Reinsurance Focus

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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On June 11, 2013 the New York Department of Financial Services released a report titled Shining A Light On Shadow Insurance: A Little-Known Loophole That Puts Insurance Policyholders And Taxpayers At Greater Risk (“the NY Report”). The NY Report describes an investigation that the New York Department initiated in July 2012 into the practice of reinsuring term and universal life insurance policies with non-New York domiciled captive insurers which are subject to “looser reserve and regulatory requirements.” Receiving publicity in a New York Times article, the NY Report pledges to continue the investigation, urges the NAIC to develop enhanced disclosure requirements for “shadow insurance,” urges the Federal Insurance Office (“FIO”) and the NAIC to conduct a “similar investigation,” and suggests “an immediate national moratorium on approving additional shadow insurance transactions until those investigations are complete ….”

As reported previously in Reinsurance Focus, the NAIC formed a special working group of the Financial Condition (E) Committee in November 2011, which has been investigating the use of captives, including the possible use of captives to evade regulatory accounting rules concerning reserves. The working group, of which New York has been an active member, approved a white paper containing its recommendations on June 6, 2013, shortly before the release of the NY Report, which inexplicably failed even to mention the existence of the NAIC’s on-going inquiry. The approved NAIC white paper recommends a number of changes to accounting and other rules. In order to promote uniformity of practice, the NAIC working group has recommended that some of the proposed changes be included in the NAIC’s accreditation requirements rather than in merely optional guidelines which may or may not be adopted by individual states. In another instance of curious timing, the NY Report recommended that the FIO establish a task force to look into issues relating to captives, while it is public knowledge that the FIO already had established such a task force.

The insurance commissioners of Delaware, Louisiana (the current NAIC President) and Tennessee have, according to news reports, rejected the call in the NY Report for a moratorium, stating that: (1) many transactions engaged in by captives are appropriate and lawful, not involving the “shadow insurance” allegations contained in the NY Report; (2) captives can be regulated properly, if necessary with additional resources applied by the state insurance departments; and (3) the current NAIC captives initiative will continue and proceed to a proper conclusion.

This post written by Rollie Goss.

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Alabama, Pennsylvania, and Louisiana have joined the ranks of several other states that have adopted regulations nearly identical to the NAIC Credit for Reinsurance Model Regulation, which allows a ceding insurer to receive a credit for reinsurance as an asset or reduction from liability when insurance is ceded to a reinsurer that meets certain requirements. Alabama’s Credit for Reinsurance Regulation passed the House and the Senate on April 18, 2013 and May 2, 2013, respectively, and takes effect on January 1, 2014. H. B. 199, Reg. Sess. (Ala. 2013). Pennsylvania amended its Requirements for Qualified and Certified Reinsurers on May 25, 2013 with an effective date of June 24, 2013 to mirror recent amendments to the NAIC Model Regulation. Pa. Ins. Dep’t., Requirements for Qualified and Certified Reinsurers, 43 Pa.B. 2816 (May 25, 2013). Louisiana passed a bill effective May 23, 2013 which allows reinsurance credits to captive insurers under certain conditions. S. B. 120, Reg. Sess. (La. 2013).

This post written by Abigail Kortz.

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On April 24, 2013, the Iowa State Senate adopted a Credit for Reinsurance Act that becomes effective January 1, 2014. On March 20, 2013, the Maryland State Senate adopted Senate Bill 777, an Act concerning “Insurance – Ceding Insurers and Reinsurance,” which takes effect June 1, 2013. The language of both Acts closely tracks that of the NAIC Credit for Reinsurance Model Law, which allows a ceding insurer to receive a credit for reinsurance when insurance is ceded to a reinsurer that meets certain requirements. Senate File 182, 85th Gen. Assembly (IA Apr. 24, 2013); Senate Bill 777, Gen. Assembly (MD 2013). A staff summary provides an analysis of the Maryland act.

This post written by Abigail Kortz.

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As previously reported on this blog, the Connecticut Insurance Department amended its Credit for Reinsurance law to align with the NAIC Credit for Reinsurance Model Law with an effective date of October 1, 2012. On March 1, 2013, the Department issued a bulletin which provides practical guidance to insurers seeking to become credited reinsurers in Connecticut. The bulletin sets forth the requirements for certification eligibility and includes a checklist addressing those requirements, which must be submitted along with the application for certification. State of Conn. Ins. Dep’t., Requirements to Become a Connecticut Certified Reinsurer, Bulletin No. FS-25 (Mar. 1, 2013).

This post written by Abigail Kortz.

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The Consumer Financial Protection Bureau (“CFPB”) recently filed complaints in the Southern District of Florida against Genworth Mortgage Insurance Corporation, Mortgage Guaranty Insurance Corporation, Radian Guaranty Inc., and United Guaranty Corporation alleging violations of the Real Estate Settlement Procedures Act (“RESPA”) by engaging in the practice of paying kickbacks to captive reinsurance affiliates of mortgage lenders in exchange for referrals. All four mortgage insurers have agreed to consent orders, which inter alia (1) prohibit them from entering into any new captive mortgage reinsurance arrangements for a period of ten years, regardless of whether the arrangement includes any payments that might be interpreted as kickbacks, (2) prohibit them from accessing funds held in trust related to existing reinsurance arrangements other than for the reimbursement of reinsurance claims, (3) impose a civil penalty ranging from $2.6 to $4.5 million each, and (4) require them to submit to compliance monitoring and reporting to the CFPB. The fact that these settlements prohibit any captive reinsurance agreements for ten years, whether or not a “kickback” payment was involved, seems to overreach the allegations of the Complaints. See, e.g., CFPB v. Radian Guaranty Inc., Case No. 13-21188 (S.D. Fla. Apr. 9, 2013) (Order granting motion to approve consent judgment and Complaint).

This post written by Abigail Kortz.

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There has been significant development in both the cat bond and traditional reinsurance markets so far in 2013, with the emergence of competition between the markets, new bond terms, a cash influx into the reinsurance sector, a re-examination of business strategies and pricing reductions in both markets. Reinsurance Focus Blogmaster Rollie Goss, who has been representing ceding insurers in both cat bond and traditional reinsurance transactions, analyzes these developments in a Special Focus article titled The Developing Relationship Between the Catastrophe Bond and Traditional Reinsurance Markets.

This post written by Rollie Goss.

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There are two new strategies being considered for catastrophe risk transfers. First, H.R. 1101, recently introduced in the House of Representatives, provides for a pre-funded public-private cat risk insurance “backstop” through privately funded reinsurance through state approved plans. The bill includes requirements for reinsurance coverages to be provided by the program. The goals of this program include the stabilization of the cat risk reinsurance market, the expansion of market capacity and the reduction of the dependence on the federal government for funding for responding to disasters.

Second, five Pacific island nations, Marshall Islands, Samoa, Solomon Islands, Tonga and Vanuatu have become members of the Pacific Catastrophe Risk Insurance Pilot. Sponsored by the World Bank, with funding from Japan, the two year pilot program features cat risk modeling by AIR and parametric trigger coverage from four insurance companies, Swiss Re, Mitsui Sumitomo Insurance, Sompo Japan and Tokio Marine Nichido. The objective of the program appears to be to assess whether catastrophe insurance for hurricane, earthquake and tsunami risks might be workable feasible to provide immediate post-event liquidity to member countries. Although details are not presently available, this pilot may envision a program similar to that of the Caribbean Catastrophe Risk Insurance Facility.

This post written by Rollie Goss.

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As previously reported by Jorden Burt, LLP, the New York Department of Financial Services published a notice of proposed rulemaking regarding changes to New York’s Credit for Reinsurance regulations in November 2012. The proposed changes were published and took effect on March 20, 2013. Missouri also recently introduced a bill that will change its credit for reinsurance regulations effective January 1, 2014. The changes authorize a reduction in the required statutory trusteed surplus for reinsurers who discontinue underwriting new business for at least three years, provides credit for reinsurance ceded to credited insurers and eligibility requirements for certification, and requires ceding insurers to take steps to diversify their reinsurance programs. Both the New York and Missouri amendments are based upon the NAIC Credit for Reinsurance Model Law and Regulations. N.Y. Comp. Codes R. & Regs. tit. 11, § 125 (2013); S.B. 60, 97th Gen. Assemb., Reg. Sess. (Mo. 2013).

This post written by Abigail Kortz.

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In a case that has been litigated since 2004, and on which we have frequently reported, the New York Attorney General (“NYAG”) has attempted to block progress toward resolution by filing an objection to the pending settlement between class plaintiffs and a group of defendants. The NYAG asserts that the settlement is “unfair and inadequate” because it does not take into account an allegedly fraudulent finite reinsurance transaction between AIG and General Reinsurance Corp. The court found that the NYAG lacks standing to object, both under the Class Action Fairness Act and constitutional standing requirements, and denied the NYAG’s request for intervention taking into consideration the interest of the settlement class to resolve the matter without further delay. The court did, however, entertain the NYAG’s concerns about misrepresentations in the Class Notice regarding findings from the plaintiffs’ loss causation expert and ordered a Supplemental Notice to be sent out, which includes an additional opportunity to opt out of the settlement class. The Fairness Hearing for the proposed settlement is set for April 10, 2013. In re American International Group, Inc. Securities Litigation, Case No. 04-cv-8141 (USDC S.D.N.Y. Jan. 7, 2013).

This post written by Abigail Kortz.

See our disclaimer.