Reinsurance Focus

We have previously posted on the NAIC’s pending inquiries into the appropriateness of the use of captives. There are two recent developments of note with respect to such issues. First, the NAIC’s subgroup which has been conducting an inquiry has exposed for public comment a revised version of its white paper titled Captives and Special Purpose Vehicles. This draft does not resolve all of the disagreements evident in prior discussions of these issues at the NAIC, calling for further study with respect to some issues. The comment period for this document ends April 29, 2013. Second, the Treasury’s Federal Insurance Office (“FIO”) has formed a task force, headed by District of Columbia Insurance Commissioner William White, to examine the national implications of the use or possible abuse of captives and special purpose vehicles by life insurance companies. This represents a new direction for the FIO, and the reason for this shift is not readily apparent. Although the FIO has been involved mostly in international issues so far, and the NAIC white paper does identify its inability to regulate offshort capitves as an issue, it is unclear whether the FIO’s interest has been prompted by international regulatory concerns.

This post written by Rollie Goss.

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After more than four years of litigation, a class action suit brought against Washington Mutual comes to a close with an unopposed class settlement in the amount of $4 million, which includes $1.2 million for attorneys’ fees and litigation costs. The class action involved allegations that defendants received kickbacks from private mortgage insurers to whom they referred borrowers that exceeded the value of reinsurance services provided by defendants to those insurers. The Eastern District of Pennsylvania determined that class settlement was fair and reasonable because continued litigation would be complex, expensive, and lengthy since formal discovery would still need to be completed. The court also concluded that plaintiffs ran the risk of losing on summary judgment or at trial because resolving the issue of whether the reinsurance agreements adequately transferred risk to the defendants would depend on a battle of the experts. Finally, the court reasoned that there was a strong likelihood a class would not be certified outside of settlement because the defendants had potentially viable defenses that could not adequately be litigated on a class-wide basis. The court approved the class settlement and the award of attorney’s fees and costs in separate orders. Alexander v. Washington Mutual, Inc., Case No. 07-4426 (E.D. Pa. Dec. 4, 2012).

This post written by Abigail Kortz.

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Virginia’s Bureau of Insurance issued guidelines for implementation of the Commonwealth’s credit for reinsurance law. The Bureau’s December 13, 2012 Administrative Letter 2012-11 (the “Letter”) lists the basic criteria the Bureau will rely on in making determinations as to whether a domestic ceding insurer can take credit for reinsurance, based on the reinsurer qualifying as: (1) a licensed Virginia insurer in good standing, (2) an accredited Virginia reinsurer with at least $20 million surplus, (3) a reinsurer licensed in a state with similar credit laws and at least $20 million surplus, (4) a single assuming insurer with a trust account and at least $20 million surplus, (5) a participant in an association of unincorporated underwriters and at least $100 million surplus, (6) a participant in an association of incorporated underwriters with aggregate surplus of $10 billion and a joint trusteed surplus of at least $100 million; or (7) a reinsurer certified in Virginia with a surplus of $250 million, domiciled and licensed in a qualified jurisdiction, and with acceptable ratings from two or more ratings agencies.

The Letter also delineates ceding insurer responsibilities in ensuring the validity of credit reported on their statements, and provides information pertaining to filing requirements and forms.

This post written by John Pitblado.

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Effective October 1, 2012, the Connecticut Insurance Department has amended its Credit for Reinsurance law to align with the November 2011 amendments to the NAIC Credit for Reinsurance Model Law. The amendments to Connecticut’s law adopt the NAIC Model Law’s reporting requirements, which require a domestic ceding insurer to notify the Insurance Commissioner when reinsurance recoverables and amounts ceded to a single assuming insurer exceed certain thresholds. State of Conn. Ins. Dep’t, Credit for Reinsurance Reporting Requirements, Bulletin No. FS-24 (Dec. 3, 2012).

This post written by Abigail Kortz.

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On December 1, 2012, the NAIC’s Reinsurance (E) Task Force convened at the 2012 NAIC Fall Meeting to discuss the status of several regulatory issues. The NAIC staff reported that 11 states have adopted some form of the NAIC Model Credit for Reinsurance Law and Regulation, which allows for reduced collateral requirements for certified reinsurers. The Model Law and Regulation were approved at the Fall Meeting as optional standards, meaning states may continue to require 100% collateral. The Task Force also exposed its Draft NAIC Process for Developing and Maintaining the List of Qualified Jurisdictions for a 45-day comment period and noted that 4 jurisdictions, Bermuda, Germany, Switzerland and the UK, will receive expedited review. Another discussion focused on a survey of states regarding the Dodd-Frank’s Nonadmitted and Reinsurance Reform Act, which brought to light concerns about how to treat reinsurers that have large segments of insurance business for purposes of solvency regulation.

This post written by Abigail Kortz.

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On November 28, 2012, the New York Department of Financial Services published a notice of proposed rulemaking (with no hearing scheduled) regarding the Credit for Reinsurance regulations to more closely align its program with the recently amended NAIC Credit for Reinsurance Model Law and Regulations. The revisions to New York’s regulations are substantially similar to Section 8 of the Model Regulations, but also require reinsurance contracts to include terms regarding venue and choice of law. Section 8 and New York’s proposed amendment set forth the rating schedule used to determine reduced collateral requirements for reinsurers domiciled outside of the U.S. As previously reported by Jorden Burt LLP, the NAIC amended the Model Law and Regulations in November 2011 to add Section 8 and New York promulgated its Credit for Reinsurance regulations in November 2010 when it became only the second state to adopt a ratings-based framework. The comment period for the proposed amendments to New York’s Credit for Reinsurance regulations ends on January 12, 2013. N.Y. Comp. Codes R. & Regs. tit. 11, § 125 (proposed Nov. 28, 2012).

This post written by Abigail Kortz.

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The NAIC has had a special sub-group reviewing the regulation and use of captive insurers and special purpose vehicles. John Pitblado reports in a Special Focus article on the scope and development of this review.

This post written by John Pitblado.

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On September 7, 2012, the governor of California signed into law two bills implementing amendments to the NAIC Credit for Reinsurance Model Law and NAIC Insurance Holding Company System Regulatory Model Act. The former, SB 1216, allows full credit to insurers for insurance ceded to unauthorized reinsurers that satisfy certain financial strength ratings, without the need to post full collateral. It also contains provisions increasing oversight of the nature and extent of risk ceded by domestic insurers. The California law differs from the NAIC Model, however, by authorizing the insurance commissioner to disallow credit for reinsurance under certain circumstances, notwithstanding technical compliance with the new requirements.

The second bill, SB 1448, increases oversight over an insurer’s holding company system, specifically over “enterprise risk” defined as “any activity, circumstance, or event or series of events involving one or more affiliates of an insurer that, if not remedied promptly, is likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole.” The law requires, among other things, the filing of annual enterprise risk reports, and a statement that the insurer’s board of directors is responsible for overseeing corporate governance and internal controls, and that the insurer’s officers or senior management have approved, implemented, and continue to maintain and monitor corporate governance and internal control procedures. The law also authorizes the commissioner to establish and participate in a supervisory college to determine compliance for insurance holding company systems with international operations.

Both laws go into effect January 1, 2013. The credit for reinsurance law, however, will be deemed automatically repealed on January 1, 2016, unless separate legislation provides otherwise.

This post written by Michael Wolgin.

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We previously reported on the NAIC’s inquiry into the potentially abusive use of captives to avoid certain accounting rules. As part of that inquiry, the NAIC’s Financial Condition (E) Committee’s Captives and Special Purpose Vehicle Use Subgroup has called for comments on its white paper titled Captives and Special Purpose Vehicles. Comments are due by the close of business on November 16, 2012. The white paper describes some disagreement among different states on issues relating to captives. The end of the comment period is shortly before the NAIC’s scheduled fall meeting.

This post written by Rollie Goss.

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An acquirer of a reinsurance company sued the former parent company of the reinsurer under the relevant stock purchase agreement (SPA) for indemnification of $13.1 million in “losses” allegedly owed in connection with reinsurance contracts that covered the airplanes that were involved in the attack on the World Trade Center on 9/11. The acquirer contended that the reinsurer misrepresented the extent of its 9/11 liabilities by setting its reserves based on one “terrorism” event under the governing contracts, rather than a higher liability for two “hijacking” attacks. The acquirer argued that the reinsurer was required to reserve for two attacks because the cedents had done so, and because the reinsurer had received broker advices for two losses. The court denied the parties’ cross-motions for summary judgment, holding that factual questions existed as to whether the reinsurer’s alleged fraud constitutes a “loss” under the SPA, and if it does, whether the “loss” was caused by the falsity of the reinsurer’s misrepresentations. The court’s findings included: (1) that the SPA’s provisions providing indemnity for “loss” were ambiguous, such that the court could not determine whether indemnity was limited to only amounts paid in excess of the reinsurer’s reserves; and (2) that conflicting testimony of the parties’ experts as to whether the reinsurer misrepresented that its reserving practices complied with “U.S. generally accepted actuarial standards” created disputed issues of fact. The court also held that benefit of the bargain damages were not available under the SPA, which contained broad waivers of “all causes of action related to the transactions contemplated” by the agreement, and of consequential, indirect, and incidental damages. WT Holdings, Inc. v. Argonaut Group, Inc., Case No. 600925/2009 (N.Y. Sup. Ct. July 10, 2012).

This post written by Michael Wolgin.

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