Reinsurance Regulation

GAO ISSUES REPORT ON NATURAL CATASTROPHE INSURANCE COVERAGE ISSUES

July 7, 2010 by Carlton Fields

The U.S. Government Accountability Office recently reported to Rep. Bachus, the ranking majority member of the House Financial Services Committee, of its findings pertaining to various proposals meant to address increasingly difficult insurance coverage issues arising from natural catastrophes. The GAO’s report analyzes various legislative proposals that generally increase federal involvement in insurance coverage for natural catastrophes, through the lens of furthering the public policy goals of (1) charging premium rates that reflect the risk of loss, (2) encouraging broad participation, (3) encouraging the private market to provide natural catastrophe insurance, and (4) limiting costs to U.S. taxpayers. The report identifies the trade-offs that would need to be balanced in legislative assessment of the proposals, such as the trade-off of, on the one hand, increased federal subsidies that would cause premium rates to inadequately reflect the risk of loss, thereby increasing public participation, but, on the other hand, discouraging private marketplace participation and decreasing pre- and post-event mitigation efforts, and encouraging unwise development in high risk areas. The report discusses the roles of and impact on the reinsurance and capital markets in dealing with the risk of natural catastrophe, mentioning that reinsurance issues were also covered in a prior report issued by the GAO in November 2007. It also includes a summary of the GAO’s briefing of the minority staff, and the resultant revisions to the final report.

This post written by John Pitblado.

SECOND REINSURER APPROVED FOR FLORIDA REDUCED COLLATERAL REGULATION

June 29, 2010 by Carlton Fields

The Florida Office of Insurance Regulation (“OIR”) has approved XL Re Ltd. as the second non-Florida reinsurer to operate in Florida without having to post 100 percent collateral. The approval is pursuant to a Florida regulation, 69O-144.007, which allows credit for reinsurance without full collateral for transactions involving reinsurers not domiciled in Florida, provided that certain requirements are satisfied. The requirements include, among other requirements:

the reinsurer must obtain financial ratings from no less than two approved rating agencies;
the percentage of collateral required is determined based upon the lowest rating;
the reinsurer must consent to service of process and jurisdiction;
the reinsurer and its regulator must provide periodic financial and other information to the OIR; and
the reinsurer must hold surplus in excess of $100 million.

Hannover Re was the first reinsurer approved for reduced collateral transactions under this regulation.

This post written by Rollie Goss.

FEDERAL AND STATE LEGISLATIVE AND REGULATORY UPDATE

June 4, 2010 by Carlton Fields

Following are selected Federal and/or State legislative and regulatory developments in the areas of reinsurance, captive insurance, and catastrophe funds:

Federal Reinsurance: H.R. 4944, Siding with America’s Patients Act was referred on April 30, 2010 to the Subcommittee on Health, Employment, Labor, and Pensions. The proposed bill, as it relates to reinsurance, amends the Internal Revenue Code to allow a tax credit for qualified health insurance costs to residents of a State that implements a high-risk pool, a reinsurance pool, or other risk-adjustment mechanism.

State Reinsurance: New Jersey A2670, the Reinsurance and Surplus Lines Stimulus and Enhancement Act, was introduced on May 13, 2010. The proposed bill provides incentives for surplus lines insurers and reinsurers that are financially sound to do business in New Jersey. It establishes a process, under the oversight of the Commissioner of Banking and Insurance, for a domestic insurer with policyholder surplus in excess of $15 million to be designated as a domestic surplus lines insurer. Under this designation, a domestic surplus lines insurer could only insure New Jersey risks procured from a surplus lines producer in accordance with the provisions of the surplus lines law. A domestic surplus lines insurer could not issue policies of private passenger automobile insurance, workers’ compensation or workers’ occupational disease insurance. Additionally, the proposed bill permits the Commissioner in his discretion to allow credit for reinsurance if the reinsurance is ceded to an assuming insurer that holds surplus or the equivalent in excess of $250 million. In determining whether credit should be allowed, the Commissioner shall consider certain requirements enumerated in the proposed bill, which largely relate to the adequacy of the regulatory authority in the insurer’s domiciliary jurisdiction. An identical bill, S2010, was introduced in the New Jersey Senate.

The Office of General Counsel of the New York Insurance Department on March 5, 2010 issued Opinion 10-03-02, which addressed two questions on the prior approval of reinsurance agreements. The first question addressed was whether “insurance in force,” as those words are used in New York Insurance Law § 1308(e)(1)(A), mean all of the in-force policies issued by an insurer, or a sub-class thereof, such as in-force policies that are reinsured and cover risks located in New York. According to the Opinion, insurance in force means all of the in-force policies issued by an insurer, regardless of whether the policies are reinsured or cover risks located in New York. The second question, which was answered in the affirmative, addressed whether a property/casualty insurer should submit to the Superintendent of Insurance its proposed reinsurance agreement to reinsure all, or almost all, of its motor vehicle lessor/creditor gap insurance policies through an insurer that is not authorized to do business as an insurer in New York.

State Captive Insurance: On May 6, 2010, a bill (A2360) that seeks to create a captive insurance market in New Jersey was reported out of the Assembly Financial Institutions and Insurance Committee favorably with committee amendments. The proposed bill, as amended, permits a captive insurance company to be licensed by the New Jersey Department of Banking and Insurance to do business in the State in any of the lines of insurance in subtitle 3 of Title 17 of the Revised Statutes or Title 17B of the New Jersey Statutes, generally including contracts or policies of life insurance, health insurance, annuities, indemnity, property and casualty, fidelity, guaranty and title insurance, and reinsurance, provided the captive meets certain requirements relating to formation, capital and surplus, examination, local office presence, ability to meet policy obligations, payment of certain fees and taxes, and annual reporting. The proposed bill would regulate captive insurers, association captive insurers, sponsored captive insurers, and industrial insured captive insurers. Among other things, the proposed bill would create a Captive Insurance Regulation and Supervision Fund to provide the financial means for the Commissioner to administer the bill’s requirements. A companion bill, S168, was introduced in the New Jersey Senate.

Federal Catastrophe Funds: H.R. 2555, the Homeowners’ Defense Act of 2009, (mentioned in our June 9, 2009 posting) was ordered on April 27, 2010 to be reported to the House, as amended, with a favorable recommendation by a record vote of 39 yeas and 26 nays. The bill proposes to establish a program to provide Federal support for State-sponsored insurance programs to help homeowners prepare for and recover from the damages caused by natural catastrophes, to encourage mitigation and prevention for such catastrophes, to promote the use of private market capital as a means to insure against such catastrophes, to expedite the payment of claims and better assist in the financial recovery from such catastrophes.

This post written by Karen Benson.

Self-Funded Employee Benefit Plans Can Be Insurers Under Texas Law, so Stop-Loss Insurance Policies Sold to Them Are Reinsurance

May 18, 2010 by Carlton Fields

A Texas court has ruled that stop-loss insurance policies sold to self-funded employee benefits plans constitute reinsurance, such that the Texas Department of Insurance cannot regulate them. The Department has no authority to regulate reinsurance (although it can and does regulate direct insurance). Two insurance companies therefore sought a declaratory judgment that they acted correctly by reporting stop-loss policies sold to self-funded plans as reinsurance instead of direct insurance. The parties stipulated to the facts and filed cross-motions for summary judgment. The trial court granted the Department’s motion for summary judgment, agreeing with the Department that self-funded plans are not insurers under Texas law. This judgment was reversed on appeal. Because self-funded plans do many of the acts that constitute doing the business of insurance, the appellate court held that self-funded plans are insurers. Among other things, the plans make insurance contracts with the employees of the employer sponsors; collect premiums for their service from the plan sponsor or the employees or both; deliver insurance contracts to the employees; and provide expense indemnification, reimbursement, or direct payment of medical expenses to individuals. American National Insurance Co. v. Texas Department of Insurance, Case No. 03-08-00535-CV (Tex. Ct. App. Apr. 22, 2010).

This post written by Brian Perryman.

NAIC Naic Spring Meeting Summary

May 12, 2010 by Carlton Fields

The Spring Meeting of the NAIC saw relatively little progress on reinsurance issues. Several groups received reports on the status of federal financial services reform legislation. The Regulatory Modernization Initiatives Task Force received testimony from four state legislators and two insurance executives. The International Insurance Relations Committee received information and discussed strategic planning initiatives under way at the International Association of Insurance Supervisors (“IAIS”). The Reinsurance Task Force received an update on the pending Congressional legislation and the NAIC’s proposed federal statute, the Reinsurance Regulatory Modernization Act (“RRMA”). The NAIC is no longer seeking a Congressional sponsor for the RRMA for this session of Congress. These activities have been the subject of prior posts to this blog. In addition, the Reinsurance Task Force:

received a report on reinsurance-related activities of the IAIS;
agreed to initiate discussions with interested parties with respect to contract certainty considerations;
received an update on a proposal to amend Schedules F and S of the Annual Statutory Financial Statement to facilitate the collection of information with respect to financial institutions that have issued or confirmed letters of credit for reinsurance collateral purposes;
passed a motion to submit a recommendation to the Financial Examiners Handbook Technical Group to revise the example letter of credit; and
passed a motion to direct NAIC staff to initiate a request to the Financial Condition Committee to amend the Credit for Reinsurance Model Law to reduce the trusteed surplus requirement for a multiple-beneficiary trust mainbtained for reinsurance collateral purposes by an assuming insurer in run-off.

This post written by Rollie Goss.