Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

You are here: Home / Archives for Reinsurance Regulation

Reinsurance Regulation

European Reinsurers Question Whether Proposed Changes to the Credit for Reinsurance Models Would Ensure Compliance with the Covered Agreement

by

We have posted a number of times on the Covered Agreement between the U.S. and the E.U. concerning the reduction of collateral requirements for reinsurance provided by reinsurers domiciled in the E.U. The approach of the National Association of Insurance Commissioners (“NAIC”) to the implementation of the Covered Agreement, through its Reinsurance Task Force, has been based upon proposed amendments to the Credit for Reinsurance Model Act and Credit for Reinsurance Model Regulation, with the assumption being that the adoption of the revised Models by the individual states would ensure compliance with the Covered Agreement. Drafts of the revised Models have been under consideration, and are scheduled to be presented for a vote at the NAIC’s Fall National Meeting in approximately two weeks. The Reinsurance Advisory Board (“RAB”), which is a trade association composed of European domiciled reinsurers that purport to account for “approximately 60% of worldwide reinsurance business,” has submitted a comment letter to the chair of the NAIC’s Reinsurance Task Force expressing doubts over whether the proposed revisions to the Models would appropriately implement the Covered Agreement. This is potentially a serious issue, because if the revised Models do not appropriately implement the requirements of the Covered Agreement, the adoption of the revised Models by the states might not save state credit for reinsurance laws from preemption by the Covered Agreement. The RAB is represented at the CEO level by Gen Re, Hannover Re, Lloyd’s of London, Munich Re, Partner Re, Scor, and Swiss Re.

While many of the comments in the RAB’s letter concern fairly modest wording issues, one of the concerns expressed by the RAB is that “some of the language in the exposure drafts [of the proposed Model revisions] deviates significantly from the language of the bilateral agreement [i.e., the Covered Agreement] and thereby provides extensive discretion to state regulators in their compliance with the terms of the bilateral agreement.” We raised this issue as a possible concern in our last post on the Covered Agreement. One of the criticisms of the Covered Agreement in the Congressional hearing on the agreement shortly after it was announced was that it was too rigid, and took away the discretion and flexibility that individual state insurance commissioners have in our state-based structure of insurance regulation. The focus of the letter on the ability of individual state insurance commissioners to exercise some discretion in the implementation of the Models raises an issue that may be problematic. It will be interesting to see if and how the NAIC responds to this letter.

On a related note, the U.S. Department of the Treasury has announced plans to engage in discussions with the United Kingdom aimed at agreeing to a Covered Agreement with the U.K. that would be similar to that in place with the E.U. The NAIC has stated its position on that announcement.

This post written by Rollie Goss.
See our disclaimer.

UK Court Considers Whether Payment of Insurance Claim Violates Iran Sanctions

by

A court in the United Kingdom has issued a ruling considering the intersection of a clause in an insurance agreement meant to protect the insurer from obligations that would violate international sanctions regimes and the rapidly changing realities of US sanctions against Iran.

At the heart of the case was an insurance agreement providing coverage for cargo carried on two ships that transported goods to Iran in August 2012. Upon arrival in Iran, certain cargo covered by the insurance agreement was put into storage, from which it was stolen in September or October 2012. The insured made a claim based on this loss in March 2013, but the insurer denied coverage on the basis of clause in the agreement providing that “no (re)insurer shall be liable to pay any claim . . . to the extent that the . . . payment of such claim . . . would expose that (re)insurer to any sanction, prohibition or restriction under . . . the trade or economic sanctions, laws, or regulations of . . . the United States of America.”

The insurer argued that paying this claim would expose it to sanctions based on US sanctions barring the provision of services to Iran. The parties agreed that insurance is a covered service and that the insurer was prohibited by these sanctions from paying this claim when it was made in March 2013. The insurer argued that its obligations were extinguished at that time, but the insured argued that later developments allowed the insurer to pay the claim. Specifically, in 2015, the US entered in an agreement with Iran called the Joint Comprehensive Plan of Action (JCPOA) under which the sanctions were relaxed. Under provisions of the JCPOA that went into effect in January 2016, the insurer could have paid the claim but delayed doing so while awaiting confirmation from the US and UK governments that this was allowed. Then, in May 2018, President Trump announced that the US was withdrawing from the JCPOA effective June 27, 2018, with a wind down provision allowing certain transactions to take place through November 4, 2018, and the parties disagreed regarding whether paying this claim was among the permitted transactions.

The court made several significant findings. First, it found that the fact that payment was prohibited at the time the claim was made in 2013 did not extinguish the insurer’s obligation to pay the claim, but instead only suspended that obligation until such time as the law changed to allow such payment to be made, as happened in 2016. Second, it found that payment of the claim was a permitted transaction under the wind down provision of the US withdrawal from the JCPOA. Finally, it interpreted the provision excusing the payment of the claim to the extent it “would expose” the insurer to sanctions to mean that the insurer had the burden to show that the payment was prohibited under the sanctions law, and not merely that there was a risk that a relevant government entity would interpret the payment to be prohibited. The court therefore decided that the insured was entitled to payment of the claim.

Mamancochet Mining Ltd. v. Aegis Managing Agency Ltd., [2018] EWHC 2643 (Comm)

This post written by Jason Brost.

See our disclaimer.

Texas Department of Insurance Proposes Rule Changes Regarding Captive Insurance

by

The Texas Department of Insurance has proposed a set of amendments to its regulations concerning captive insurance in order to implement changes passed into law by the Texas legislature in 2015 and 2017. The 2015 legislation allowed the Department to approve dividends and distributions to holders of an equity interests in a captive insurance company, while the 2017 legislation allowed captive insurance companies to be formed as captive exchanges, allowed the Commissioner to waive the actuarial opinion required for captive insurers under certain circumstances, allowed the Secretary of State to form a captive insurer  before the Department approves that insurer’s formation documents, allowed the Department to approve distributions to policyholders, and provided a procedure for making determinations regarding acceptable qualified jurisdictions and rating agencies for reinsurance transactions.

The proposed regulations establish rules and procedures meant to implement each of these changes.

The Department will be accepting public comments on these proposed regulations through October 22, 2018.

This post written by Jason Brost.

See our disclaimer.

Rhode Island Makes Technical Changes to Its Credit for Reinsurance Regulation

by

Rhode Island adopted the NAIC Credit for Reinsurance Model Regulation in 2014. Recently, Rhode Island made technical changes to the regulation and substituted forms issued by the Rhode Island Department of Insurance by separate Bulletin. The regulation is codified in the Rhode Island Insurance Regulation 230-RICR-20-45-3 – Financial Standards and Corporate Operations – Credit for Reinsurance. The regulation and accompanying form bulletin are available online.

This post written by Gail Jankowski.

See our disclaimer.

Data Breach Bill Applicable to Reinsurers Heads to Floor of Us House of Representatives

by

The “Consumer Information Notification Requirement Act” (H.R. 6743) was passed out of the House of Representatives Committee on Financial Services one week after being introduced and is now headed to the floor for consideration by the full chamber. The bill, which amends the Gramm-Leach-Bliley Act to provide a national standard for financial institution data security and breach notification, expressly applies to reinsurers. The bill, however, does not in its current form address its application to reinsurers domiciled outside the United States. It requires reinsurers to provide a “breach notice” to the state insurance authority of the reinsurer’s domicile state “in the event of unauthorized access that is reasonably likely to result in identity theft, fraud, or economic loss.” The bill also requires the state insurance authority of the reinsurer’s domicile to enforce standards related to data security safeguards. The bill preempts states from enacting any data protection-related requirements for insurers that are in addition to or different from those described in the bill. The bill is opposed by the NAIC, among others. We will track the progress of this bill and post on any further legislative action. H.R. 6743, “Consumer Information Notification Requirement Act.”

This post written by Benjamin E. Stearns.

See our disclaimer.