Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Reinsurance Regulation

Texas Department of Insurance Adopts New Reinsurance Regulations for Reciprocal Insurers

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In November 2021, the Texas Department of Insurance adopted new administrative reinsurance regulations relating to reciprocal reinsurers. The rules took effect on January 1, 2022.

Section 7.615 (28 Tex. Admin. Code § 7.615) largely mirrors NAIC Model Regulation #786, and adds a new way for ceding insurers to receive credit for reinsurance ceded to non-U.S. assuming reinsurers domiciled in a “reciprocal jurisdiction,” as defined by Texas Annotated Insurance Code section 493.108, which also became effective on January 1, 2022. The ceding reinsurer is eligible to receive the credit if it meets certain requirements and conditions, including satisfying minimum capital, surplus, and solvency requirements; agreeing to submit to jurisdiction in the state of Texas; and various other rules set forth in section 493.108 and section 7.615(c).

Section 7.616 (28 Tex. Admin. Code § 7.616) is substantially similar to NAIC Model Regulation #787, the purpose of which is to establish standards governing reserve financing arrangements for certain life insurance policies. Certain types of reinsurance treaties are exempt from the new rule, as set forth in section 7.616(c).

Applied Underwriters Defeats Class Certification in Long-Running Worker’s Compensation Reinsurance Dispute

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Applied Underwriters beat back an attempt by plaintiffs to certify a class in their lawsuit related to Applied Underwriters’ “EquityComp” and “SolutionOne” workers’ compensation programs. We previously reported on this case, which involves a disputed Reinsurance Participation Agreement used to control worker’s compensation rates, on July 21, 2016, December 1, 2016, November 15, 2017, January 31, 2018, and August 30, 2018. The court has now determined that plaintiffs failed to demonstrate that a class action would be “superior” to individual actions, as required by four factors under Federal Rule 23(b)(3), and denied class certification.

In determining that the first factor of the class members’ interest in individually controlling the litigation, weighed against certification, the court noted that the individual damages alleged by claimants in this action were large and there was no evidence that any class member would be unable to bring an action absent class certification. The second factor of the extent and nature of any litigation concerning the controversy already begun by class members, weighed “strongly” against certification, as more than “100 separate arbitrations, lawsuits, and California Department Insurance appeals involving 67 California participants in the program” were already pending. On that basis, the court determined that a substantial number of putative class members had an interest in controlling their own litigation and that “realistic alternatives” to a class action exist.

The third factor of the desirability of concentrating the litigation in the particular forum, weighed “slightly” against certification, where the remaining claims were all brought under California law (which weighed in favor of certification), but the many potential claimants were “located throughout the state,” including some that were “far from this court.” Additionally, certifying the class would automatically select federal court as the preferred forum for all class members even though the previously filed actions discussed above had demonstrated otherwise.

Finally, the court determined the “manageability” factor of the likely difficulties in managing a class action, also weighed against certification, where the court would have to determine the extent of overlap between the class action and the many previously filed actions, as well as how to properly formulate a class notice that accounts for the potentially overlapping and differing claims brought in the various actions and the class action. “These difficulties would only be magnified where many similar actions have already concluded and others have progressed substantially.”

Shasta Linen Supply, Inc. v. Applied Underwriters, Inc., Case No. 2:16-cv-1222-WBS-AC (USDC E.D. Cal. Jan. 29, 2019).

National Council of Insurance Legislators Calls upon Federal Reserve to Limit Examinations of State-Regulated Insurers

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The Dodd-Frank Act provided the Federal Reserve Board with limited authority over certain insurance holding companies with federally regulated banking subsidiaries, creating some tension with the general rule, embodied in the McCarran-Ferguson Act, that insurance is regulated at the state level. The National Council of Insurance Legislators (NCOIL) has issued a resolution critical of the Federal Reserve Board’s use of that authority, stating that, in exercising its limited authority over these entities, “the Federal Reserve Board has over-extended its examination powers by routinely requiring insurance companies to supply information and responses to inquiries of the sort in practice that are the province of” state insurance regulators, “on whose work Federal Reserve Board examiners are statutorily required” to rely. This, the NCOIL resolution states, “will most likely conflict with, the jurisdiction of State insurance regulators over solvency and market conduct regulation or, at best, will be duplicative.”

The NCOIL resolution further:

  • “calls upon the Federal Reserve Board to direct its examiners that the insurance operations of state-regulated insurers . . . are regulated by the individual states and that the Federal Reserve Board’s examinations are, to the fullest extent possible, to rely upon the examination reports and other work of state insurance regulators and not to duplicate and/or conflict with the states’ regulatory powers over the insurers’ market conduct or solvency”;
  • “encourages Congress to provide oversight and, if necessary, enact legislation to ensure” that the Federal Reserve Board abides by these limits; and
  • “calls upon the Federal Reserve Board to consult with, defer to, and rely on to the fullest extent possible, and to avoid, to the fullest extent possible, duplication of, the work of state insurance regulators on matters involving the regulation of insurance operations and solvency of insurers, regardless of the insurers’ affiliations with federally-regulated financial institutions.”

Resolution Asserting McCarran-Ferguson Reverse Preemption over the Supervision of Insurance Companies by the Federal Reserve Board and Its Examiners (Nat’l Council of Ins. Legislators, Dec. 8, 2018)

Texas Department of Insurance Repeals and Replaces Surplus Lines Insurance Regulations

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The Texas Department of Insurance has repealed and replaced Chapter 15 of the Texas Administrative Code relating to surplus lines insurance. The Commissioner of Insurance previously published and considered public comments concerning the proposed revisions in mid-2018. According to a December 10, 2018 release, the proposed revisions were largely adopted without change, though certain non-substantive modifications were made in response to comments. The Commissioner stated that the revisions were necessary to implement legislation concerning Texas surplus lines insurance and to generally update and reorganize Department of Insurance rules. The newly-adopted Chapter 15 can be viewed here.