time of a policy’s purchase; however, insurers must provide such disclosures at the time of offer and renewal The timing of an insurer’s disclosures may conform with either subpart B of the Program’s regulations or Section 103(b)(2) of TRIA, as amended by the Reauthorization Act.
• Insurers that offered coverage for insured losses prior to January 12, 2015, using the then-current NAIC Model Disclosure Form No. 1, NAIC Model Disclosure Form No. 2, or other disclosures consistent with Program regulations, are not required to provide a revised disclosure to the policyholder.
• Disclosures on or after January 12, 2015 provided in connection with a new or mid-term offer of coverage for insured losses should be based on Program regulations and the Reauthorization Act.

New Offers of Coverage

The Interim Guidance expects an insurer to make a new offer of coverage for insured losses with respect to any in-force policy that does not provide coverage for insured losses, except where:

• The policy incorporates a conditional exclusion or change of terms and conditions relating to coverage for insured losses and, because the Program is in effect, the insurer forbears effective January 1, 2015 (or as of the effective date of the policy, if later) on the exercise of the conditional exclusion or change in terms and conditions. The insurer should provide the policyholder written notice no later than April 13, 2015, of the insurer’s forbearance or written notice of the insurer’s withdrawal of any previous exercise of the conditional exclusion or change in terms and conditions. In the written notice, the insurer should state that the insurer’s forbearance or withdrawal, as applicable, is effective January 1, 2015 (or as of the effective date of the policy, if later); or
• The policyholder declined coverage for insured losses, so long as the insurer’s offer did not materially differ in price from that which the insurer would have offered following enactment of the Reauthorization Act.

The Interim Guidance further advises that if a policyholder declined coverage for insured losses but the insurer’s offer materially differed in price from that which the insurer would have offered following enactment of the Reauthorization Act, then the insurer should consider making a new offer to that policyholder.

In response to the Reauthorization Act and the Interim Guidance, the NAIC developed a Model Bulletin to expedite communication of implementation issues concerning the Reauthorization Act. Several states, such as Alabama, Kentucky, Louisiana, Maryland, North Carolina, Oklahoma, Rhode Island, and Wyoming have issued the Model Bulletin tailored to existing state regulatory requirements for each jurisdiction. It is anticipated that additional jurisdictions will issue similar bulletins or memoranda concerning compliance with the Reauthorization Act.

This post written by Kelly A. Cruz-Brown.

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The Delaware Court of Chancery has denied U.S. Bank, N.A.’s request for an order establishing its right to retain cash and securities valued at $156 million and maintained by Freestone Insurance Company, a reinsurer now in receivership, in a custodial account at the Bank. When Freestone’s delinquency proceedings began, it maintained assets valued at $175 million with the Bank, which held the assets in trust to secure the insurer’s right to payment from Freestone (and others) as reinsurer. The Bank turned over only $19 million of the assets and moved for an order establishing its right to retain the rest, arguing it was entitled to keep the assets as security for potential indemnification claims and present and future expenses. The court denied the Bank’s motion, finding the Bank was not entitled to retain indefinitely assets valued at $156 million nor was it entitled to a security interest in those assets. Instead, the court ordered the Bank to turn over the $156 million to the Insurance Commissioner of the State of Delaware, allowing the Bank to keep only its current administrative fees to the extent incurred as of a date thirty days after the date the commissioner demanded the assets’ return. In the Matter of the Liquidation of Freestone Insurance Co., C.A. No. 9574-VCL (Del. Ch. Dec. 24, 2014).

This post written by Renee Schimkat.

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In CFTC Letter No. 14-145 Exemption (November 12, 2014) and CFTC Letter No. 14-152 No-Action (December 18, 2014), the U.S. Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight (DSIO) exempted entities engaging in insurance-linked securities (“ILS”) transactions from commodity pool operator registration requirements, subject to certain conditions as specified by each respective letter. The above-referenced letters requested no- action or exemption relief from the CFTC’s commodity pool obligations because the definition of “commodity interest” under Section 1a(10) of the Commodities Exchange Act (“CEA”) was expanded under the Dodd-Frank Act, to include swaps, and could subject an ILS Issuer to be considered a commodity pool and require registration with the CFTC. It is noteworthy that among the conditions for relief in each letter, active management of the assets and liabilities over the lifetime of the Issuer is prohibited.

This post written by Kelly A. Cruz-Brown.

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On December 31, 2014, the Federal Insurance Office (FIO) issued a report entitled “The Breadth and Scope of the Global Reinsurance Market and the Critical Role Such Market Plays in Supporting Insurance in the United States.”  The report was prepared pursuant to the Dodd-Frank Act.  It provides an overview of the history, forms, and purposes of reinsurance, the U.S. regulatory framework governing reinsurance, and the global reinsurance market.  The report analyzes the important role that global reinsurers play to U.S. insurance industry generally.  It does not, however, purport “to analyze the extent to which reinsurance or any particular reinsurer could be systemically important.”

The report discussed two roles of the federal government in the reinsurance market.  First, it mentions that the Dodd-Frank Act contains several provisions relating to the oversight of reinsurance.  It is noted that the approach of those provisions is “to enhance uniformity in the state-based insolvency regulation of insurers and reinsurers by increasing deference to the state in which the reinsurer is domiciled or licensed.”

Second, it discusses some of the history of credit for reinsurance collateral reform, and mentions that efforts by the NAIC to achieve uniformity with respect to this area through a Model Act have not been successful.  The report states that the Treasury Department and the United States Trade Representative are considering exercising their authority to enter into an international agreement  concerning this issue, which would preempt inconsistent state laws.

This post written by Michael Wolgin.

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On January 12, 2015, the Terrorism Risk Insurance Act Program (“TRIA” or “Program”), which was originally adopted in 2002 to provide a federal backstop to protect insurers from catastrophic claims arising from terrorist attacks on U.S. soil, was extended.

Specifically, the TRIA Reauthorization Act of 2015 (the “Reauthorization Act”), Public Law No: 114-114th-1, revises the Program as follows:

• Extends the Program until December 31, 2020.
• Decreases the federal share of the compensation for the insured losses of an insurer during each Program year by 1% until it equals 80% of the portion of the amount exceeding the annual insurer deductible.
• Increases the insurance marketplace aggregate retention amount under the Program (currently $27.5 billion) by $2 billion per calendar year until such amount equals $37.5 billion.
• Directs the Secretary of the Department of Treasury (the “Secretary”) to conduct a study within nine months after the enactment of the Reauthorization Act regarding the process used by the Secretary to certify an act as an act of terrorism under the Program.
• Directs a biennial study by the GAO regarding the impact on the Federal government of assessing and collecting upfront premiums on insurers that participate in the Program and the creation of a capital reserve fund under the Program.
• Authorizes the Secretary to establish and appoint the Advisory Committee on Risk-Sharing Mechanisms (the “Advisory Committee”) to provide advice, recommendations, and encouragement with respect to the creation and development of the nongovernmental risk-sharing for the protection against losses arising from acts of terrorism. The Advisory Committee must consist of nine members who are directors, officers, or other employees of insurers, reinsurers, or capital market participants that are participating or that desire to participate in the nongovernmental risk-sharing mechanisms and who are representative of the affected sectors of the insurance industry, including commercial property insurance, commercial casualty insurance, reinsurance, and alternative risk transfer industries.
• Requires insurers participating in the Program to submit to the Secretary beginning January 1, 2016, and each calendar year thereafter, information regarding insurance coverage for terrorism losses to analyze the effectiveness of the Program. The information to be reported shall include information regarding lines of insurance with exposure to such losses; premiums earned on such coverage; geographical location of exposures; pricing of such coverage; the take-up rate for such coverage; the amount of private reinsurance for acts of terrorism purchased; and such other matters as the Secretary considers appropriate.
• Authorizes the Secretary to conduct a study (commencing June 30, 2017, and every other June 30 thereafter) of small insurers participating in the Program, and identify any competitive challenges small insurers face in the terrorism risk insurance marketplace.

Furthermore, the Reauthorization Act includes several other amendments, unrelated to the Program. It amends the Gramm-Leach-Bliley Act to establish the National Association of Registered Agents and Brokers as an independent nonprofit corporation to prescribe licensing and insurance producer qualification requirements and conditions on a multi-state basis, while retaining essential state regulatory authority. It also removes Dodd-Frank Act margin requirements for certain end-users, like utilities and manufacturers, involved in derivatives trading to hedge risk. Finally, it requires the Federal Reserve to have at least one governor with community banking or supervision experience.

This post written by Kelly A. Cruz-Brown.

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A Pennsylvania court overseeing Reliance Insurance Company’s liquidation proceedings approved the settlement agreement between Reliance and XL Reinsurance Company. The agreement allowed the liquidator to terminate and commute the obligations between Reliance and XL under the parties’ reinsurance agreement, such that the estate would receive a $7,248,830 economic benefit. In re Reliance Insurance Company in Liquidation, 1 REL 2001 (Pa. Commw. Ct. Oct. 2, 2014).

This post written by Leonor Lagomasino.

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