Reinsurance Focus

The NAIC has released summaries of the minutes of the meetings of its Reinsurance Task Force and Surplus Lines Task Force, both of which took place on August 13, 2012, during the Summer National Meeting in Atlanta.

The Reinsurance Task Force adopted recommendations regarding accreditation standards, heard status updates on implementation of the revised credit for reinsurance models, approved establishing a subgroup regarding quota share reinsurance contracts, addressed ongoing international reinsurance issues, including US/EU dialogue and activities of the International Association of Insurance Supervisors, heard updates from the Captive and Special Purpose Vehicle Use Subgroup on alternative risk transfer in relation to existing state law, and heard a status update from The Financial Condition Committee regarding ceding reinsurers in receivership.

The Surplus Lines Task Force created a Surplus Lines Requirements Subgroup, to research issues related to eligibility requirements, which were addressed at the meeting.

This post written by John Pitblado.

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In this Special Focus piece, entitled “The Benefits of Cat Bonds for Ceding Insurers and the Potential for Life and Annuity Risk Bonds,” Rollie Goss compares the relative advantages of catastrophe bonds over traditional reinsurance, as well as the developing market for transfer of life and annuity risks.

This post written by Rollie Goss.

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In a case we have reported on previously, AIG purported to settle class action securities law claims arising from alleged finite reinsurance transactions between it and Gen Re. The district court, however, denied the parties’ joint motion for approval of the settlement, finding that it could not certify a settlement class because the “fraud-on-the-market” theory used to prove reliance was not viable under the facts of the case, resulting in a failure to satisfy the predominance requirement of Federal Rule of Civil Procedure 23(b)(3). The Second Circuit reversed, however, finding that the failure of the fraud-on-the-market theory was relevant only to a manageability analysis, and not to a predominance analysis. Since a court need not engage in a manageability analysis to certify a settlement class under the Supreme Court’s Amchem case, a settlement class could be certified. In re American International Group Securities Litigation, No. 10-4401-cv (2d Cir. Aug. 13, 2012)

This post written by John Pitblado.

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The NAIC Captive and Special Purpose Vehicle Use Subgroup held a meeting on August 11, 2012 to discuss the Subgroup’s Captives and Special Purpose Vehicles draft White Paper. The Subgroup was formed earlier this year, the draft White Paper explains, to address the broadened use of captives and the potential concern that a “shadow insurance industry is emerging.” The draft White Paper addresses, in some detail, state authority over captives and SPVs, transparency and confidentiality requirements, the types of business and risks ceded to captives and SPVs, capitalization standards, accounting and reporting requirements, credit for reinsurance, and holding company analysis considerations.

A primary concern of the Subgroup is that some captives and SPVs may be being used as a means to avoid statutory accounting rules. The White Paper concludes that, in the transactions the Subgroup reviewed, regulators properly required that transactions made with captives to support economic reserves be backed with investment grade, liquid assets, such that the “net result” of the transactions be that “collectively the ceding insurer and captive have liquid assets supporting GAAP equivalent reserves.” The White Paper also makes recommendations regarding the accounting treatment for XXX and AXXX reserve redundancies, and encourages states with active captive and SPV markets to adopt the NAIC’s Special Purposes Reinsurance Vehicles Model Act, and further suggests that changes might be made to this model act to encourage states to adopt it. Minutes of the August 11 meeting and minutes of prior meetings of the subgroup held by conference call are available for review.

This post written by Ben Seessel.

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Swiss Re has released its annual insurance-linked securities (“ILS”) market update, noting that 2012 has seen the most active first half since the record-setting issuance in 2007 (and 2012 is not far behind). The ILS market – an alternative to traditional reinsurance – consists mainly of catastrophe bonds (or “cat bonds”) and longevity bonds, both of which serve as hedges against traditional insurance-based risks (property-casualty risks in the case of cat bonds, and “longevity” based risks associated with the life insurance, pension and annuity markets). A number of new sponsors came to market, with U.S. hurricane risk the most common covered peril for new issues. The update notes that sponsors are increasingly turning to “indemnity” triggers (coverage triggers based on loss levels, thus functioning more or less like traditional excess or reinsurance), rather than the industry index triggers that were previously more common. The update also notes that the market share for modeling firm AIR Worldwide has increased dramatically to 91%.

This post written by John Pitblado.

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On August 2, 2011, we reported on a decision by the United States Court of Appeals for the Second Circuit to vacate the criminal convictions of Gen Re and AIG executives stemming from an allegedly fraudulent finite reinsurance transaction designed to improve AIG’s financial statements. On June 22, 2012, the defendants entered into agreements with prosecutors to defer prosecution and dismiss the indictments after passage of one year, subject to the defendants’ respective payment of fines ranging from $250,000 to $100,000, and compliance with other conditions. The agreements identified “relevant considerations” to their execution, namely, (a) the Second Circuit’s vacatur decision, (b) the 12 months time that has now elapsed since the defendants’ conduct, (c) the significant resources required to conduct a retrial, (d) the defendants’ payment of fines, (e) SEC penalties, and (f) defendants’ admission that certain “aspects” of the reinsurance transaction were fraudulent. United States v. Ferguson, Case No. 3:06CR137 (USDC D. Conn. June 22, 2012).

This post written by Michael Wolgin.

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Several states have recently withdrawn from the Nonadmitted Insurance Multi-State Agreement (“NIMA”), the interstate compact sponsored by the NAIC to collect and allocate surplus lines tax revenues consistent with Dodd Frank’s Nonadmitted and Reinsurance Reform Act of 2010 (“NRRA”). We have reported earlier on NIMA’s development and progress. States that have withdrawn include Alaska, Connecticut, Mississippi, Nebraska and Hawaii. Departing states have cited several reasons for withdrawing: the lack of a financial benefit from participating; the increased burden and cost in overseeing and auditing NIMA’s Clearinghouse; increased costs imposed on brokers and insureds from the Clearinghouse’s service fee; and conflict with state insurance laws on reporting requirements. Mississippi is among the states withdrawing notwithstanding that its insurance commissioner was a principal officer of NIMA. NIMA’s remaining members include only Florida, Louisiana, Nevada, Puerto Rico, South Dakota, Utah and Wyoming.

This post written by Ben Seessel.

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Florida’s state-owned property insurer, Citizens Property Insurance Company, is the ceding insurer on the largest reinsurance cat bond ever to be placed, a $750 million hurricane risk bond issued by Bermuda special purpose reinsurer Everglades Re, which provides coverage for two years. This is Citizen’s initial cat bond, and the Citizens Board has authorized the purchase of private reinsurance for the 2012 hurricane season to supplement the risk transfer of the cat bond. This represents a significant expansion of the cat bond market. Reinsurance Focus blogmaster Rollie Goss and Jorden Burt attorney Bob Shapiro served as special reinsurance counsel to Citizens for the Everglades Re cat bond and for Citizens’ private reinsurance placements.

This post written by Rollie Goss.

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After settling with AIG for $1 billion, the New York Attorney General remains in pursuit of two former AIG executives—former CEO Maurice “Hank” Greenberg and former CFO Howard Smith—in connection with their alleged roles in a finite reinsurance transaction between AIG and Gen Re and a transaction between AIG and Capco Reinsurance Company, an offshore shell company that AIG allegedly used to disguise unfavorable loss ratios from the investing public. The appellate court affirmed the denial of defendants’ motion for summary judgment on the AG’s claims, which are brought under New York’s Martin Act and Executive Law section 62(12). The appellate court held that the claims are not preempted by federal securities laws and that triable issues exist based on the record evidence. The court also reversed the trial court’s grant of summary judgment to the AG on liability with respect to the Capco transaction. State of New York v. Greenberg, No. 401720/05 (N.Y. App. Div. May 8, 2012).

This post written by Ben Seessel.

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At the recent NAIC Spring Meeting, the E Committee’s Reinsurance Task Force exposed for comment drafts of two documents relating to the implementation of the recently revised credit for reinsurance Model Act and Model Regulation: (1) a memorandum discussing implementation issues; and (2) a discussion of changes to the accreditation criteria.

This post written by Rollie Goss.

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