Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Reinsurance Regulation

Chancery Division of the High Court of England Sanctions Business Transfer Scheme Involving Applicant Insurance Companies Under the Financial Services Markets Act

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In Phoenix Life Ltd, Re, also known as: Reassure Life Ltd, Re Phoenix Life Assurance Europe Designated Activity Co, Re, the Chancery Division of the High Court of England sanctioned a plan by the applicant companies Reassure Life Ltd (RLL), Phoenix Life Ltd (PLL), and Phoenix Life Assurance Europe (PLAE) of an insurance business transfer scheme under the Financial Services and Markets Act.

United Kingdom insurers, PLL and RLL, were engaged in “closed-fund run off in the long-term sector” and PLAE was an Irish designated activity company established to facilitate the business transfer scheme. The business to be transferred had been written in Ireland, Iceland, Germany, Norway, and Sweden. The purpose of the scheme was to “ensure that policyholders in those countries obtained the full range of benefits following the UK’s departure from the European Union” by transferring “to PLAE the legal rights and obligations of PLL and RLL relating to the transferring policies together with their associated assets and liabilities.” Claims related to misselling and maladministration were not included in the scheme.

The conclusions of an independent expert who reviewed the scheme were submitted to and accepted by the Court, including the expert’s findings that “the scheme would not have a material adverse effect on the security of the benefits under the transferring policies … and the reasonable expectations of the transferring policyholders in respect of their benefits…” The Court also agreed with the independent expert’s conclusions that the nontransferring policyholders would not suffer any material adverse effects as a result of the scheme. The Court sanctioned the scheme concluding that “the technical requirements of the legislation had been complied with” and that the independent expert’s conclusion regarding PLAE’s financial strength was reasonable. In approving the scheme, the Court also agreed with several other conclusions reached by the independent expert, including that the reinsurance arrangements involved in the scheme would not create a “material adverse effect on the security of the benefits under the policies to be transferred under the scheme.”

Phoenix Life Ltd, Re, also known as: Reassure Life Ltd, Re Phoenix Life Assurance Europe Designated Activity Co, Re, (Chancery Division, High Court of England, Oct. 24, 2022)

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)