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Reinsurance Regulation

CONNECTICUT ISSUES BULLETINS REGARDING FINANCIAL REPORTING REQUIREMENTS FOR SURPLUS LINES INSURERS AND ACCREDITED REINSURERS

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The Connecticut Insurance Department has issued two bulletins addressing 2016 and 2017 financial reporting requirements for foreign eligible surplus lines insurers and accredited reinsurers. Regarding surplus lines insurers, the department advised that each insurer, before March 1st, must submit a signed report of its financial condition for 2016, and must report their financial condition on a quarterly basis in 2017, including a breakdown of the company’s Connecticut business showing premiums and losses by line. Regarding accredited reinsurers, the department provided that each Connecticut reinsurer: (1) must, before March 1st, submit a signed report of its financial condition for 2016; (2) must file, in addition to the Annual Statement, an actuarial opinion and management discussion and analysis on March 1st and April 1st respectively; (3) need not file quarterly statements unless specifically requested; (4) must file before June 1st, a copy of the company’s independent audit report for 2016; and (5) must file a list of Connecticut insurers ceding business to the accredited reinsurer in 2016. The bulletin also included the March 1st deadline for reinsurance trusts to file documents detailing the balance in the trust and a listing of the trust’s 2016 investments. Finally, managers of non-affiliated reinsurance pools were advised to direct participating companies that are not licensed in Connecticut to file a copy of their Annual Statement with the Connecticut Department. Connecticut Insurance Department Bulletin Numbers FS-4SL-16 & CT Bulletin FS-4AR-16 reinsurer reports 11.28.16 FS-4SL-16 (Nov. 28, 2016).

This post written by Michael Wolgin.

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IRS TREATS CAPTIVES WITH SECTION 831(B) ELECTIONS AS “TRANSACTIONS OF INTEREST”

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On the heels of Congress’ amendments last year to Section 831(b) of the Internal Revenue Code to curb perceived abusive use of so-called “micro” captive insurance companies, the IRS recently issued Notice 2016-66 officially classifying such uses as “transactions of interest” as of November 1, 2016. Such classification means that any taxpayers engaging in a transaction similar to the one described in the Notice on or after November 1, 2006 must disclose such participation. Material advisors may also have disclosure and list maintenance obligations under Sections 6111 and 6112. Failure to disclose such a transaction exposes the taxpayer to penalties under Section 6707A of the Code. Other penalties may also apply upon audit.

Section 2.01 of the Notice describes specific attributes of the transaction. They include a person who owns a business entity acting as the Insured. A Captive owned by such person, the Insured, or related persons enters into purported insurance or reinsurance contracts with the Insured. The Captive makes an election under Section 831(b), which allows the Captive to exclude from its income net written premium. The person, the Insured, or related persons own at least 20 percent of the Captive’s stock. Finally, one or both of the following is true:

  • Total liabilities assumed by the Captive for insured losses and administrative expenses during the “Computation Period” is less than 70 percent of:
    • Premiums earned by the Captive during the “Computation Period,” less
    • Policyholder dividends paid by the Captive during the Computation Period; or
  • The Captive has made a loan or otherwise conveyed assets to the person, the Insured, or a person related to such person or Insured in a manner claimed to be tax free.

The Notice defines the “Computation Period” as the most recent five taxable years of the Captive or, if the Captive has been in existence for less than five taxable years, the entire period of the Captive’s existence. This means that, for most taxpayers, immediate dissolution of a Captive will not avoid the disclosure obligations. Anyone with a captive arguably within the ambit of Notice 2016-66 should contact a tax professional for further advice.

This post written by Richard Euliss.

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COURT UPHOLDS PRIOR RULING THAT UNFILED RATES CHARGED UNDER REINSURANCE AGREEMENT WERE NOT VOID

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On July 21, 2016, we reported on a putative class action filed in a California U.S. district court by Shasta Linen Company against Applied Underwriters, Inc. and its affiliate entities, alleging that the “EquityComp” workers’ compensation insurance program marketed and sold by Applied Underwriters violated California insurance law and regulations. Shasta asserted that the defendants unlawfully used a Reinsurance Participation Agreement (RPA) to control workers’ compensation rates (and thus, charge higher rates) without first having the RPA filed and approved by the department of insurance as required by law. The court dismissed Shasta Linen’s claims to the extent that they sought to invalidate the RPA’s rates on the theory that the RPA was an unfiled plan pursuant to section 11735 of the California Insurance Code. The court reasoned that the use of a rate that has not been filed is not an unlawful rate unless and until the commissioner conducts a hearing and disapproves the rate.

Subsequent to the court’s ruling, the California Commissioner issued an order in an administrative proceeding, finding that the RPA was void because it had not been filed and approved by the department. Shasta Linen then sought reconsideration of the court’s prior dismissal, arguing that the Commissioner’s Order was a “change in controlling authority meriting reconsideration” by the court. On October 17, 2016, the court held that the Commissioner’s order misinterpreted the law, and was not “controlling.” The court denied reconsideration, but it did so “without prejudice as to attempts by plaintiff to invalidate the [RPA] on grounds other than the theory that defendants violated” section 11735. Shasta Linen Supply, Inc. v. Applied Underwriters, Inc., Case No. 2:16-cv-00158 (USDC E.D. Cal. Oct. 17, 2016).

This post written by Michael Wolgin.

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SPECIAL FOCUS: DODD-FRANK IN A TRUMP ADMINISTRATION

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There is considerable uncertainty as to how President-elect Trump may proceed with respect to the regulation of the financial services sector of the U.S. economy.  We present one possible approach, based on a pending bill, in a Special Focus article, What Might Be the Future of the Dodd-Frank Act’s Insurance and Reinsurance-Related Provisions in a Trump Administration.

This post written by Rollie Goss.
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FIO ANNUAL REPORT ON THE INSURANCE INDUSTRY

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In September, the Federal Insurance Office (“FIO”) issued its Annual Report on the Insurance Industry for 2015, including its “outlook” for 2016 based upon results reported through June 30, 2016.

For 2015, the U.S. insurance industry, both life and health and property and casualty “reported another year in a run of solid financial performance, and, in the aggregate, remained in sound financial condition.” FIO notes the continued effects of low interest rates are exacerbated as life insurers are challenged in constructing investment portfolios that properly match liabilities and a decline in the sale of annuity products.

State insurance regulators have improved standards applicable to life insurers ceding to captive reinsurers, “but additional work is needed to develop a consistent oversight regime aimed at improving the transparency and solvency of captive life reinsurers.” In January 2016, state insurance regulators adopted amendments to the Credit for Reinsurance Model Law “that would provide states with the authority to implement regulations relating to a captive framework, as well as regulations applicable to reinsurance captives outside the scope of the captive framework.”

By 2016, a total of 42 state legislatures have enacted a new reserving methodology called “Principles Based Reserving” (PBR), which relies upon an insurer’s individualized risk modeling and analysis techniques. The three-year implementation period of PBR will begin on January 1, 2017.

The report also discusses cybersecurity issues relevant to the insurance sector, including the Cybersecurity Information Sharing Act, as well as the current state of the cyber risk insurance market and common products offered by a number of insurers.

On April 1, 2016, the U.S. Department of Treasury issued a notice of proposed rulemaking to implement changes to the Terrorism Risk Insurance Program (“TRIP”) required by the TRIP Reauthorization Act, and FIO continues to consider comments received in developing a final rule. Per the report, “TRIP remains an important mechanism in ensuring that terrorism risk insurance remains available and generally affordable in the United States.”

Lastly, FIO notes its continued work at the International Association of Insurance Supervisors with other member jurisdictions, spanning nearly 140 countries, in the development of international standards for the supervision of insurance.

For the full text of the report, click here.

Annual Report on the Insurance Industry, Federal Insurance Office, U.S. Department of the Treasury (Sept. 2016)

This post written by Nora A. Valenza-Frost.

See our disclaimer.