Reinsurance Focus

Hawaii’s House/Senate conference committee cleared the way for passage by the full houses of NAIC’s Model Act on Credit for Reinsurance, to address NAIC’s recommended updates pursuant to its Solvency Modernization Initiative.  The bill was adopted and became law July 8, 2014.  The Committee amended prior drafts of HI SB 2821 “A Bill for an Act Relating to Insurance,” and recommended final passage of the amended version to the respective Houses. According to the Conference Committee Report, the purpose of the bill is to (1) adopt revisions to NAIC’s model laws on Credit for Reinsurance, Standard Valuation, Standard Non-Forfeiture Law for Life Insurance, and Insurance Company Holding System Act; and (2) maintain accreditation with NAIC. The Committee’s amendments included:

• Adding a definition for “domestic insurance holding company system;”
• Deleting a definition for “domestic single-state insurer;”
• Clarifications regarding the filing of financial statements;
• Specifying exemptions regarding the annual enterprise risk report;
• Permitting certain Insurance Commissioner examinations;
• Specifying obligations regarding subpoenas; and
• Creating effective dates for various parts of the measure.

This post written by John Pitblado.
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Alaska’s Division of Insurance has released a bulletin notifying licensees, surplus lines insurance companies in the State of Alaska, and other interested parties that it has adopted regulations modifying surplus lines requirements to conform to Alaska statutory changes due to the federal Nonadmitted and Reinsurance Reform Act of 2010. The regulations include modifications to diligent search requirements, additional requirements for the notice of nonrenewal and premium increases, and additional fees for certain licenses. All affected parties must comply with the new requirements as of September 4, 2014, the effective date of the regulations. Alaska Ins. Bulletin No. 14-05 (Aug. 13, 2014).

This post written by Renee Schimkat.

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NAIC’s Executive Committee met at NAIC’s annual meeting in Louisville, Kentucky on August 16 and 17, 2014. The Executive Committee furthered its action on reserve requirements for captive reinsurers (as reported here last year) and adopted the “XXX/AXXX Reinsurance Framework” which will guide development of proposed regulatory changes to the types of assets and securities required to meet statutory reserve requirements.

Arising from worries about potentially abusive use of captives creating a “shadow insurance industry (as reported here in 2012), the framework would, among other things, require ceding companies to disclose the assets backing their risk-based-capital (RBC) computations.

As noted in the Principle-Based Reserving (PBR) Implementation (EX) Task Force’s report to the Executive (EX) Committee, the framework:

• addresses concerns regarding reserve financing transactions without encouraging such transactions to move off-shore. The changes would be prospective and apply to XXX term life insurance business and AXXX universal life with secondary guarantees.
• requires the ceding company to collateralize a portion of the total statutory reserves with hard assets such as cash and securities, collateralize the remainder with other assets and forms of security identified as acceptable by regulators, disclose the assets and securities used; and hold an RBC cushion as required for other business.
• will be codified through the Credit for Reinsurance Model Law, with the creation of a new model regulation.

The PBR subcommittee’s report is based on the June 4 Rector & Associates, Inc. report’s recommendations (a copy of which is available on the PBR taskforce’s website: http://www.naic.org/committees_ex_pbr_implementation_tf.htm).

This post written by John Pitblado.

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A Pennsylvania federal court recently denied a motion to dismiss a putative class action lawsuit in which homeowners claim violations of the Real Estate Settlement Procedures Act of 1974 based on an alleged “captive reinsurance scheme” related to private mortgage insurance.

The plaintiffs allege that between January 2006 and December 2008, they obtained residential mortgage loans from National City Mortgage (“National City”), which contracted with certain primary insurers to provide private mortgage insurance. These insurers subsequently reinsured with National City’s captive reinsurer, National City Mortgage Insurance Company, Inc. (“NCMIC”), pursuant to a captive reinsurance arrangement. Under this arrangement, the primary insurers paid NCMIC a portion of the borrowers’ insurance premiums in exchange for NCMIC assuming some of the primary insurers’ risk. The plaintiffs claim this reinsurance arrangement violated RESPA’s prohibition on kickbacks because premium payments from the primary insurers to NCMIC were made in return for National City’s referral of business. According to the plaintiffs, this arrangement also violated RESPA’s prohibition on fee-splitting because it was only sham reinsurance. They allege that NCMIC provided no service in return for the portion of the insurance premiums it accepted.

Defendants moved to dismiss the complaint for failure to state a claim, making a variety of arguments. The district court denied the motion, finding that the plaintiffs were entitled to equitable tolling due to alleged fraudulent concealment by the defendants and had set out facts sufficient to meet the federal pleading standards for a violation of RESPA and unjust enrichment. White v. PNC Financial Services Group, Case No. 11-7928 (USDC E.D. Pa., August 18, 2014).

This post written by Catherine Acree.

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The Maryland Insurance Commissioner adopted regulations regarding Credit for Reinsurance effective August 18, 2014. The regulations will implement changes made to Title 5, Subtitle 9 of the Maryland Insurance Article, and are based upon recent amendments to model law and regulation developed by the National Association of Insurance Commissioners entitled “Credit for Reinsurance Model Law” (No. 785) and “Credit for Reinsurance Model Regulation” (No. 786), respectively. The regulations provide standards for a licensed ceding insurer to receive credit for reinsurance ceded to a certified reinsurer as a reduction of collateral requirements and include provisions that establish: 1) eligibility requirements to be considered for certification as a certified reinsurer; 2) eligibility requirements of a jurisdiction in which an assuming insurer may be domiciled to be considered a qualified jurisdiction; 3) eligibility requirements to be considered for approval as an accredited reinsurer; 4) a rating method to be used in the certification process; and, 5) a sliding scale with the level of required collateral varying from 0% to 100% of ceded liabilities based on the certified reinsurer’s rating.

This post written by Kelly A. Cruz-Brown.

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The Emergency Regulation, effective April 21, 2014, conforms 11 NYCRR 27 to the requirements of the Non-Admitted and Reinsurance Reform Act of 2010 (“NRRA”). The amendments make the following changes to Insurance Regulation 41:

• Defines three new terms: “exempt commercial purchaser,” “insured’s home state,” and “United States.”
• Provides an exception for an Exempt Commercial Purchaser (“ECP”) consistent with Insurance Law Section 2118(b)(3)(F)
• Regarding ECPs requires:
  • An excess line broker or the producing broker to affirm in part A or part C of the affidavit that the ECP was specifically advised in writing, prior to placement, that the insurance may or may not be available from the authorized market that may provide greater protection with more regulatory oversight.
  • Requires an excess line broker to identify the insured’s home state in part A of the affidavit; and (4) clarify that the premium tax is to be allocated in accordance with Section 27.9 of Insurance Regulation 41 for insurance contracts that have an effective date prior to July 21, 2011
• Revises the address to which reports required by Section 27.7 should be submitted.
• Requires a licensed excess line broker to:
  • Electronically file an annual premium tax statement unless the broker is granted an exemption pursuant to Section 27.23 of Insurance Regulation 41.
  • Acknowledge that payment of the premium tax may be made electronically.
• Clarifies how an excess line broker must calculate the taxable portion of the premium for insurance contracts that have an effective date prior to July 21, 2011 and insurance contracts that have an effective date on or after July 21, 2011 and that cover property or risks located both inside and outside the United States.
• Requires an excess line broker to obtain, review, and retain certain trust fund information if the excess line insurer seeks an exemption from Insurance Law Section 1213.
• Requires an excess line insurer to file electronically with the NYDFS a current listing that sets forth certain individual policy details.
• Specifies that that in order to be exempt from Insurance Law Section 1213 pursuant to Section 27.16 of Insurance Regulation 41, an excess line insurer must establish and maintain a trust fund, and to permit an actuary who is a fellow of the Casualty Actuarial Society (FCAS) or a fellow in the Society of Actuaries (FSA) to make certain audits and certifications (in addition to a certified public accountant), with regard to the trust fund.
• Specifies that an excess line insurer will be subject to Insurance Law Section 1213 unless the contract of insurance is effectuated in accordance with Insurance Law Section 2105 and Insurance Regulation 41 and the insurer maintains a trust fund in accordance with Sections 27.14 and 27.15 of Insurance Regulation 41, in addition to other current requirements.
• Clarifies that the requirements set forth Sections 27.3 27.4, 27.5, 27.6, 27.10, 27.11, 27.12, 27.17, 27.18, 27.19, 27.20, and 27.21 apply when the insured’s home state is New York.
• Repeals existing Section 27.23 and adds new Section 27.23 titled, “Exemptions from electronic filing and submission requirements”. An insurer or excess line broker may request exemption from electronic filing and submission requirements; however, the request must be in writing and filed with the NYDFS at least 30 days prior to the filing due date. The request for exemption must:
  • Identify the insurer’s NAIC number or the excess line broker’s New York license number;
  • Identify the specific filing or submission the insurer or excess line broker is applying for the exemption;
  • State whether the request for an exemption is based upon undue hardship, impracticability, or good cause;
  • Provide a detailed explanation for the reason(s) why the request should be approved;
    and
  • Specify whether the request for an exemption extends to future filings or submissions,
    in addition to the specific filing or submission identified in the exemption request.
• Amends Appendix 4, which sets forth the premium tax allocation schedule, to apply to insurance contracts that have an effective date prior to July 21, 2011.
• Adds a new Appendix 5 setting forth the premium tax allocation schedule to apply to insurance contracts that have an effective date on or after July 21, 2011 and that cover property and risks located both inside and outside the United States.

11 NYCRR 27 (Insurance Regulation 41) (2014).

This post written by Kelly A. Cruz-Brown.

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In October 2013, North Carolina enacted the North Carolina Captive Insurance Act, joining 30 other states with captive-enabling legislation. On July 7, 2014, North Carolina enacted House Bill 267, which amends the Act. The North Carolina Department of Insurance described the amendments as improving the Act to be “more competitive with other captive states, provide additional flexibility to the insurance commissioner in the regulation of captives, and allow for the formation of additional types of captives in North Carolina.” A copy of North Carolina House Bill 267 is available here.

This post written by Michael Wolgin.

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Governor John Kasich signed Ohio House Bill 117 into law on June 17, 2014, becoming the 31st state to join the captive market. The legislation allows Ohio-domiciled companies to form their own “captive” insurance companies, which operate for the most part like other insurers, but which serve only the parent or affiliated companies. The legislation allows companies to insure and reinsure risks “in house”, subject to certain reserve requirements and other regulations governing insurers generally.

This post written by John Pitblado.

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In a letter dated May 19, 2014, the Captive Insurance Companies Association (CICA) urged the National Association of Insurance Commissioners (NAIC) to reject proposed revisions to the definition of “multi-state reinsurer” in the Part A and Part B preambles of the standards for state accreditation. According to the CICA, the proposed new definition is overly broad and would bring a new regulatory burden for numerous alternative risk structures that have nothing to do with problem that is sought to be addressed by the change, i.e., the utilization of special purpose vehicles and captives as reinsurance mechanisms by life and annuity insurers regarding excess reserves. The CICA argues that the proposed definition would subject most captive reinsurers (including reinsurers in the property/casualty industry) to NAIC accreditation standards, and that there is no evidence that captives need this additional regulatory burden. The CICA argues that if the NAIC is concerned with the life and annuity reinsurance provided by the captive subsidiaries of large commercial insurers that may present “systemic risk” to the global financial system, then the definition should be properly tailored so as to avoid application for the thousands of captives that are not in this category.

Previously, the preamble had excluded “insurers that are licensed, accredited or operating in only their state of domicile but assuming business from insurers writing that business that is directly written in a different state.” The proposed revised definition removes that exclusion, defining a multi-state reinsurer as “an insurer assuming business that is directly written in more than one state and/or in any state other than its state of domicile. This includes but is not limited to captive insurers, special purpose vehicles and other entities assuming business.”

This post written by Catherine Acree.

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Colorado has amended its laws regarding credit for reinsurance and receiverships to conform to certain model acts adopted by the National Association of Insurance Commissioners (NAIC). House Bill 14-1315, conforms Colorado Revised Statutes 10-3-701 through 10-3-706 with the NAIC Credit for Reinsurance Model Act to establish criteria that the insurance commissioner is to use in certifying reinsurers, imposes requirements on ceding insurers to take certain steps to manage their concentration of risk, and imposes requirements upon the insolvency of a non-U.S. insurer or reinsurer that provides security to fund its U.S. obligations.

Furthermore, House Bill 14-1315 enacts Colorado Revised Statute 10-3-540.5 to specify the conditions under which insurance companies may offset their obligations to each other when an insurance company becomes insolvent. Colorado Revised Statute 10-3-540.5 adopts section 711 of the NAIC Insurer Receivership Model Act.

The Governor signed House Bill 14-1315 on May 31, 2014. The amendments to Colorado Revised Statutes 10-3-701 through 10-3-706 are effective January 1, 2015. Colorado Revised Statute 10-3-540.5 is effective August 6, 2014.

This post written by Kelly A. Cruz-Brown.

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