Reinsurance Focus

Tony Cicchetti offers a Treaty Tip concerning arbitrator selection, and a recent case concerning the process for selecting the umpire for an arbitration in a matter involving Lloyd’s.

This post written by Tony Cicchetti.

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.

The Second Circuit has affirmed the dismissal of another of a rash of lawsuits by Names at Lloyd’s challenging the enforceability of judgments obtained against them by Lloyd’s in the United Kingdom. The plaintiff Richard A. Tropp, a Name at Lloyd’s, brought a suit in federal district court to declare that a judgment obtained against him by Lloyd’s was unenforceable, as well as for an accounting from Lloyd’s. Tropp invested $160,000 of his retirement savings in the market but, due to its collapse, became liable to Lloyd’s on a $900,000 judgment entered by a UK court. Lloyd’s moved to dismiss for improper venue, since Tropp agreed in the “Choice Clause” of his contract with Lloyd’s to litigate all disputes in England, and for failure to state a claim. Tropp’s primary argument was that this forum selection clause is unenforceable because UK law deprived him of any remedy. The district court rejected this, because a “close reading” of the UK litigation revealed Tropp was not denied any remedy, but “simply was not victorious on the merits of his claims.” The UK courts provided due process. Tropp v. Corporation of Lloyd’s, Case No. 07 Civ. 414 (USDC S.D.N.Y. Mar. 26, 2008).

In a summary order, the Second Circuit affirmed, principally reasoning that, although Tropp was unsuccessful in his attempts to assert defenses and counterclaims against Lloyd’s in the UK courts, “his experiences do not cause us to revisit our holding that the Lloyd’s forum selection clauses (of which this is one) are valid because UK remedies are available.” Tropp v. Corporation of Lloyd’s, No. 08-2332 (2d Cir. July 19, 2010).

This post written by Brian Perryman.

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.

General Re Corp. has agreed to a Consent Judgment with the SEC in settlement of allegations that it issued finite reinsurance to AIG and Prudential. The settlement requires that Gen Re disgorge $12.2 million in profits gained as a result of the transactions, with interest. As in prior similar agreements with other insurers, the SEC filed a Complaint in the Southern District of New York, issued a litigation release describing the agreement, and the Court entered a consent Final Judgment. In a twist, Liberty Mutual has filed a motion and memorandum of law seeking to intervene and claim a portion of the disgorged funds, alleging that the SEC rejected its request that it escrow the funds so that it could assert a claim against them. Liberty Mutual is concerned that the settlement with the government will preclude it from asserting a separate claim against Gen Re for what amounts to the same amounts. At the same time, at the request of Gen Re, another judge of the same court continues to seal a proposed class settlement with the Ohio Attorney General, acting on behalf of the Ohio Public Employees Retirement System in a claim relating to Gen Re’s transactions with AIG.

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.

The Second Circuit Court of Appeals recently affirmed a district court decision (reported on this blog March 10, 2009), which dismissed a putative shareholder derivative class action against PXRE Group, Ltd., a publicly traded Bermuda reinsurer, and certain of its directors and officers. The plaintiff shareholders alleged that PXRE intentionally or recklessly understated loss projections in the immediate aftermath of Hurricanes Katrina, Rita and Wilma in 2005, in order to preserve its credit rating. Specifically, the plaintiffs claimed that PXRE failed to take river flooding into account in its loss modeling, and that its loss modeling software was inadequate for much-larger-than-typical hurricane loss modeling, and was based only on typical hurricane loss modeling. The plaintiffs alleged specific misleading statements in press releases that it argued were intended to deceive in advance of public offerings. In an effort to establish scienter, the plaintiffs’ Complaint included allegations purportedly obtained from “confidential informants” from PXRE, including actuaries, a Vice President in charge of loss modeling, and the Chief Actuary of a “peer company.” Citing heightened pleading requirements for securities/fraud type claims, the district court dismissed the case, as plaintiffs had failed to sufficiently allege the bases for its allegations. The Second Circuit court affirmed by short summary order, citing the district court’s “thorough, well-reasoned opinion.” In re PXRE Group, Ltd., No. 09-1370 (2d Cir. Dec. 21, 2009).

This post written by John Pitblado.

Guy Carpenter has published a report on the cat bond market for the third quarter of 2009 on its GC Capital Ideas website. While the third quarter is “traditionally quiet,” there were two significant issues coming to market this year, which is a significant expansion over the same quarter of 2008.

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.