Reinsurance Focus

The Consumer Financial Protection Bureau issued a press release on January 29, 2014, announcing that it has initiated an administrative proceeding against PHH Corporation and its affiliates arising from an alleged mortgage insurance “kickback” scheme. CFPB claims that when PHH initiated mortgages requiring mortgage insurance (typically, where the buyer cannot put up a 20 percent downpayment), it referred the consumers to mortgage insurers with which PHH partnered, in exchange for the insurers then purchasing reinsurance from PHH’s subsidiaries. The CFPB claims this violated the Real Estate Settlement Procedures Act and unfairly increased the cost of borrowing for consumers. The CFPB’s Notice of Charges will be available on the CFPB website after February 12, 2014.

This post written by John Pitblado.

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The Missouri Department of Insurance has announced its approval of two Swiss reinsurers, Swiss Reinsurance Co. Ltd. and Swiss Re Corporate Solutions Ltd., under Missouri’s “credit for reinsurance” law. This allows the two reinsurers to post reduced capital for Missouri transactions, based in part on their high credit rating from recognized rating agencies, and their respective capital surpluses, which far exceed the $250 million minimum under the law ($22.9 billion, and $2.65 billion, respectively).

This post written by John Pitblado.

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The Office of the Superintendent of Financial Institutions of Canada promulgated new reinsurance rules under Canada’s Insurance Companies Act, governing reinsurance transactions with a “related” reinsurer. The rules require detailed disclosures by the applicant (primary insurer) of required due diligence, objectives, risks, premiums, coverage, choice of law and other issues involved in the transaction. The rules also require detailed submissions from the proposed related reinsurer, regarding its financials, jurisdictions in which it operates, organization charts and past history of administrative or criminal sanctions, among other things. OSFI Index DA No. 21 (Dec. 2013).

This post written by John Pitblado.

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The United States Government Accountability Office has issued a Report to Congressional Committees entitled “Property and Casualty Insurance – Effects of the Nonadmitted and Reinsurance Reform Act of 2010.” The Report describes the size and condition of the surplus lines insurance market and examines actions states have taken to implement the Act’s provisions and the effects of the Act, if any, on the price and availability of coverage. The GAO analyzed end-of-year financial data for 2008 through 2012 for insurers who sold surplus lines insurance in 2012 and interviewed insurance regulators from states with a large number of surplus lines insurers, industry associations representing interests in the surplus lines market, and large insurers and brokers. Among the GAO’s finding are: (1) surplus lines insurers’ premiums have increased modestly from $24.8 billion to $25.2 billion; (2) the companies have generally remained profitable; (3) the Act has caused little noticeable shifting in coverage between the admitted and surplus lines markets; (4) nearly all states have modified their laws to implement at least portions of the Act; (5) the changes in states’ laws have simplified compliance for multistate risks, according to market participants; and (6) a few states are also participating in a premium tax-sharing agreement, as permitted by the Act.

This post written by Michael Wolgin.

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Allstate Floridian won an appeal in a case alleging that it failed to pass on the savings it enjoyed from taxpayer-subsidized reinsurance. In 2007, Florida’s legislature passed a law making the subsidized reinsurance available to Florida insurers at rates lower than those offered in the private market. Insurers like Allstate were supposed to pass those savings onto consumers. The plaintiff brought a putative class action against Allstate arising from the Florida Office of Insurance Regulation’s determination that Allstate had charged excessive premium rates. The rates had been filed with the Office, but were later determined to be excessive. The trial court dismissed the putative class action, finding all four claims asserted were barred by the filed rate doctrine, but also finding that each claim failed in its own right to state legally sufficient claims for various reasons. However, on appeal, plaintiffs only briefed and argued the filed rate issue, and not the other several reasons the district court cited in dismissing the claims. The Eleventh Circuit Court of Appeals therefore affirmed, finding the plaintiff had abandoned the other issues that precluded reversal. Sapuppo v. Allstate Floridian Ins. Co., No. 13-11558 (11th Cir. Jan. 7, 2014).

This post written by John Pitblado.

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On December 18, 2013, Fannie Mae and Freddie Mac issued notices announcing updated requirements for lender-placed insurance (“LPI”) for all Fannie and Freddie mortgage loans. Included in the update is a new requirement that a loan servicer’s LPI carrier must not be an “affiliated entity,” including affiliated captive insurers and reinsurers. A new certification will be required for the servicers to certify that they comply with Fannie’s and Freddie’s requirements for acceptable LPI insurance carriers. Fannie and Freddie also will require servicers, upon request, to provide copies of their LPI policies, including any contractual arrangements with servicers and LPI carriers. The servicers will also be required to respond to periodic requests for data. Copies of Fannie’s Servicing Guide Announcement SVC-2013-27 and Freddie’s 2013-27 Bulletin, can be accessed here.

This post written by Michael Wolgin.

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We have posted many times on the slowly developing changes in the area of credit for reinsurance and reinsurance collateral requirements. The recent report on insurance regulation from the Federal Insurance Office contained a recommendation in this area: “To afford nationally uniform treatment of reinsurers, FIO recommends that Treasury and the United States Trade Representative (USTR) pursue a covered agreement for reinsurance collateral requirements based on the National Association of Insurance Commissioners Credit for Reinsurance Model Law and Regulation.” FIO Report, page 37. Such an agreement likely would be an international agreement which, pursuant to the Dodd-Frank Act, would preempt and supersede state laws in this area.

At the same time, the NAIC has been monitoring the adoption by the states of the Credit for Reinsurance Model, and has pursued a process of certifying foreign jurisdictions as “qualified jurisdictions” for purposes of of permitting reinsurers licensed or domiciled in such jurisdictions to seek certification by states for reduced collateral requirements under the Credit for Reinsurance Model. The NAIC has announced the addition of four international supervisory authorities as Conditional Qualified Jurisdictions: the Bermuda Monetary Authority; the German Federal Financial Supervisory Authority; the Swiss Financial Market Supervisory Authority; and the United Kingdom Prudential Regulation Authority of the Bank of England. According to the NAIC article, this approval permits states to begin certifying reinsurers licensed or domiciled in those jurisdictions for collateral reduction purposes, with the full review of these four jurisdictions by the NAIC continuing during 2014. Individual states have the authority to approve jurisdictions not on the NAIC’s list of qualified jurisdictions. Since the NAIC/Model approach depends upon action by individual states, this route is unlikely to achieve the uniformity advocated by the FIO Report, at least in the short term.

This post written by Rollie Goss.

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The Department of Health and Human Services (“HHS”) has published a Notice of Proposed Rulemaking proposing the reinsurance payment parameters and uniform contribution rate for the 2015 benefit year and certain oversight/audit provisions for the transitional reinsurance programs required to be established in each state pursuant to the Patient Protection and Affordable Care Act to help pay the cost of treating high-cost enrollees in the individual market from 2014 through 2016. In addition to explaining both the operation of the HHS’s Affordable Care Act Health Insurance Model for estimating market enrollment and expenditure distributions, as well as the composition of the uniform contribution rate formula (which includes an annually decreasing reinsurance payment pool, contributions to the U.S. Treasury, administrative expenses, and an estimation of enrollees in plans required to make reinsurance contributions), the Notice also proposes for the 2015 benefit year (1) a uniform reinsurance contribution rate of $44 annually per enrollee in plans required to make required reinsurance contributions (versus $63 in 2014), (2) a $70,000 attachment point (versus $60,000 in 2014), (3) a $250,000 reinsurance cap (same as in 2014), and (4) a 50% coinsurance rate (versus 80% in 2014). Moreover, the Notice proposes to decrease the attachment point for 2014 from $60,000 to $45,000 to account for the HHS’s prior overestimation of the total covered claims costs of individuals enrolled in reinsurance-eligible plans in 2014. Lastly, the HHS proposes that if reinsurance contributions collected for a benefit year exceed the requests for reinsurance payments for the benefit year, the HHS would increase the coinsurance rate on its reinsurance payments, ensuring that all of the contributions collected for a benefit year are expended for claims for that benefit year.

This post written by Kyle Whitehead.

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On November 19, Senator Thune of South Dakota introduced S. 1724, the “Union Tax Fairness Act,” which proposes to provide that the reinsurance fee to be paid by health insurers and third-party administrators (on behalf of group plans) under the transitional reinsurance program of the Patient Protection and Affordable Care Act (“ACA”) be applied equally to all such issuers and administrators so that no special exemptions are available. This requirement would not be waivable. The bill (which can be read here) has been referred to the Committee on Health, Education, Labor, and Pensions. A companion house bill, H.R. 3755, was introduced by Congressman Perry of Pennsylvania on December 12 and has been referred to the House Committee on Energy and Commerce.

In other ACA reinsurance-related legislative activity, Congressman Tiberi of Ohio introduced on November 13 H.R. 3489, a bill to amend Section 1341 of the ACA to repeal entirely the funding mechanism for the transitional reinsurance program. The bill (which can be read here) reminds that the transitional reinsurance program was established to stabilize risk in the individual health insurance market during the first three years of the health insurance exchanges established by the ACA, but it then emphasizes (1) that the reinsurance fees to be paid to the U.S. Treasury serve as a disincentive for employers to continue offering coverage to all employees and (2) that employers do not receive any benefits of the program. That bill has been referred to the House Subcommittee on Health.

This post written by Kyle Whitehead.

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The Federal Insurance Office has finally issued the report required by the Dodd-Frank Act assessing the regulation of insurance in the United States. The report includes recommendations for the federal government to consider a limited role in helping to make the regulation of insurance more uniform. With respect to reinsurance, the report contains the following recommendations:

· States should develop a uniform and transparent solvency oversight regime for the transfer of risk to reinsurance captives (see page 32 of the report); and

· To afford nationally uniform treatment of reinsurers, FIO recommends that Treasury and the United States Trade Representative pursue a covered agreement for reinsurance collateral requirements based on the National Association of Insurance Commissioners Credit for Reinsurance Model Law and Regulation (see page 37 of the report). This would apparently be an international level agreement to introduce uniformity throughout the states, which under Dodd-Frank would pre-empt state laws.

This post written by Rollie Goss.

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