Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Reinsurance Regulation

AMICO DISPUTES CASH HOLDINGS IN MANHATTAN RE REHABILITATION

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In response to a rehabilitation plan for Delaware insurance company Manhattan Re proposed by its receiver, American Motorists Insurance Company (a reinsurer of Manhattan Re) filed objections with the Delaware Court of Chancery. AMICO argued that the plan should be rejected because the receiver improperly intended to dispose of certain cash holdings that AMICO claimed constituted cash collateral under its reinsurance agreements with the company. Additionally, AMICO moved to have the parties’ dispute referred to arbitration, and for a preliminary injunction to preserve the disputed cash until arbitration is resolved. The court found that Delaware law permits enforcement of the arbitration clause in the reinsurance agreement which compelled the parties to arbitrate their dispute over the cash. Additionally, the court issued a partial stay of the proceedings pending resolution of the arbitration. In re Rehabilitation of Manhattan Reinsurance Co., No. 2844 (Del. Ct. Ch. Oct. 4, 2011).

This post written by John Black.

LEVELING THE PLAYING FIELD: NAIC FINANCIAL CONDITION (E) COMMITTEE ADOPTS REVISIONS TO CREDIT FOR REINSURANCE MODELS

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The NAIC’s Financial Condition (E) Committee has adopted revisions to the NAIC Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model Regulation (#786). In this edition of Special Focus, Tony Cicchetti discusses the revisions’ ramifications for reinsurance regulation.

This post written by Anthony Cicchetti.

REINSURER PRECLUDED FROM INTERPOSING EARLY DEFENSES IN LIQUIDATION CLAIMS PROCESS

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Everest Reinsurance Company intervened in the liquidation proceedings of Midland Insurance Company, and moved to have the anti-suit injunction vacated, in order to allow it to participate in the claims settlement process, and to interpose defenses. The trial court denied the motion, and Everest appealed. The appellate court affirmed, finding Everest’s defenses were premature, as none of the relevant claims had yet been approved, and because adequate procedures existed for it to interpose defenses later in the process. It further found that Everest’s ability to challenge the liquidator’s claims decisions was limited by the “follow the fortunes” language in its reinsurance policies. Everest also appealed the trial court’s decision denying its motion for an order precluding the liquidator and Midland policyholders from introducing evidence of settlements entered into by Everest as a direct insurer in other proceedings. The court, however, affirmed that ruling as well, noting such evidence might be relevant insofar as it demonstrated that Everest utilized claims handling methodologies that it seeks to challenge in the Midland proceeding. In re Liquidation of Midland Insurance Co., No. 41294/86 (N.Y. App. Aug. 25, 2011).

This post written by John Pitblado.

FINANCIAL STABILITY OVERSIGHT COUNCIL ISSUES FIRST ANNUAL REPORT

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The Financial Stability Oversight Council (“FSOC”) has issued its first annual report. Established by the Dodd-Frank Act, the purposes of the FSOC are: (1) to identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace; (2) to promote market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the U.S. government will shield them from losses in the event of failure; and (3) to respond to emerging threats to the stability of the U.S. financial system. The initial annual report focuses on the establishment of the FSOC and its initial activities to restore stability and strength of the U.S. financial markets, especially in the areas of capital levels, leverage, liquidity, resolution plans, volatility, swaps, the mortgage market and systemic risk. The Report also identifies the increased role of foreign banks in the U.S. marketplace as a risk point, since such institutions are not subject to the same regulation as are U.S.-based institutions. There is concern that foreign banks are subject to less strict capital and other financial standards than are U.S. banks, but that the pending Basel III reforms will help to address such issues.

The Report does not mention reinsurance, and contains only passing references to the insurance market, stating that “[t]he traditional U.S. insurance market largely functioned without disruption in payments to consumers throughout the financial crisis and the recovery.” The Report does note the role of financial guaranty and mortgage insurance in markets and products which experienced stress in recent times. The insurance industry is discussed at pages 61-62, 73 and 140-41 of the Report, which notes that insurance companies generally have strengthened their balance sheets and improved their investment portfolios.

On July 26, 2011, the Senate Committee on Banking, Housing & Urban Affairs held a nomination hearing which included Roy Woodall, the President’s insurance appointee to the FSOC, as well as nominees for the chair of the FDIC and the Comptroller of the Currency. The vast majority of the questions during the hearing were directed to the FDIC and OCC nominees, with no critical questioning of Mr. Woodall. As of the writing of this post, the Committee has not voted on those nominations.

This post written by Rollie Goss.

UK FSA ASSESSES WILLIS LIMITED LARGEST BRIBERY FINE EVER

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The UK Financial Services Authority handed down its largest ever fine relating to bribery in late July. The FSA issued a final notice fining Willis Limited £6.895 for failures in its anti-bribery and corruption systems and controls, concluding that Willis’ systems allowed for an unacceptable level of risk that overseas third party payments could be used for corrupt purposes. Over the course of 4 years, Willis made a series of payments to overseas third parties to assist in winning business from overseas clients. The FSA, however, also concluded that the misconduct on the part of Willis was not deliberate or reckless. Willis was given 14 days from the issuance of the penalty to remit payment. FINANCIAL SERVICES AUTHORITY, FSA/PN/066/2011 (U.K. July 21, 2011).

This post written by John Black.