Reinsurance Focus

There has been considerable concern in the insurance and reinsurance industries that certain hedging and reinsurance activities that companies have engaged in for a number of years, particularly with respect to life insurance and annuity products, might be viewed as swaps under regulations implementing the swap regulation provisions of the Dodd-Frank Act, complicating those transactions and increasing their costs.  A division of the Commodity Futures Trading Commission recently issued a no-action letter indicating that it would not recommend that the Commission take enforcement action based upon the view that certain longevity risk reinsurance transactions are “swaps.”  This is the first time that the Commission has addressed whether a specific insurance transaction is covered by the swap rules.  The transaction at issue encompassed longevity and inflation risks from a pool of plan beneficiaries under a non-U.S. defined benefit pension plan.  The risks were the subject of longevity swap hedging transactions and reinsurance through a Bermuda domiciled cell insurance company.  The Dodd-Frank Act contains an insurance safe harbor provision, which was intended to provide a basis for finding that certain enumerated traditional insurance products and activities, including annuities and reinsurance, are not regulated swaps.  The no-action letter analyzes the described transaction and finds that it involves an insurance policy and a “traditional reinsurance contract,” which should not be characterized as a swap.  This no-action letter provides insight into how the CFTC views the insurance safe harbor provision of the Dodd-Frank Act.  CFTC Letter No. 14-67 (April 8, 2014).

This post written by Rollie Goss.

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Vermont has amended its law governing how ceding insurers take credit for reinsurance within the state. The law, in part, implements new eligibility requirements for assuming insurers to be accredited reinsurers and requires ceding insurers to take certain steps to manage their concentration of risk. It also imposes certain requirements upon the insolvency of a non-U.S. insurer or reinsurer that provides security to fund its U.S. obligations. The Governor signed the act into law on May 9, 2014, and the amendments were effective upon passage. 8 V.S.A. Sec. 3634a.

This post written by Renee Schimkat.

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On May 15, 2014, the Utah Insurance Department and Surplus Line Association of Utah issued Bulletin 2014-5 to all surplus lines insurers and surplus lines producers/brokers informing them of the following changes by the Utah legislature for policies issued or renewed in Utah after May 13, 2014:

• Insurers who wish to audit a surplus lines policy must initiate the audit within six months after the expiration of the term for which the premium is paid and must complete the audit within three years after the surplus lines insurance transaction expires. The failure to meet either of these requirements will preclude the insurer from charging premiums in excess of the terms of the original policy.
• A surplus lines insurer may not count as earned premium an amount in excess of 50% of the initial premium until the earlier of (1) the completion of the audit; or (2) the term for which the auditable policy was written has expired and the time to conduct an audit has passed.
• If an audit is conducted, the insured is entitled to a refund if the actual exposure is less than the estimated exposure. The insured may request such an audit and the insurer will be bound by the insured’s statement of exposure, requiring refund of the excess portion of the premium, if the insurer does not conduct the audit as required by this law.
• Alternatively, if the risk is determined to be greater than the initial estimate upon a timely audit, the insurer is entitled to additional premium.

These new laws apply to the extent they are not pre-empted by federal law.

This post written by Leonor Lagomasino.

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Vermont has amended its captive insurer statute (H. 563) to permit a  company to elect a “dormant captive insurance company” status for a period of five years (renewable) if it meets certain criteria: (1) unimpaired, paid-in capital and surplus of not less than $25,000; (2) submission of a prescribed annual report; and (3) payment of a license renewal fee.  Dormant companies are those which: (1) do not insure controlled unaffiliated business; (2) have ceased transacting the business of insurance (including the issuance of insurance policies); and (3) have no remaining liabilities associated with insurance business transactions or outstanding insurance policies.  Dormant companies are not liable for certain premium taxes.

This post written by Rollie Goss.

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Connecticut has amended its law concerning captive insurers doing business in the state to include, in part, a new provision on how foreign captive insurers can become Connecticut domestic companies and revisions on how captive insurers can take credit for certain reinsurance risk. The law defines a “captive insurer” as “an insurance company owned by another organization whose exclusive purpose is to insure risks of the parent organization and affiliated companies or, in the case of groups and associations, an insurance organization owned by the insureds whose exclusive purpose is to insure risks of member organizations and group members and their affiliates.” The changes to the law become effective October 1, 2014. Conn. Sub. Senate Bill No. 188, Public Act No. 14-6.

This post written by Renee Schimkat.

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Tennessee’s governor signed into law a repeal of that state’s previously-passed enabling legislation, which allowed it to join the Surplus Lines Insurance Multi-State Compliance Compact (“SLIMPACT”). SLIMPACT was one of the two models proposed by various states in response to the invitation and recommendation to do so set forth in the Non-Admitted and Reinsurance Reform Act (“NRRA”) as part of the omnibus Dodd-Frank financial regulation overhaul passed by Congress in 2010. SLIMPACT is an interstate compact created for the purpose of allowing states to take advantage of shared administration of data, record-keeping, and premium tax allocation. Tennessee was the last state to join, which it did in June, 2011, becoming the ninth state. By its terms, SLIMPACT was slated to become effective once ten states joined. However, its future is now in doubt as it moved farther away from its ten-state goal, after stalling at nine states for the last three years. The repeal bill, Tennessee Senate Bill 356, was signed into law on April 4, 2014, and repeals Section 56-14-201 of the Tennessee Code. The bill becomes effective July 1, 2014.

This post written by John Pitblado.

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The Dodd-Frank Act encouraged states to cooperate in the regulation of surplus lines insurance premium tax allocation.  In a Special Focus article, John Pitblado provides an update on the efforts of the states to address this issue.

This post written by John Pitblado.

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The NY DFS announced an amendment to its regulations governing excess line placements to conform with the Nonadmitted and Reinsurance Reform Act of 2010 (“NRRA”), which prohibits any State, other than the insured’s home state, from requiring a premium tax payment for nonadmitted insurance. The new regulation sets forth capital and surplus requirements for non-admitted insurers, and otherwise conforms the regulations to the NRRA, as adopted by New York and signed into law in 2011, amending Chapter 61 of the Insurance Laws.

This post written by John Pitblado.

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The Vermont Department of Financial Regulation’s Captive Insurance Division has released a bulletin entitled “Guidance for Special Purpose Financial Insurers” to provide guidance regarding licensing standards and regulatory requirements for Special Purpose Financial Insurance Companies, formerly known in Vermont as “Special Purpose Financial Captives” until legislation mid-last year. With a pronounced goal of “support[ing] the use of appropriate uniform standards for regulation of insurer-owned captives and Special Purpose Financial Insurance Companies and to establish best practices and high standards for their continued use,” the bulletin has an NAIC-esque tone. Among other standards, the bulletin provides a sampling of qualified transactions and then discusses transaction review, reporting, and disclosure procedures that appear to engender significant collaboration between and among interested and/or cedents’ regulators. Vermont’s bulletin comes on the heels of a string of regulator releases addressing the captive insurance market, including releases from the New York Department of Financial Services and NAIC in June and July 2013, respectively, and, most recently, the FIO in December 2013. Vt. Ins. Bulletin No. C-2014-01 (Jan. 27, 2014).

This post written by Kyle Whitehead.

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Foreign retrocession insurance transactions are beyond the reach of IRS excise taxes based on the plain language of 26 U.S.C. § 4371(3), which aims to tax insurance transactions involving policies issued by foreign insurers or reinsurers. The District Court for the District of Columbia recently granted summary judgment to a Bermuda reinsurer in its suit against the IRS for a refund of an excise tax extracted from the foreign reinsurer in connection with its ceding of risk to a retrocessionaire. The Government maintained that Congress intended to impose a tax on any and all successive levels of insurance or reinsurance obtained from a foreign insurer, but the court held that the statute had clear internal limitations on its application. Specifically, taxes could be levied on premiums paid on policies of reinsurance covering specific insurance contracts, including casualty insurance, indemnity bonds, life insurance, sickness or accident insurance, or annuity contracts. However, retrocession policies are reinsurance policies covering the risks of reinsurance policies, not one of the types of insurance contracts enumerated by Section 4371(3). Validus Reinsurance, Ltd. v. United States, Case No. 13-0109 (ABJ) (D.D.C. Feb. 5, 2014).

This post written by Kyle Whitehead.

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