Reinsurance Focus

Plaintiffs alleged that AXA Equitable Life Insurance Company violated New York insurance law prohibiting misrepresentations by insurers of their financial condition, because AXA had not disclosed “shadow transactions” in its filings with the New York Department of Financial Services (“NYDFS”). NYDFS defines “shadow insurance” as the use of captive reinsurers in foreign jurisdictions with lower reserve requirements to do an “end-run around higher reserve requirements.” Plaintiffs contended that AXA was not as financially sound as it had represented because in failing to disclose “shadow transactions,” AXA received higher ratings from rating agencies and was able to post fewer reserves thus selling a product that had undisclosed risks and created an “increased risk to the insurance system as a whole. . . .”

The court denied class certification and granted AXA’s motion to dismiss for lack of Article III standing. Plaintiffs did not allege that their premiums were higher because of the alleged “shadow transactions” nor that they had relied upon AXA’s representations in filings with the NYDFS. Violation of rights created by state law (as opposed to federal law), standing alone, does not allege an “injury” sufficient to establish Article III standing. Plaintiffs needed to have established that at least one of them had suffered an “invasion of a legally protected interest which is . . . concrete and particularized” and “actual or imminent, not conjectural or hypothetical.” The Court also explained that since plaintiffs never alleged that they would not have purchased the policies had the disclosures been made or that they had suffered any financial harm because of the misrepresentations, the alleged risk of harm was only in the future and was a very tenuous risk at that. Jonathan Ross v. AXA Equitable Life Insurance Co., Case No. 14-CV-2904 (USDC S.D.N.Y. July 21, 2015).

This post written by Barry Weissman.

See our disclaimer.

At its December 11, 2014 meeting, the National Association of Insurance Commissioners (NAIC) approved seven foreign countries as Qualified Jurisdictions so that reinsurers licensed and domiciled in those jurisdictions will be eligible for reinsurance collateral reduction requirements under NAIC’s Credit for Reinsurance Model Law. Four of those jurisdictions – Bermuda, Germany, Switzerland, and the United Kingdom, were previously on NAIC’s list of Conditional Qualified Jurisdictions. Effective January 1, 2015, these four, along with Japan, Ireland and France, will be full Qualified Jurisdictions subject to a 5-year term, after which they will be re-evaluated under the provisions of the Qualified Jurisdiction Process.

NAIC also adopted the Revised Insurance Holding System Regulatory Act and Actuarial Guideline 48. The Act, in part, updates the model to clarify the group-wide supervisor for a defined class of internationally active insurance groups. AG 48 establishes national standards regarding certain captive reinsurance transactions and includes regulation of the types of assets held in a backing insurer’s statutory reserve. AG 48 takes effect in 2015. NAIC issued a news release on its actions, which can be found here.

This post written by Renee Schimkat.

See our disclaimer.

In July of this year, the State Corporation Commission of the Commonwealth of Virginia issued an Order declaring Southern Title Insurance Company insolvent and ordering its liquidation. Among other things, the Order authorized the receiver to use approximately $10 million of its assets “to enter into contracts of reinsurance to pay all policyholder claims.” The Order also set a Claims Filing Deadline and established other procedures and guidelines for the liquidation. Commonwealth ex rel. State Corp. Comm’n v. Southern Title Ins. Co., No. INS-2011-00239 (Va. State Corp. Comm’n July 28, 2014).

This post written by Catherine Acree.

See our disclaimer.

On September 11, 2013, the Southern District of New York approved the final settlement in the protracted class litigation regarding allegedly artificially inflated prices for AIG securities. This final settlement resolves all claims against defendant Gen Re with a settlement fund of $72 million for a class of persons and entities who purchased AIG securities from October 28, 1999 through April 1, 2005. Lead counsel was awarded $6.5 million in attorneys’ fees (9.09% of the settlement fund) and $525k in expenses. Any funds not claimed by class members will be distributed to a 501(c)(3) not-for-profit rather than returned to the defendant. The three previous settlements resolved claims against PwC, AIG, and Starr International Company. In re American International Group, Inc. Securities Litigation, 04 Civ. 8141 (DAB) (S.D.N.Y. Sept. 11, 2013).

This post written by Abigail Kortz.

See our disclaimer.

In 2005, former New York Attorney General Eliot Spitzer commenced a civil enforcement action against AIG, AIG’s former CEO, and AIG’s former CFO Howard Smith for allegedly engaging in fraudulent reinsurance transactions. In response, Smith submitted a Freedom of Information Law (“FOIL”) request seeking the disclosure of the AG’s communications with the press regarding the complaint. A New York Supreme Court held that the AG’s office has a responsibility and obligation to gain access to Spitzer’s personal email account to determine if it contains documents that should be disclosed in accordance with the FOIL request. The court, however, also allowed the AG’s office to appeal the issue. On appeal, the Appellate Division determined that Spitzer is a necessary party and remanded the case without deciding the issue so the Supreme Court can order Spitzer’s joinder. Smith v. New York State Office of the Attorney General, No. 515758 (N.Y. App. Div. Oct. 17, 2013).

This post written by Abigail Kortz.

See our disclaimer.

We have previously posted on the NAIC’s initiatives with respect to captives and the NY Department’s captives report. The NAIC’s Executive Committee and Plenary, in a joint teleconference, have adopted the Reinsurance Task Force’s proposed White Paper on the activities of captives. Activity regarding captives at the NAIC continues on several fronts, including:

Financial Analysis Working Group of the Financial Condition (E) Committee

Additional responsibilities relating to captives have been assigned to this working group:

• Perform analytical reviews of transactions (occurring on or after a date as determined by the NAIC membership) by nationally significant US life insurers to reinsure XXX and/or AXXX reserves with affiliated captives, special purpose vehicles (SPVs), or any other US entities that are subject to different solvency regulatory requirements than the ceding life insurers, to preserve the effectiveness and uniformity of the solvency regulatory system.
• For such transactions entered into and approved prior to this date and still in place, collect specified data in order to provide regulatory insight into the prevalence and significance of these transactions throughout the industry.
• Provide recommendations to the domiciliary state regulator to address company specific concerns and to the PBR Implementation (EX) Task Force to address issues and concerns regarding the solvency regulatory system.

It was noted that some state insurance departments already conduct reviews of some individual transactions involving captives.

Principle-Based Reserving Implementation (EX) Task Force of the Executive (EX) Committee

This task force will consider the Report’s recommendations in the context of the proposed Principal-Based Reserving system and make further recommendations, if any, to the Executive (EX) Committee. This activity may be conducted through a new Captive Working Group, which will report to this task force. The Captive Working Group will consider the following issues:

• Address any remaining XXX and AXXX problems without encouraging formation of significant legal structures utilizing captives to cede business;
• Address confidentiality of information; and
• Recommend enhancement to the Financial Analysis Handbook Guidance to allow for a consistent approach for states’ review and ongoing analysis of transactions involving captives and SPVs.

Blanks Working Group of the Accounting Practices and Procedures Task Force of the Financial Condition (E) Committee

This working group is evaluating an exposure draft of a definition of “captive affiliate,” which, if adopted, would result in enhanced disclosure in Schedule F of transactions with captives. (see recent agenda item).

Reinsurance Task Force of the Financial Condition (E) Committee

The Reinsurance Task Force may implement other recommendations from the White Paper.

This post written by Rollie Goss.

See our disclaimer.

New York’s Department of Financial Services issued an amendment to Insurance Regulation 147 (11 NYCRR 98) which changes reserve requirements on universal life with secondary guarantee policies. The amendment is designed to conform Regulation 147 with NAIC’s revisions to actuarial guidelines calling for reserves for all universal life with secondary guarantee business written between July 1, 2005 and December 31, 2012 to be calculated under a “principles-based” approach. For business issued after January 1, 2013, reserves are to be calculated using a formulaic-based approach. Insurers must also file quarterly financial statements based on minimum reserve standards in effect on the date of filing. New York Department of Financial Services Fourth Amendment to 11 NYCRR 98 (May 17, 2013).

This post written by John Pitblado.

See our disclaimer.

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.

See our disclaimer.

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.

See our disclaimer.

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.

See our disclaimer.