Reinsurance Regulation

On December 31, 2014, the Federal Insurance Office (FIO) issued a report entitled “The Breadth and Scope of the Global Reinsurance Market and the Critical Role Such Market Plays in Supporting Insurance in the United States.”  The report was prepared pursuant to the Dodd-Frank Act.  It provides an overview of the history, forms, and purposes of reinsurance, the U.S. regulatory framework governing reinsurance, and the global reinsurance market.  The report analyzes the important role that global reinsurers play to U.S. insurance industry generally.  It does not, however, purport “to analyze the extent to which reinsurance or any particular reinsurer could be systemically important.”

The report discussed two roles of the federal government in the reinsurance market.  First, it mentions that the Dodd-Frank Act contains several provisions relating to the oversight of reinsurance.  It is noted that the approach of those provisions is “to enhance uniformity in the state-based insolvency regulation of insurers and reinsurers by increasing deference to the state in which the reinsurer is domiciled or licensed.”

Second, it discusses some of the history of credit for reinsurance collateral reform, and mentions that efforts by the NAIC to achieve uniformity with respect to this area through a Model Act have not been successful.  The report states that the Treasury Department and the United States Trade Representative are considering exercising their authority to enter into an international agreement  concerning this issue, which would preempt inconsistent state laws.

This post written by Michael Wolgin.

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On January 12, 2015, the Terrorism Risk Insurance Act Program (“TRIA” or “Program”), which was originally adopted in 2002 to provide a federal backstop to protect insurers from catastrophic claims arising from terrorist attacks on U.S. soil, was extended.

Specifically, the TRIA Reauthorization Act of 2015 (the “Reauthorization Act”), Public Law No: 114-114th-1, revises the Program as follows:

• Extends the Program until December 31, 2020.
• Decreases the federal share of the compensation for the insured losses of an insurer during each Program year by 1% until it equals 80% of the portion of the amount exceeding the annual insurer deductible.
• Increases the insurance marketplace aggregate retention amount under the Program (currently $27.5 billion) by $2 billion per calendar year until such amount equals $37.5 billion.
• Directs the Secretary of the Department of Treasury (the “Secretary”) to conduct a study within nine months after the enactment of the Reauthorization Act regarding the process used by the Secretary to certify an act as an act of terrorism under the Program.
• Directs a biennial study by the GAO regarding the impact on the Federal government of assessing and collecting upfront premiums on insurers that participate in the Program and the creation of a capital reserve fund under the Program.
• Authorizes the Secretary to establish and appoint the Advisory Committee on Risk-Sharing Mechanisms (the “Advisory Committee”) to provide advice, recommendations, and encouragement with respect to the creation and development of the nongovernmental risk-sharing for the protection against losses arising from acts of terrorism. The Advisory Committee must consist of nine members who are directors, officers, or other employees of insurers, reinsurers, or capital market participants that are participating or that desire to participate in the nongovernmental risk-sharing mechanisms and who are representative of the affected sectors of the insurance industry, including commercial property insurance, commercial casualty insurance, reinsurance, and alternative risk transfer industries.
• Requires insurers participating in the Program to submit to the Secretary beginning January 1, 2016, and each calendar year thereafter, information regarding insurance coverage for terrorism losses to analyze the effectiveness of the Program. The information to be reported shall include information regarding lines of insurance with exposure to such losses; premiums earned on such coverage; geographical location of exposures; pricing of such coverage; the take-up rate for such coverage; the amount of private reinsurance for acts of terrorism purchased; and such other matters as the Secretary considers appropriate.
• Authorizes the Secretary to conduct a study (commencing June 30, 2017, and every other June 30 thereafter) of small insurers participating in the Program, and identify any competitive challenges small insurers face in the terrorism risk insurance marketplace.

Furthermore, the Reauthorization Act includes several other amendments, unrelated to the Program. It amends the Gramm-Leach-Bliley Act to establish the National Association of Registered Agents and Brokers as an independent nonprofit corporation to prescribe licensing and insurance producer qualification requirements and conditions on a multi-state basis, while retaining essential state regulatory authority. It also removes Dodd-Frank Act margin requirements for certain end-users, like utilities and manufacturers, involved in derivatives trading to hedge risk. Finally, it requires the Federal Reserve to have at least one governor with community banking or supervision experience.

This post written by Kelly A. Cruz-Brown.

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A court in the United Kingdom has approved the transfer of the entire long-term insurance business of Prudential Annuities Limited (PAL) to The Prudential Assurance Company Limited (PAC). The transfer’s purpose was to simplify the corporate structure of Prudential UK’s business, improve the flexibility and efficiency of capital management, and facilitate Prudential’s response to regulatory developments. The transfer affected approximately 134,000 contracts of long-term insurance business, all non-profit pension policies, and approximately 90,000 policyholders. Regulators did not object to the transfer and an independent expert and three actuaries all supported it.

PAL was already an asset of the PAC fund to which its business was transferred and, since 2012, the vast majority of PAL’s business had been reinsured by that fund. The court found that the reinsurance arrangements for the transfer significantly restricted the ability of the PAC fund to “walk away” from PAL and agreed with the independent expert that there would be no adverse change to either PAL or PAC policyholders from the transfer. Finding that all requirements of the Financial Services and Markets Act 2000 had been met, the court sanctioned the transfer of business. In the Matter of Prudential Annuities Ltd., [2014] EWHC 4770 (Ch.) (High Courts of Justice (Chancery Division) Cos. Ct.) Nov. 13, 2014).

This post written by Renee Schimkat.

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