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Reinsurance Regulation

ARKANSAS REVISES REGULATION OF CAPTIVE INSURANCE COMPANIES TO CREATE INCORPORATED PROTECTED CELLS AND DORMANT CAPTIVE INSURANCE COMPANIES

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Arkansas has amended its statutory regulation of captive insurance companies in two significant ways. First, following the lead of several other states and foreign jurisdictions, the amendment provides for the creation of “incorporated protected cells,” which it defines as “a protected cell that is established as a corporation or other legal entity separate from the sponsored captive insurance company or producer reinsurance captive insurance company of which it is a part.” Second, it provides for the designation of a captive insurance company as a “dormant captive insurance company.”

Under the new regulation, the creation of an incorporated protected cell requires the prior written approval of the Arkansas insurance commissioner, and a protected cell may be converted into an incorporated protected cell “without affecting the protected cell’s assets, rights, benefits, obligations, and liabilities.” Once created, an incorporated protected cell may enter into its own contracts, and counterparties have no recourse against the sponsored captive insurance company and its assets “other than against assets properly attributable to the incorporated protected cell that is a party to the contract or obligation.”

The law defines “dormant captive insurance company” as “a pure captive insurance company, sponsored captive insurance company, or industrial insured captive insurance company that has: (1) Ceased transacting the business of insurance, (2) No remaining liabilities associated with insurance business transactions, or insurance policies issued before the filing of its application.” Such a company must apply for a certificate of dormancy, which is subject to renewal every five years. Once granted this certificate, a dormant captive insurance company must maintain unimpaired, paid-in capital and surplus of $25,000 and pay a periodic license renewal fee, but it is not subject to Arkansas’ minimum premium tax. Before it may resume issuing insurance policies, it must get approval from the commissioner of insurance.

This amendment made two other changes. First, it removed restrictions on the corporate forms that captive insurance companies may take, which were previously limited to domestic stock insurers, stock insurers with their capital divided into shares and held by shareholders, mutual insurers without capital stock, and reciprocal stock insurers, depending on the type of captive. Under the new law, any “captive insurance company may be formed and operated in any form of business organization authorized under Arkansas law and approved by the Insurance Commissioner.” Second, it gave the commissioner discretion to determine whether business written by a sponsored captive insurance company must be fronted by an insurance company, something that was previously mandatory. 2017 Arkansas Laws Act 370 (H.B. 1476)

This post written by Jason Brost.

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UPDATE ON LIQUIDATION OF THE HOME INSURANCE COMPANY

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The New Hampshire liquidation court approved the commutation, settlement, and release agreement between The Home Insurance Company (liquidating) and Pennsylvania Manufacturers Association Insurance Company (PMAIC). The commutation agreement was approved February 10, 2017 and provides for the commutation of all of Home’s ceded and assumed business to or from PMAIC, as well as the resolution of all of PMAIC’s contribution claims against Home. A redacted copy of the commutation agreement, with economic terms removed, was filed with Home’s motion for approval. Additionally, in New York, in a contested claim between the liquidator and a Danish non-admitted reinsurer, the court approved the reinsurer’s posting of a security bond in the stipulated amount of $259,886.13. In re Liquidation of The Home Insurance Co., 217-2003-EQ-00106 (N.H. Sup. Ct. Feb. 10, 2017) (order approving commutation); Motion for Approval (Dec. 15, 2016); Sevigny v. Trygvesta Forsikring A/S, Case No. 16 Civ. 4874 (USDC S.D.N.Y. Jan. 30, 2017) (stipulation and bond); (Feb. 14, 2017) (bond).

This post written by Gail Jankowski.

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FLORIDA DEPARTMENT OF REVENUE ISSUES ADVISEMENT DETERMINING THAT A REINSURER AND ITS CEDENTS DID NOT HAVE NEXUS IN FLORIDA FOR TAX PURPOSES

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On January 13, 2017, the Florida Department of Revenue issued a Technical Assistance Advisement regarding whether a reinsurer had nexus with the state of Florida that would require it to file a corporate income tax return and whether the Florida activities of the reinsurer’s ceding companies made Florida the location of the reinsurer’s and cedents’ regional home office. As to both questions, the DOR answered in the negative.

First, the DOR concluded that the reinsurer did not have nexus with the state because the reinsurer was not an approved reinsurer registered with the Florida Office of Insurance Regulation, and the reinsurer did not reinsure policies of insurers that were domiciled or commercially domiciled in Florida. Next, the DOR found that the ceding companies did not have a regional home office in Florida because – even though the ceding companies performed in Florida many activities traditionally carried out in a regional home office, such as selling insurance or approving or rejecting coverage, Florida was not the domicile or nerve center of the ceding companies.

Recognizing the term “regional home office” to have no definition, the DOR looked to the Department’s previous definition of the residence of a corporation as (1) a corporation’s domicile, or (2) with respect to diversity jurisdiction, “as the nerve center of the corporation”. The DOR then found that this standard was not met. The ceding companies’ “activities are not performed entirely for three states, or two states and one or more foreign countries … less than 5% of the ceding insurer’s underwriters are located in Florida … all national advertising [ ] is handled outside Florida … [and] the Florida office location only performs activities authorized by the home office.” In reaching this conclusion, the DOR further recognized as important the strict construction of taxing statutes in favor of the taxpayer. Florida Dept. of Revenue Technical Assistance Advisement – 17C1-001 (Jan. 13, 2017).

This post written by Brooke L. French.

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COURT OF APPEALS AFFIRMS DISMISSAL OF “SHADOW INSURANCE” LAWSUITS

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In a summary order, the United States Court of Appeals for the Second Circuit has affirmed the dismissal of two “shadow insurance” putative class action lawsuits against Axa Equitable Life Insurance and Metropolitan Life Insurance on the basis that the plaintiffs lacked standing under Article III of the United States Constitution to sue them in United States District Court.  The Complaints alleged that the insurance companies misused captive reinsurers domiciled in foreign jurisdictions to avoid higher reserve requirements of U.S. jurisdictions, resulting in the misstatement of their financial information and increased risks for plaintiffs.  The District Court had dismissed the suits based on the failure of the plaintiffs to establish Article III standing.

The Court of Appeals found that the Complaints failed adequately to allege that the plaintiffs had suffered injury-in-fact, a necessary element of Article III standing.  First, the court rejected plaintiffs’ argument that allegations that the companies had violated New York Insurance Law section 4226 sufficiently alleged injury-in-fact because of injury “inherent in the statutory violation.”  The Court held that “[t]he mere fact that an insurer may make a misleading representation does not require or even lead to the necessary conclusion that the misleading representation is material or even likely to cause harm.”  Second, the Court held that to establish standing plaintiffs had to allege that the injury-in-fact was concrete, particularized, and “actual or imminent, not conjectural or hypothetical.”  (Citing Spokeo, Inc. v. Robbins, 136 S.Ct. 1540 (2016).  The Court found that the harm alleged in the Complaints was speculative and hypothetical, insufficient to establish standing.

For readers interested in a deeper reading of this appeal, following are links to the recording of the oral argument at the Second Circuit and some of the briefs of the parties in the consolidated appeal: Appellants’ principal brief; Axa’s brief; MetLife’s brief; and Appellants’ reply brief.

Appellate oral argument:


Ross v. Axa Equitable Life Insurance Company and Robainas v. Metropolitan Life Insurance Company, Nos. 15-2665, 15-3504, 15-3553 and 15-4189 (2d Cir. Feb. 23. 2017).

This post written by Rollie Goss.
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