Reinsurance Focus

The recent earthquake and tsunami in Japan have roiled the reinsurance markets. In this Special Focus article, John Pitblado examines some of the ensuing bond issues the industry will want to watch carefully.

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.

Willis Re has reported that the reinsurance market is overcapitalized, resulting in reductions in reinsurance rates for January 1, 2011 renewals of from 5% to 10%. Visit Willis Re’s web site for a summary of the report and the full report.

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.

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.