Reinsurance Focus

The European Union’s Solvency II initiative has received considerable trade press exposure, but the NAIC’s Solvency Modernization Initiative has received less attention. Learn about the general outlines of these initiatives in our Special Focus article, Solvency Ho! An Update on U.S. and European Solvency Initiatives.

This post written by John Pitblado.

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By Consent Order dated December 13, 2011, the Florida Office of Insurance Regulation approved the application of Bermuda reinsurer Platinum Underwriters Bermuda, Ltd. to operate in Florida with posting less than 100% collateral. The Order recites Platinum’s fulfillment of statutory criteria, and notes Platinum’s demonstration of $1.366 billion in capital and surplus and favorable ratings from two accepted agencies. According to the Office’s December 14, 2011 press release, Platinum is the sixteenth Bermuda reinsurer approved to use Florida as its port-of-entry state, in addition to a Germany company and a U.K. company. In the Matter of: Platinum Underwriters Bermuda, Ltd., Case No. 122414-11-CO (Fla. Office of Insurance Regulation Dec. 13, 2011).

This post written by John Pitblado.

See our disclaimer.

On November 6, 2011, the NAIC Executive Committee-Plenary adopted revisions to the NAIC’s Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model Regulation (#786). The revisions, as finally adopted, are substantially in the form covered in our Special Focus analysis of the revisions adopted in September by the Financial Condition (E) Committee, with one notable addition. The Model Law, in new Section 2(J), now imposes certain notification requirements on a ceding company when its reinsurance recoverables from a single reinsurer (or group of assuming companies) exceed specified levels of the ceding company’s surplus or gross written premium. Note: The redlining in these documents is from the NAIC, and apparently shows the differences between the just adopted versions and the previously existing text of the model law and model regulation.

This post written by Anthony Cicchetti.

Underwriters at Lloyd’s, London was approved by Consent Order of the Florida Office of Insurance Regulation to become the seventeenth reinsurer admitted under Florida’s law allowing foreign reinsurers to post reduced collateral, upon demonstration that it is financially sound and highly rated by eligible ratings institutions. As set forth in the Consent Order, Lloyd’s reported capital and surplus of $29.9 billion, well-exceeding Florida’s $250 million requirement. In re Underwriters at Lloyd’s, London (Fla. O.I.R. Oct. 6, 2011).

This post written by Michael Wolgin.

The United States Court of Appeals for the Second Circuit has vacated the criminal convictions of Gen Re and AIG executives stemming from a finite reinsurance transaction with undisclosed payments, which allegedly was intended to improve AIG’s financial statements without transferring any significant risk. A jury had convicted all of the defendants on all charges. The matter was remanded for a new trial. After hundreds of pages of briefing and numerous arguments of prosecutorial misconduct, erroneous evidentiary rulings and improper jury charges, the Court of Appeals found only two bases for vacating the convictions: (1) the admission of three bar charts which linked the decline in AIG’s stock price to the transaction at issue; and (2) a jury charge “that allowed the jury to convict without finding causation.”

The stock price evidence was interesting because the court found that “the charged offenses here do not require a showing of loss causation ….” Nevertheless, the prosecution sought to use causation evidence “to humanize its prosecution” and show that the transaction harmed AIG stockholders who had purchased AIG stock for their retirement accounts or the college funds of their children. The evidence presented the defendants with a dilemma: to allow the jury to attribute the full stock price decline to the transaction or introduce prejudicial evidence “of other besetting scandals, wrongdoing, and potentially illegal actions at AIG.” The defendants sought to sidestep the problem by stipulating to materiality, but the government refused. The court found that the district court’s admission of the charts was inconsistent with other rulings on the stock price issue, and was prejudicial to the defendants.

With respect to the jury charge issue, the court noted that the defendants did not specifically object to the causation instruction, which was the product of competing suggestions by counsel, but that the instruction nevertheless warranted reversal under the plain error rule, as it “is improbable, let alone ‘absolute[ly] certain[],’ that the jury based its verdict on a properly instructed ground.”

This opinion contains an extensive but relatively concise discussion of the finite reinsurance transaction at issue, and of the fact that low risk finite reinsurance transactions are acceptable, “and have their uses,” unless they violate FAS 113, the so-called 10-10 rule, entail no risk, and amount to fraud. The court described how this particular transaction was deliberately structured to conceal certain credits and repayments from the companies’ outside auditors. The court rejected all but two of the defendants’ numerous challenges, including allegations that one key prosecution witness had committed perjury, although it suggested that the government be circumspect about how his testimony is presented in a new trial. A major “take away” from this opinion is the clear holding that finite reinsurance transactions can be the basis for criminal convictions of the executives involved in such transactions. United States v. Ferguson, et al., No. 08-6211-CR (2d Cir. August 1, 2011).

This post written by Rollie Goss.

The Florida Office of Insurance Regulation (FOIR) has approved two more Bermuda-based reinsurance companies, Aspen Insurance Ltd. and AXIS Specialty Ltd., to become an “eligible reinsurer” under Florida law and thereby operate in Florida’s property catastrophe reinsurance market with reduced collateral. Ceding insurance companies may now receive full credit on their financial statements for their Aspen or AXIS Specialty property catastrophe reinsurance ceded without full collateral. These approvals bring to fourteen the number of reinsurance companies approved under this program. In re Aspen Insurance Ltd., Case No. 117338-11-CO (FOIR May 6, 2011) and In re AXIS Specialty Ltd., Case No. 117743-11-CO (FOIR May 23, 2011).

This post written by Michael Wolgin.

Alterra Bermuda Limited and Arch Reinsurance Limited were both approved by Consent Order of the Florida Office of Insurance Regulation, to become the eleventh and twelfth reinsurers, respectively, admitted under Florida’s law allowing foreign reinsurers to post reduced collateral, upon demonstration that they are financially sound and highly rated by eligible ratings institutions. As set forth in the respective Orders, Alterra is a Bermuda-based reinsurer with capital and surplus in excess of $1.5 billion, and Arch is a Bermuda-based reinsurer with over $4.2 billion in capital and surplus. In re: Alterra Bermuda Limited, No. 115697-11-CO (Fla. O.I.R. March 23, 2011); In re: Arch Reinsurance Limited, No. 115570-11-CO (Fla. O.I.R. March 31, 2011).

This post written by John Pitblado.

The New Jersey Governor has signed into law a new bill that creates a reduced collateral reinsurance program similar to those enacted by Florida and New York. The new law, A2670, permits the posting of less than 100% collateral if the reinsurer meets certain financial and regulatory standards. A summary of the new bill is available.

Meanwhile, the Florida Office of Insurance Regulation has authorized another Bermuda-based reinsurer to operate in Florida with reduced collateral requirements. A Consent Order was entered approving Montpelier Reinsurance Ltd. for the program, and the OIR issued a press release announcing the agreement.

This post written by Rollie Goss.

The Florida Office of Insurance Regulation has approved two more Bermuda-based reinsurers for its collateral reduction program. Consent Orders have been entered approving Allied World Assurance Company, Ltd. and Tokio Millennium Re Ltd. The OIR also issued press releases announcing the agreements with Allied World and Tokio Millennium. Nine reinsurers have now been approved for this program.

This post written by Rollie Goss.

The following are selected State bills and regulations that were recently introduced or adopted on the topic of reinsurance.

Nonadmitted and Reinsurance Reform: In response to the mandates of the Nonadmitted and Reinsurance Reform Act of 2010 of the Dodd-Frank Act, the legislatures of Connecticut (Bill No. 50), Kentucky (Bill No. 167), and North Dakota (Bill No. 1123) have introduced bills to establish requirements that are consistent with the federal law for surplus lines insurers doing business in the state. Kentucky’s bill is modeled after the surplus lines proposal approved by the National Conference of Insurance Legislators (“NCOIL”). At this time, it is unclear based on what has been published whether the Connecticut or North Dakota bills follow the surplus lines proposal approved by NCOIL, the proposal approved by the National Association of Insurance Commissioners or are unlike either of those proposals.

Reinsurance Covering Title Insurance Policies: Proposed legislation (Bill No. 322) relating to the requirements for reinsurance contracts covering title insurance policies was introduced in the Texas Senate. The proposed legislation amends Section 2551.302 of the Texas Insurance Code to remove the requirement that prior approval of the form of reinsurance contract be obtained from the Insurance Department. The proposed legislation also repeals Section 2551.303 concerning additional requirements regarding the approval and form of reinsurance contract.

Reinsurance and Accounting Practices and Procedures Manual: Pursuant to emergency rulemaking, the New York Insurance Department adopted amendments to New York Insurance Regulation No. 172 (11 NYCRR 83) to incorporate by reference the NAIC Accounting Practices and Procedures Manual as of March 2010, except as provided in 11 NYCRR 83.4. The Manual includes a body of accounting guidelines referred to as Statements of Statutory Accounting Principles (“SSAPs”). Section 83.4 sets out “Conflicts and Exceptions” to the Manual, and makes clear that in instances of conflict or deviation, New York statutes and regulations control. Section 83.4 is amended, as it relates to reinsurance, to adopt paragraph 25 of SSAP No. 61, “Life, Deposit-Type and Accident and Health Reinsurance,” with the following addition:

If a ceding insurer that receives credit for reinsurance by way of deduction from its reserve liability remits the associated reinsurance premiums for coverage beyond the paid-to-date of the policy, the ceding insurer may record an asset for the portion of the gross reinsurance premium that provides reinsurance coverage for the period from the next policy premium due date to the earlier of: (1) the end of the policy year or (2) the next reinsurance premium due date. The asset shall be admitted as a write-in asset to the extent that the reinsurer must refund premiums to the ceding insurer in the event of either the termination of the ceded policy or the termination of the reinsurance agreement.

This post written by Karen Benson.