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Reinsurance Regulation

GEN RE DISMISSED FROM AIG CONSOLIDATED SECURITIES LITIGATION

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A New York federal court granted judgment on the pleadings to the Gen Re defendants in the consolidated AIG securities litigation (about which we have previously posted on July 17, 2008 and November 17, 2009). The partial judgment under Rule 54 does not affect the other defendants. In 2008, Gen Re and certain of its individual officers moved for judgment on the pleadings, arguing that they were not liable to AIG as a matter of law for alleged “fraud on the market” in connection with alleged statements made pertaining to AIG, as a result of the U.S. Supreme Court’s decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008). In its recent ruling, the court agreed, holding that AIG’s pleading failed to allege the elements of “material misrepresentation or omission,” and “reliance upon that misrepresentation” under the standards set in Stoneridge, and therefore granted judgment on the pleadings to the Gen Re defendants. In re American International Group, Inc. Securities Litigation, No. 04-cv-8141 (USDC S.D.N.Y. Sept. 10, 2010)

This post written by John Pitblado.

POST-DODD-FRANK REGULATORY DEVELOPMENTS

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The implementation of the Dodd-Frank Act (“DFA”) is underway with a flurry of rulemaking and other activity.

NAIC and state actions

Although the DFA did not include any significant requirements with respect to reinsurance collateral requirements, it did include a provision prohibiting states from denying credit for reinsurance if the domiciliary state of the ceding insurer recognizes such credit under certain circumstances. In light of the NAIC’s prior Reinsurance Regulatory Modernization Act (“RRMA”), which is the subject of prior blog entries, this DFA provision, Florida’s existing reinsurance collateral reduction provision (69O-144.007) and the perceived interest of states in moving forward with “individual state-based reinsurance collateral reduction reforms,” the NAIC’s Financial Regulation Standards and Accreditation Committee has made an “informal request” to the Reinsurance Task Force “to consider which key elements of the [NAIC’s RRMA] should be considered in reviewing any individual state initiates, and whether these key elements should be incorporated into the Credit for Reinsurance Model Law and Regulation.” An initial draft recommendation has been exposed for comment, with the comment period expiring September 16, 2010. This document contains many similarities to the Florida regulation, and specifically cites to the Florida regulation. Meanwhile, the New York Insurance Department has published a Notice of Proposed Rulemaking for proposed amendments to New York’s reinsurance collateral requirements. A summary and impact statement for the proposed New York amendment have been published. It appears that rather than promoting uniform collateral reform, the NAIC will be permitting state-by-state variations with some form of guidance.

On another front, at its 2010 Summer Meeting last month, the NAIC’s Executive Committee formed a special task force to consider the issues relating to surplus lines premium taxes raised by the DFA.

Federal actions

As the Office of National Insurance Office and the Financial Stability Oversight Council are being organized, one point of interest for those in the reinsurance and insurance industries is the rulemaking with respect to swaps and other financial products. The principal focal points of those efforts are the SEC and the CFTC. The SEC has issued a press release concerning its comment process and the CFTC and the SEC have published their comment topic lists and schedules. In addition, the CFTC and SEC held a joint swap roundtable.

This post written by Rollie Goss.

IAIS MID-YEAR REPORT ADDRESSES MACROPRUDENTIAL SURVEILLANCE OF REINSURANCE COMPANIES AND THE REINSURANCE MARKET

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The Global Reinsurance Market Mid-Year Report recently released by the International Association of Insurance Supervisors (“IAIS”) focuses on the extent to which regulators of insurance and reinsurance companies are gathering data and engaging in macroprudential analysis of the reinsurance sector. The report contains three parts: (1) a discussion of what a macroprudential surveillance approach means in this context; (2) examples of such activities in the United States (through the NAIC), India, Europe and globally through the World Bank and the International Monetary Fund; and (3) a “case study” of such surveillance efforts. It is interesting that the fragmentation of regulation in the United States among the states is viewed as beneficial to this analysis, because it illustrates a possible global model in which one entity (the NAIC in the U.S. model) would gather data and provide stress testing on a broad scale across multiple jurisdictional lines. To some, this may overstate the NAIC’s activities in the reinsurance sector. The unspoken assumption is that the IAIS would serve that global role, and the report touts its data gathering activities as a first step along this path.

Highlights from the report:

  • While the meaning of macroprudential surveillance in insurance and reinsurance varies by jurisdiction, such activities are geared towards identifying, assessing and monitoring risks to the financial system. These activities include gathering and analysis of macroeconomic and financial market information, and of how these data interact with each other.
  • The current global financial crisis has highlighted the complexities inherent in capturing and making sense of risks that evolve rapidly in time, and cut across geographical boundaries and financial sectors.
  • Although most supervisory authorities do not have a formalized definition of macroprudential surveillance, nearly all of them carry out some such activities.
  • The two most prevalent macroprudential surveillance activities are insurance market analysis and analysis of the impact of macroeconomic variables on the insurance market. In both instances, the focus tends to be on the analysis of domestic data, with international data analysis receiving comparatively less attention.
  • Under 50% of regulators carry out insurance market-wide stress testing; however, approximately 20% of those who do not stress test their markets have plans in place do so within the next 12 months.
  • Macroprudential surveillance activities appear to assist regulators in: (1) identifying and assessing relevant changes in insurance markets as well as macroeconomic factors affecting these markets; (2) providing early warning signals of emerging risks, and enabling prompt action; (3) providing value-adding information for forward-looking monitoring; and (4) identifying futures issues that may affect the insurance market.
  • There is limited information available on insurance-specific macroprudential surveillance activities at the global level collected and compiled by insurance regulators.

This post written by Rollie Goss.

NEW YORK PUBLICIZES DRAFT AMENDMENTS TO CREDIT FOR REINSURANCE REGS

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In what appears to be one of the first, if not the first, state insurance department action in response to the Nonadmitted and Reinsurance Reform provisions of the Dodd-Frank Act (DFA), New York recently issued for comment a draft of proposed amendments to its regulations governing credit for reinsurance. As we discussed in Carlton Fields’s recent webinar on reinsurance aspects of DFA, New York was one of the states that previously had publicized proposed modifications, or enacted actual modifications, to their reinsurance laws to, among other things, address the perceived inequality confronted by non-U.S. reinsurers relating to collateral requirements for U.S. ceded business. In this regard, New York’s latest draft carries forward its previous proposal, which calls for a ratings-based framework for the determination of collateral requirements. Notably, however, several changes now embodied in New York’s proposal appear to respond directly to DFA.

For example, whereas it previously aimed to reach “authorized insurers,” New York under this draft amendment would expressly exclude from the provision’s reach situations where the cedent’s state of domicile (other than New York) recognizes credit for the ceded risk and is an NAIC-accredited state, or has financial solvency requirements substantially similar to the requirements for NAIC accreditation. In addition, those who participated in our webinar will recall that DFA includes provisions relating to the law that may govern a reinsurance contract. On this front, New York’s proposal states that the reinsurance contract must provide that disputes thereunder be governed by and construed in accordance with one of three options: (1) the laws of New York, (2) the laws of the cedent’s domicile, or (3) the laws of any state chosen by the cedent. New York’s draft proposal expressly provides that an agreement by the parties to arbitrate disputes is not overridden by such governing law provisions, consistent with DFA. The brief public comment period for New York’s draft proposed amendment ended on August 4th.

Absent further initiative by the NAIC to move forward with its previous proposal to “modernize” reinsurance regulation as it relates to collateral requirements, New York’s approach, if it goes into effect, could represent another piece in a patchwork whereby various states adopt their own modified collateral requirements within the parameters of DFA, while others maintain the status quo. We will continue to monitor such developments to keep our readers informed.

This post written by Tony Cicchetti.