Reinsurance Focus

The Florida Office of Insurance Regulation has approved a seventh reinsurer for participation in Florida’s reinsurance marketplace with modified collateral requirements. Bermuda domiciled Renaissance Re, wholly owned by Bermuda holding company Renaissance Re Holdings, was formed after Hurricane Andrew in 1992 to provide additional cat risk capacity to Florida’s property insurance marketplace and cat insurance in other markets. The holding company’s founding shareholders include GE Investment, GE Pension Trust, USF&G and Warburg and Pincus Investors. The holding company is listed on the New York Stock Exchange. The Florida OIR has, consistent with prior reinsurer approvals, entered into a Consent Order with Renaissance Re outlining the representations made by the company and the conditions of the approval. The Consent Order drops the company’s collateral requirement from 100% to 20%, a dramatic drop. The company is to meet the collateral requirement through letters of credit that comply with certain requirements.

This post written by Rollie Goss.

A bill that would establish a Federal license for national reinsurers was introduced on December 16, 2010 in the U.S. House of Representatives by Representative Dennis Moore, a six term Democrat from Kansas who is the outgoing chair of a subcommittee of the House Financial Services Committee. The bill – “Federal License for Reinsurers Act of 2010” (H.R. 6529) – seeks to create a more harmonized reinsurance regulatory system that would apply to the operation of both U.S. and foreign domiciled reinsurers. The bill creates a licensing scheme for national reinsurers that would be administered by the Director of the Federal Insurance Office (“FIO”). Under the bill, FIO’s Director is charged with setting criteria for the licensing and operation of a national reinsurer. Both U.S. entities and non-U.S. entities that establish a branch may apply for a Federal license to transact reinsurance business provided the entity has satisfied unspecified eligibility requirements.

Under the bill, FIO’s Director may revoke, suspend or restrict a Federal license whenever he determines that a national reinsurer is no long operating in a manner consistent with the criteria for licensing and operation. The bill also allows for conversion to a State reinsurance license, subject to notification and approval by FIO’s Director. Additionally, the bill subjects the provisions of Title 11 of the U.S. Bankruptcy Code to a delinquency proceeding for the liquidation or reorganization of a U.S. national reinsurer.

The operation of licensed foreign domiciled reinsurers would be subject to supervisory arrangements negotiated by the Secretary of Commerce and the U.S. Trade Representative with qualified supervisory authorities of non-U.S. jurisdictions that maintain and apply legal standards, regulatory requirements, and enforcement capabilities substantially equivalent to those applied by FIO’s Director, and in which the awards of arbitration panels and judgments of appropriate U.S. courts are enforceable and collectible. An authorized foreign reinsurer will be authorized to transact reinsurance business to the extent authorized by the applicable supervisory arrangement, which must explicitly include certain enumerated conditions relating to reciprocity, dispute resolution, insolvency, among other things.

The bill contains provisions preempting State laws that are contrary to or inconsistent with the purposes of the bill (except those which may be applicable to corporate taxes generally), including state laws that create disparate treatment between national reinsurers or authorized foreign reinsurers and State licensed insurers or reinsurers solely on the basis of the entity’s status. Preemption of State law will be determined by FIO’s Director, which can be judicially reviewed.

The bill prohibits States from interfering, directly or indirectly, with a U.S. insurer or reinsurer (i) applying for a Federal license or operating as a national reinsurer; or (ii) ceding insurance to a national reinsurer or an authorized foreign reinsurer. It also prohibits States from denying credit, either as an asset or a reduction of liabilities, on account of reinsurance ceded to a national reinsurer or an authorized foreign reinsurer. These provisions conflict with: (1) the clear provisions of the Dodd-Frank Act, which explicitly commits decisions as to reinsurance credit to the State of domicile of ceding insurers; (2) guidelines adopted by the NAIC concerning reinsurance credit and collateral; and (3) regulations adopted by Florida and New York concerning reinsurance credit and collateral. If the requirements for a federal reinsurance license do not include financial strength or other risk-based factors, this bill may turn out to be an attractive alternative for reinsurers who wish to operate with relatively modest regulation.

The bill requires cooperation between FIO’s Director and State insurance regulators, requiring the FIO’s Director to: (1) consult, as he deems appropriate, with the relevant State insurance regulators concerning regulatory matters; (2) notify all State insurance regulators of supervisory arrangements entered into; and (3) notify the relevant State insurance regulators of a change in the status of, or any administrative action taken against, a national reinsurer or an authorized foreign reinsurer. It is notable that two of these three “cooperation” requirements merely provide for the FIO’s Director to inform State insurance regulators of actions taken by the FIO, and the third leaves the decision of whether to “consult with” State insurance regulators at all to the discretion of the FIO’s Director. This is not robust consultation or “cooperation.”

In addition, the bill provides that there shall be no determination whether to subject an entity to supervision by the Board of Governors and heightened prudential standards under Section 113 of the Dodd-Frank Act on account of an entity’s status as a national reinsurer or authorized foreign reinsurer.

If the bill is adopted, FIO’s Director must commence licensing of national reinsurers and the entry into supervisory arrangements after the promulgation of regulations, which must occur not later than 2 years from the date of the enactment of the bill.

The bill was referred to the House Committee on Financial Services. The bill does not have any co-sponsors as of the writing of this post, and it is not known whether it is being sponsored by any trade associations.

This post written by Karen Benson.

On December 16, 2010, the NAIC adopted the proposed Reinsurance Collateral Reduction & Accreditation Recommendations and the Nonadmitted Insurance Multistate Agreement (“NIMA”), which were profiled in our December 6, 2010 post. The broader surplus lines proposal adopted by the National Conference of Insurance Legislators, profiled in the same post, now has the support of both the Council of State Governments and the National Conference of State Legislatures. The open question is how the states will react to these non-binding proposals.

This post written by Rollie Goss.

New York recently joined Florida in adopting a regulation approving reduced collateral for certain reinsurance agreements based largely upon the financial strength of the reinsurer. In this Special Focus article, Jorden Burt partner Anthony Cicchetti provides an analysis of the New York regulation, which takes effect January 1, 2011.

Recently, the Florida Office of Insurance Regulation issued a press release announcing that it had reached separate agreements with three Bermuda-based reinsurers. The reinsurers – Ace Tempest Re, Hiscox Insurance Co., and Partner Re – are now authorized to participate in Florida’s insurance marketplace under modified regulatory terms, including lower collateral requirements. The Florida OIR has now authorized a total of six reinsurance companies to operate in Florida under similar modified terms.

This post written by John Black.

In what appears to be one of the first, if not the first, state insurance department action in response to the Nonadmitted and Reinsurance Reform provisions of the Dodd-Frank Act (DFA), New York recently issued for comment a draft of proposed amendments to its regulations governing credit for reinsurance. As we discussed in Jorden Burt’s recent webinar on reinsurance aspects of DFA, New York was one of the states that previously had publicized proposed modifications, or enacted actual modifications, to their reinsurance laws to, among other things, address the perceived inequality confronted by non-U.S. reinsurers relating to collateral requirements for U.S. ceded business. In this regard, New York’s latest draft carries forward its previous proposal, which calls for a ratings-based framework for the determination of collateral requirements. Notably, however, several changes now embodied in New York’s proposal appear to respond directly to DFA.

For example, whereas it previously aimed to reach “authorized insurers,” New York under this draft amendment would expressly exclude from the provision’s reach situations where the cedent’s state of domicile (other than New York) recognizes credit for the ceded risk and is an NAIC-accredited state, or has financial solvency requirements substantially similar to the requirements for NAIC accreditation. In addition, those who participated in our webinar will recall that DFA includes provisions relating to the law that may govern a reinsurance contract. On this front, New York’s proposal states that the reinsurance contract must provide that disputes thereunder be governed by and construed in accordance with one of three options: (1) the laws of New York, (2) the laws of the cedent’s domicile, or (3) the laws of any state chosen by the cedent. New York’s draft proposal expressly provides that an agreement by the parties to arbitrate disputes is not overridden by such governing law provisions, consistent with DFA. The brief public comment period for New York’s draft proposed amendment ended on August 4th.

Absent further initiative by the NAIC to move forward with its previous proposal to “modernize” reinsurance regulation as it relates to collateral requirements, New York’s approach, if it goes into effect, could represent another piece in a patchwork whereby various states adopt their own modified collateral requirements within the parameters of DFA, while others maintain the status quo. We will continue to monitor such developments to keep our readers informed.

This post written by Tony Cicchetti.

On July 15, 2010, the Senate passed the Dodd-Frank Act (“DFA”), the financial regulatory modernization act that has been in the process of development and consideration by the Congress for over a year. Rollie Goss presents a Special Focus analysis of the potential impact of the DFA on the insurance and reinsurance industries and markets.

Jorden Burt will present a free webinar for Reinsurance Focus subscribers and Jorden Burt clients on the DFA’s potential impact on the insurance and reinsurance industries and markets. The webinar also will cover the potential impact of the DFA on actions by New York, Florida and potentially other states with respect to the requirement of collateral for reinsurance transactions, and the NAIC’s proposals for the regulation of reinsurance. Webinar login information will be sent to Reinsurance Focus subscribers by e-mail. To subscribe and participate in this webinar, go to our subscription page.

This post written by Rollie Goss.

The Florida Office of Insurance Regulation (“OIR”) has approved XL Re Ltd. as the second non-Florida reinsurer to operate in Florida without having to post 100 percent collateral. The approval is pursuant to a Florida regulation, 69O-144.007, which allows credit for reinsurance without full collateral for transactions involving reinsurers not domiciled in Florida, provided that certain requirements are satisfied. The requirements include, among other requirements:

• the reinsurer must obtain financial ratings from no less than two approved rating agencies;
• the percentage of collateral required is determined based upon the lowest rating;
• the reinsurer must consent to service of process and jurisdiction;
• the reinsurer and its regulator must provide periodic financial and other information to the OIR; and
• the reinsurer must hold surplus in excess of $100 million.

Hannover Re was the first reinsurer approved for reduced collateral transactions under this regulation.

This post written by Rollie Goss.

Using the definition of insurance for tax purposes promulgated by the Supreme Court in 1941 in Helvering v. LeGierse, 312 U.S. 531 (1941), as explained and implemented by later opinions and IRS Revenue Rulings, the IRS has issued a private letter ruling stating that on the facts presented to it, the reinsurance of various workers’ compensation, property and crime risks by a captive constituted insurance for tax purposes, and that the reinsurer was an insurer for tax purposes. The criteria for this determination have been well established: (1) the arrangement must involve both risk shifting and risk distribution; (2) the risk must contemplate the fortuitous occurrence of a stated contingency; (3) the arrangement must not be merely an investment or business risk; and (4) the arrangement must constitute insurance in the commonly accepted sense. IRS No. 200950017 (12/11/2009).

This post written by Rollie Goss.

On June 13, 2009, the NAIC exposed for comment Issue Paper No. 137, which proposed changes to Statement of Statutory Accounting Principle No. 62 – Property and Casualty Reinsurance (SSAP No. 62). The proposed change provides an exception to accounting principles for retroactive reinsurance agreements for reinsurance and/or retrocession agreements that meet the criteria of property and casualty run-off agreements described in the issue paper. This proposal has progressed to the stage that a proposed amendment to SSAP No. 62 has been exposed for comment. The comment period expires October 28, 2009. A public hearing will be held on the proposal, and interested parties may submit written comments and/or seek to speak at the hearing. For more information, go to the web pages of the NAIC’s Statutory Accounting Principles Working Group.

This post written by Rollie Goss.