Reinsurance Focus

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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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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In a lengthy opinion detailing extensive findings of fact and law, a New York federal district court entered its order in favor of Harbinger F&G, LLC and against OM Group (UK) Limited in an action stemming from claims arising from the stock purchase agreement for the purchase of Old Mutual Financial Life Insurance Company by Harbinger from OM Group. Under the Agreement, Harbinger was entitled to a $50 million purchase price reduction if the Maryland insurance regulators did not approve a post-closing transaction between Old Mutual and Front Street Re, a reinsurance company owned indirectly by Harbinger, and if Harbinger fulfilled certain other conditions precedent. Harbinger was required to prepare and file certain approval documentation in the form agreed to by the parties, to use reasonable best efforts to obtain governmental approval for the reinsurance transaction and, if the transaction was not approved, Harbinger was required to engage in certain remedial efforts. When the post-closing transaction was not approved but OM Group failed to make the purchase price reduction payment, Harbinger sued. After holding a bench trial on those issues not disposed of on summary judgment, the trial court entered judgment in favor of Harbinger but found OM Group was entitled to the payment of certain fees from Harbinger. “>Harbinger F&G, LLC v. OM Group (UK) Limited, Case No. 12 Civ. 05315 (CRK) (USDC S.D.N.Y. Mar. 18, 2015).

This post written by Leonor Lagomasino.

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At its December 11, 2014 meeting, the National Association of Insurance Commissioners (NAIC) approved seven foreign countries as Qualified Jurisdictions so that reinsurers licensed and domiciled in those jurisdictions will be eligible for reinsurance collateral reduction requirements under NAIC’s Credit for Reinsurance Model Law. Four of those jurisdictions – Bermuda, Germany, Switzerland, and the United Kingdom, were previously on NAIC’s list of Conditional Qualified Jurisdictions. Effective January 1, 2015, these four, along with Japan, Ireland and France, will be full Qualified Jurisdictions subject to a 5-year term, after which they will be re-evaluated under the provisions of the Qualified Jurisdiction Process.

NAIC also adopted the Revised Insurance Holding System Regulatory Act and Actuarial Guideline 48. The Act, in part, updates the model to clarify the group-wide supervisor for a defined class of internationally active insurance groups. AG 48 establishes national standards regarding certain captive reinsurance transactions and includes regulation of the types of assets held in a backing insurer’s statutory reserve. AG 48 takes effect in 2015. NAIC issued a news release on its actions, which can be found here.

This post written by Renee Schimkat.

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In 2003 and 2004, the Internal Revenue Service disallowed deductions taken by SHI Group, a subsidiary of the Swedish company Securitas AB, for insurance expenses related to a captive insurance arrangement established by Securitas AB. SHI Group, which maintained an office in California, petitioned the disallowance of these deductions in the United States Tax Court. The Internal Revenue Code permits deductions for insurance premiums as business expenses. Although the insurance premiums may be deductible, amounts placed in reserve as self-insurance are not and can only be deducted at the time the loss for which the reserve was established is actually incurred. While neither the Code nor the regulations define insurance, courts have looked primarily to four critieria in deciding whether an arrangement constitutes insurance for income tax purposes: (1) the arrangement must involve insurable risks; (2) the arrangement must shift the risk of loss to the insurer; (3) the insurer must distribute the risk of loss to the insurer; and (4) the arrangement must be insurance in the commonly accepted sense. Based on the complicated facts before it, the Tax Court determined that the captive arrangement at issue constituted insurance, allowing deductions for the related expenses. Securitas Holding, Inc. v. Commissioner, No. 21206-10, T.C. Memo 2014-225 (U.S.T.C. Oct. 29, 2014).

This post written by Leonor Lagomasino.

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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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In 2005, former New York Attorney General Eliot Spitzer commenced a civil enforcement action against AIG, AIG’s former CEO, and AIG’s former CFO Howard Smith for allegedly engaging in fraudulent reinsurance transactions. In response, Smith submitted a Freedom of Information Law (“FOIL”) request seeking the disclosure of the AG’s communications with the press regarding the complaint. A New York Supreme Court held that the AG’s office has a responsibility and obligation to gain access to Spitzer’s personal email account to determine if it contains documents that should be disclosed in accordance with the FOIL request. The court, however, also allowed the AG’s office to appeal the issue. On appeal, the Appellate Division determined that Spitzer is a necessary party and remanded the case without deciding the issue so the Supreme Court can order Spitzer’s joinder. Smith v. New York State Office of the Attorney General, No. 515758 (N.Y. App. Div. Oct. 17, 2013).

This post written by Abigail Kortz.

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In an effort to implement reduced collateral requirements for ceding insurers, New Hampshire and Delaware have both enacted legislation that conforms with the NAIC’s amendments to its Credit for Reinsurance Model Law and Regulations. New Hampshire’s amended Reinsurance law, introduced as House Bill 231 on January 1, 2013, took effect on September 13, 2013. N.H. Rev. Stat. Ann. § 405:45-:52-a. New Hampshire is also considering amending its related regulation, N.H. Code Admin. R. Ins. 600, as originally proposed on July 18, 2013. Delaware’s amended Credit for Reinsurance regulation was first published for comments on May 1, 2013, and became effective on August 15, 2013. 18 Del. Admin. Code § 1003. Though not a Model state, Hawaii also recently adopted amendments, effective July 1, 2013, relating to conditions under which risk retention captive insurers may qualify for reinsurance credits on risks ceded to a reinsurer. Haw. Rev. Stat. § 431:19-111.

This post written by Kyle Whitehead.

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We have previously posted on the NAIC’s initiatives with respect to captives and the NY Department’s captives report. The NAIC’s Executive Committee and Plenary, in a joint teleconference, have adopted the Reinsurance Task Force’s proposed White Paper on the activities of captives. Activity regarding captives at the NAIC continues on several fronts, including:

Financial Analysis Working Group of the Financial Condition (E) Committee

Additional responsibilities relating to captives have been assigned to this working group:

• Perform analytical reviews of transactions (occurring on or after a date as determined by the NAIC membership) by nationally significant US life insurers to reinsure XXX and/or AXXX reserves with affiliated captives, special purpose vehicles (SPVs), or any other US entities that are subject to different solvency regulatory requirements than the ceding life insurers, to preserve the effectiveness and uniformity of the solvency regulatory system.
• For such transactions entered into and approved prior to this date and still in place, collect specified data in order to provide regulatory insight into the prevalence and significance of these transactions throughout the industry.
• Provide recommendations to the domiciliary state regulator to address company specific concerns and to the PBR Implementation (EX) Task Force to address issues and concerns regarding the solvency regulatory system.

It was noted that some state insurance departments already conduct reviews of some individual transactions involving captives.

Principle-Based Reserving Implementation (EX) Task Force of the Executive (EX) Committee

This task force will consider the Report’s recommendations in the context of the proposed Principal-Based Reserving system and make further recommendations, if any, to the Executive (EX) Committee. This activity may be conducted through a new Captive Working Group, which will report to this task force. The Captive Working Group will consider the following issues:

• Address any remaining XXX and AXXX problems without encouraging formation of significant legal structures utilizing captives to cede business;
• Address confidentiality of information; and
• Recommend enhancement to the Financial Analysis Handbook Guidance to allow for a consistent approach for states’ review and ongoing analysis of transactions involving captives and SPVs.

Blanks Working Group of the Accounting Practices and Procedures Task Force of the Financial Condition (E) Committee

This working group is evaluating an exposure draft of a definition of “captive affiliate,” which, if adopted, would result in enhanced disclosure in Schedule F of transactions with captives. (see recent agenda item).

Reinsurance Task Force of the Financial Condition (E) Committee

The Reinsurance Task Force may implement other recommendations from the White Paper.

This post written by Rollie Goss.

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As the legislative seasons comes to a close in many states, several states have enacted modifications to their credit for reinsurance requirements to move towards the revised Credit for Reinsurance Model Act. The Missouri legislature adopted HB 133 and the Rhode Island legislature adopted HB 5608. The Georgia Department of Insurance adopted regulations (120-2-78) designed to help implement the Georgia legislature’s earlier adoption of revised credit for reinsurance requirements.

This post written by Rollie Goss.

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