The Texas Department of Insurance has repealed and replaced Chapter 15 of the Texas Administrative Code relating to surplus lines insurance.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.
Reinsurance Regulation
Texas Adopts New Regulations Regarding Captive Insurance
In 2017, the Texas legislature enacted a number of changes to the regulation of captive insurers. In September 2018, the Texas Department of Insurance proposed one new regulation and amendments to several other regulations in order to implement those changes. These amendments were adopted on December 7, 2018. Among other things, these amendments:
- include new or revised definitions;
- implement procedural changes regarding the creation of captive insurance companies by the Secretary of State;
- eliminated references to certificates of general good;
- add provisions regarding attorneys in fact who manage operations of captive exchanges;
- adopt by reference a revised Texas Captive Annual Report;
- establish procedures for requesting approval of dividends and distributions; and
- establish requirements for determining acceptable qualified jurisdictions and acceptable national and international rating agencies.
Covered Agreements: Covered Agreement Reached With UK; Implementation of Covered Agreement With EU Slows
On December 11, 2018, the Secretary of the Treasury and the United States Trade Representative sent the Chairs and Ranking Members of the Senate Committee on Banking, Housing, and Urban Affairs, the Senate Committee on Finance, the House Committee on Financial Services, and the House Committee on Ways and Means the text of a new Covered Agreement agreed to by the United States and the United Kingdom concerning the business of reinsurance, with the notification letters required for such agreements by the Dodd-Frank Act. A press release also was issued describing the new US-UK Covered Agreement.
The substantive terms of the US-UK Covered Agreement appear to be materially the same as the terms of the previously existing US-EU Covered Agreement. The implementation provisions of the US-EU Covered Agreement were a bit complicated, and the provisions of Article 9 (“Implementation of the Agreement”) and Article 10 (“Application of the Agreement”) of the new US-UK Covered Agreement also are complicated. For example, the agreement becomes applicable the later of the date it enters into force or 60 months from September 22, 2017. September 22, 2017 was the date that the US-EU Covered Agreement was officially signed. More curious is the provision of Article 9 paragraph 3.(a) of the new US-UK Covered Agreement that “[f]rom the date of entry into force of this Agreement, the United States shall encourage each U.S. State to promptly adopt the following measures: (a) the reduction, in each year following 7 November 2017, of the amount of collateral required by each State to allow full credit for reinsurance by 20 percent of the collateral that the U.S. State required as of 1 January 2017 ….” Perhaps these provisions reflect a desire that the two covered agreements become applicable at the same time, with no resulting advantage or disadvantage to reinsurers domiciled in either the EU or the UK post-Brexit.
Meanwhile, the implementation of the US-EU Covered Agreement has slowed somewhat. Consideration of final approval of the proposed amendments to the Credit for Reinsurance Model Act and Model Regulation, which is part of the implementation process, was on the agenda for the December 19, 2018 telephonic meeting of the NAIC Executive Committee and Plenary, but at the end of the meeting NAIC President McPeak, who was moderating the meeting, announced without comment that the consideration of the revisions to the Models was being deferred to a later date to allow for the consideration of late comments on the proposed Model revisions received from the US Treasury and the US Trade Representative. Neither the substance of those comments nor a revised timeline for consideration of the proposed Model revisions was provided during that meeting. It remains to be seen what the next step will be in the consideration of the proposed amendments to the Models.
Illinois Legislation Revises Laws Applicable to Captive Insurance Companies
Illinois has adopted a bill that includes a number of revisions to its laws regarding captive insurance companies. These include, inter alia:
- changes to the types of risk that a captive insurance company may insure;
- new requirements regarding minimum capital and surplus;
- a new requirement that captive insurance companies include with their annual reports of financial condition a statement of actuarial opinion regarding the reasonableness of their losses and loss adjustment expense reserves;
- a provision allowing captive insurance companies to make loans to affiliates with the prior approval of the Director of Insurance;
- new notice requirements for reinsurance agreements;
- a provision allowing captive insurance companies to accept risks from or cede risks to captive reinsurance pools or affiliated captive insurance companies with the prior approval of the Director of Insurance;
- standards for the approval of captive reinsurance pools;
- authority for the Director of Insurance to issue standards for risk management of controlled unaffiliated businesses;
- rules regarding the issuance of dividends by captive insurance companies;
- rule regarding credits allowed to ceding insurers for reinsurance;
- reporting and certification requirements for assuming insurers regarding trust funds, capital and surplus requirements, and financial strength ratings;
- a requirement that the Director of Insurance create and publish a list of jurisdictions with rules sufficient to allow assuming insurers licensed in those jurisdictions to be certified in Illinois and standards for determining the sufficiency of those rules.
These revisions went into effect immediately upon the adoption of the law on November 27, 2018.
2017 Illinois Senate Bill No. 1737, Illinois One Hundredth General Assembly – Second Regular Session
This post written by Jason Brost.
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FSOC Rescinds Prudential’s Designation as Systemically Important Financial Institution
The Financial Stability Oversight Council (“FSOC”) announced on October 17, 2018 that it has voted unanimously to rescind the designation of Prudential Financial Inc. (“Prudential”) as a systemically important financial institution (“SIFI”). Prudential is currently the largest life insurance company and the seventh largest insurer and bank holding company in the United States. Due to the size, scope and complexity of its business, it was labeled a SIFI in 2013 and added to the list of nonbanks considered “too big to fail” – those whose collapse the Treasury Department believed could threaten the stability of U.S. financial markets. SIFIs are subject to strict supervision and oversight by the Federal Reserve. Pursuant to the Dodd-Frank Act, the FSOC must annually reevaluate the continued necessity of a SIFI-designation.
The FSOC previously identified three channels through which the negative effects of a SIFI’s distressed finances could be transmitted to the market, including exposure to the SIFI by market participants, asset liquidation, and the inability or unwillingness of the SIFI to carry out critical functions or services. In 2013, the FSOC found the threat posed by Prudential arose primarily from exposure and asset liquidation channels. According to the FSOC’s most recent evaluation, although certain aspects of Prudential’s business and activities have not materially changed since 2013, several factors have significantly affected its previous conclusion that Prudential could cause financial instability if it experienced material financial distress. The factors include actions taken directly by Prudential, such as creating and dissolving captive reinsurance companies and restructuring debt, as well as certain critical regulatory developments and related initiatives by the National Association of Insurance Commissioners.
Notwithstanding the FSOC’s determination, Prudential and eight other insurance companies remain designated as globally significant SIFIs by the International Association of Insurance Supervisors and the Financial Stability Board. Two of these insurers had also been designated as SIFIs under the Dodd-Frank Act, but the labels were since rescinded or otherwise removed.
This post written by Alex Silverman.
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