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Reinsurance Regulation

CALIFORNIA ENACTS NAIC CREDIT FOR REINSURANCE AND HOLDING COMPANY MODEL LAWS

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On September 7, 2012, the governor of California signed into law two bills implementing amendments to the NAIC Credit for Reinsurance Model Law and NAIC Insurance Holding Company System Regulatory Model Act. The former, SB 1216, allows full credit to insurers for insurance ceded to unauthorized reinsurers that satisfy certain financial strength ratings, without the need to post full collateral. It also contains provisions increasing oversight of the nature and extent of risk ceded by domestic insurers. The California law differs from the NAIC Model, however, by authorizing the insurance commissioner to disallow credit for reinsurance under certain circumstances, notwithstanding technical compliance with the new requirements.

The second bill, SB 1448, increases oversight over an insurer’s holding company system, specifically over “enterprise risk” defined as “any activity, circumstance, or event or series of events involving one or more affiliates of an insurer that, if not remedied promptly, is likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole.” The law requires, among other things, the filing of annual enterprise risk reports, and a statement that the insurer’s board of directors is responsible for overseeing corporate governance and internal controls, and that the insurer’s officers or senior management have approved, implemented, and continue to maintain and monitor corporate governance and internal control procedures. The law also authorizes the commissioner to establish and participate in a supervisory college to determine compliance for insurance holding company systems with international operations.

Both laws go into effect January 1, 2013. The credit for reinsurance law, however, will be deemed automatically repealed on January 1, 2016, unless separate legislation provides otherwise.

This post written by Michael Wolgin.

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NAIC PUBLISHES EXPOSURE DRAFT OF CAPTIVES WHITE PAPER

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We previously reported on the NAIC’s inquiry into the potentially abusive use of captives to avoid certain accounting rules. As part of that inquiry, the NAIC’s Financial Condition (E) Committee’s Captives and Special Purpose Vehicle Use Subgroup has called for comments on its white paper titled Captives and Special Purpose Vehicles. Comments are due by the close of business on November 16, 2012. The white paper describes some disagreement among different states on issues relating to captives. The end of the comment period is shortly before the NAIC’s scheduled fall meeting.

This post written by Rollie Goss.

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EU-U.S. DIALOGUE PROJECT REQUESTS PUBLIC COMMENT ON DRAFT REPORTS COMPARING INSURANCE REGIMES IN THE EU AND THE U.S.

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On September 27, 2012, the Steering Committee of the EU-U.S. Dialogue Project, a collaboration among the European Commission, European Insurance and Occupational Pensions Authority, the NAIC, and the Federal Insurance Office of the U.S. Department of the Treasury, invited public comment on the reports of seven technical committees comparing certain aspects of the insurance supervisory regimes in the European Union and the United States. The draft report and invitation for comments includes a copy of the seven reports. The seven reports are based on topics deemed to be “fundamentally important to a sound regulatory regime and to the protection of policyholders and financial stability,” namely: (1) professional secrecy and confidentiality, (2) group supervision, (3) solvency and capital requirements, (4) reinsurance and collateral requirements, (5) supervisory reporting, data collection and analysis and disclosure, (6) supervisory peer reviews, and (7) independent third party review and supervisory on-site inspections. The technical committees that prepared the reports were comprised of “experienced professionals from both the European Union as well as the United States, specifically, from FIO, the EC, the NAIC, and EIOPA, as well as representatives from state insurance regulatory agencies in the United States and competent authorities of EU Member States.” Hearings were scheduled for October 12 and 16, 2012 in Washington D.C. and Brussels, respectively, and the deadline for written submissions is October 28, 2012.

This post written by Michael Wolgin.

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NEW “IRAN THREAT REDUCTION ACT” IMPLICATES INSURANCE INDUSTRY

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On August 10, 2012, President Obama signed The Iran Threat Reduction and Syria Human Rights Act (H.R. 1905) into law. Among other provisions, the Act contains provisions of particular import to the insurance industry, including bans on insuring or reinsuring: (1) vessels transporting oil from Iran if the insurer should have known that the vessel would be used for this purpose; (2) vessels transporting goods that could be used towards the proliferation of terrorism or weapons of mass destruction; (3) the National Iranian Oil Company or the National Iranian Tanker Company; and (4) barter transactions involving Iranian oil sales. Among other “safe harbour” provisions, the insurer may defend against violations of the Act (with the exception of (2) above), if it conducted due diligence in establishing and enforcing procedures to avoid violating the Act.

This post written by Michael Wolgin.

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CREDIT FOR REINSURANCE UPDATE

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About a year ago we reported on the NAIC’s adoption of amendments to the Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model Regulation (#786). Eleven states now have implemented changes to their credit for reinsurance requirements to allow for a ratings-based methodology to allow for reduced collateral requirements for certified, non-U.S. reinsurers. These states include: Florida, New York, New Jersey, Pennsylvania, California, Connecticut, Delaware, Georgia, Indiana, Louisiana, and Virginia. Certain of these states, most notably Florida and New York, already had moved in this direction before the NAIC adopted its revised Models. A number of states, however, enacted legislation during their recently completed legislative sessions.

Some of the state legislation has included variation from the NAIC Models. For example, California’s law, signed by Governor Brown in early September, authorizes the insurance commissioner to disallow credit for reinsurance under certain circumstances notwithstanding technical compliance with the new requirements. California’s law goes into effect January 1, 2013, but will be deemed automatically repealed on January 1, 2016, unless separate legislation provides otherwise. Thus, it appears that California may be taking the NAIC’s revised Model on a three-year test drive.

At the NAIC, the Reinsurance (E) Task Force continues its work on credit for reinsurance matters. Most notably, its Qualified Jurisdiction Drafting Group, led by Missouri’s Director Huff, is focusing on developing the list of qualified jurisdictions. Under the Models, this list will identify the non-U.S. jurisdictions that will qualify as acceptable domiciliary jurisdictions for non-U.S. reinsurers to be eligible for consideration for certification and, potentially, reduced collateral obligations under the Model framework.

This post written by Anthony Cicchetti.

See our disclaimer.