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Reinsurance Regulation

IRS RULES THAT CAPITIVE REINSURANCE IS INSURANCE FOR TAX PURPOSES

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Using the definition of insurance for tax purposes promulgated by the Supreme Court in 1941 in Helvering v. LeGierse, 312 U.S. 531 (1941), as explained and implemented by later opinions and IRS Revenue Rulings, the IRS has issued a private letter ruling stating that on the facts presented to it, the reinsurance of various workers’ compensation, property and crime risks by a captive constituted insurance for tax purposes, and that the reinsurer was an insurer for tax purposes. The criteria for this determination have been well established: (1) the arrangement must involve both risk shifting and risk distribution; (2) the risk must contemplate the fortuitous occurrence of a stated contingency; (3) the arrangement must not be merely an investment or business risk; and (4) the arrangement must constitute insurance in the commonly accepted sense. IRS No. 200950017 (12/11/2009).

This post written by Rollie Goss.

FEDERAL LEGISLATIVE UPDATE – IRAN SANCTIONS

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A recent bill passed by the U.S. House of Representatives that expands U.S. economic sanctions targeted at Iran’s refined petroleum resources could have significant implications for the insurance and reinsurance industry. H.R. 2194, the Iran Refine Petroleum Sanctions Act (bill text and bill summary), which was passed on December 15, 2009 by a vote of 412-12, amends the Iran Sanctions Act of 1996 to expand sanctions against persons and entities who, with actual knowledge, provide Iran with refined petroleum resources or engage in activities that contribute to Iran’s ability to import such resources. The expanded sanctions include underwriting, insuring, reinsuring, financing or brokering any such activity. Because U.S. trade sanctions already prohibit U.S. persons and entities, including insurers and reinsurers, from doing business with Iran, the legislation appears to be targeted at foreign individuals and entities.

The Act establishes additional sanctions prohibiting specified foreign exchange, banking, and property transactions. Among other things, the Act grants the President waiver authority, and directs the President to report to the appropriate Congressional committees every six months regarding any person or entity that has violated the Act. After passing the House, the Act was referred on December 16, 2009 to the Senate Committee on Banking, Housing, and Urban Affairs.

This post written by Karen Benson.

NO INTERLOCUTORY APPEALS IN REINSURANCE FRAUDULENT CONVEYANCE CASE

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In an ongoing fraudulent conveyance dispute, the district court denied cross-motions for certificates of interlocutory appeals of summary judgment orders against the plaintiff rehabilitator of an insurance company and one of the two defendants. We previously reported on the court’s denial of cross-motions for reconsideration of the summary judgment orders in a July 22, 2009 post. The rehabilitator sought to appeal the order finding there was no evidence that payments made to the reinsurer were “disproportionately small” or not the result of arms-length negotiations. The court denied this motion principally on the grounds that it would embroil the appellate court in a fact-intensive analysis. The defendant’s cross-motion also was denied. It sought an appeal of whether it was a direct or initial transferee under fraudulent conveyance law. Noting that courts usually do not allow interlocutory appeals of denials of summary judgment, the court found there were disputed issues of fact that would be better determined by a jury before proceeding to an appeal. Mills v. Everest Reinsurance Co., Case No. 05-8928 (USDC S.D.N.Y. October 28, 2009).

This post written by Brian Perryman.

FEDERAL LEGISLATIVE UPDATE

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The following are selected bills in the reinsurance area that were either recently introduced or adopted in the U.S. House of Representatives.

Global Reinsurance Report. Representative Barney Frank (D-Mass.) introduced H.R. 4173 on December 2, 2009. A key purpose of the bill is to enhance Federal understanding of insurance issues. The bill, as it relates to reinsurance, mandates that the Director of the Federal Insurance Office (to be established under another section of the bill) submit a report on the global reinsurance market and the critical role such market plays in supporting insurance in the United States to the House Committee on Financial Services and the Senate Committee on Banking, Housing and Urban Affairs by September 30, 2011. On the same day, the bill was referred to the Committee on Financial Services, and in addition to other Committees to the extent such provision fell within the jurisdiction of the Committee concerned.

Temporary Health Reinsurance Program. On November 7, 2009, the U.S. House of Representatives passed H.R. 3962, the Affordable Health Care for America Act by a vote of 220-215. On the same day, during House Floor consideration of H.R. 3962, Representative John A. Boehner (R-Ohio) had proposed an amendment (bill text and bill summary) in the nature of a substitute to H.R. 3962, which sought, among other things, to create Universal Access Programs that expand and reform high-risk pools and reinsurance programs to guarantee that all Americans, regardless of pre-existing conditions or past illnesses, have access to affordable care while lowering costs for all Americans. This amendment failed by a vote of 176-258.

The Act, as it relates to reinsurance, requires the Secretary of Health and Human Services (“HHS”) to establish a temporary reinsurance program to assist participating employment-based plans with the cost of providing health benefits to retirees and to eligible spouses, surviving spouses and dependents of such retirees. This provision would take effect 90-days after enactment of the Act. Among other things, the Act requires the Secretary of HHS to establish a temporary national high risk pool program to provide health benefits to certain uninsured individuals who have a medical condition. This program would begin on January 1, 2010 and would end when the Health Insurance Exchange is established pursuant to the Act.

H.R. 3962 was received by the Senate on November 9, 2009. It was placed on the Senate Legislative Calendar under general orders on November 16, 2009.

This post written by Karen Benson.

DISTRICT COURT FINDS THAT SERVICE OF SUIT CLAUSE WAIVES RIGHT OF REMOVAL

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In his capacity as Liquidator of Midland Insurance Company, the Superintendent of Insurance of the State of New York brought suit in New York Supreme Court against Dunav Re, a Serbian reinsurance company, seeking reinsurance monies owed. Dunav Re removed the action to federal court based on diversity jurisdiction, and the Superintendent subsequently moved to remand based on the ground that Dunav Re had consented to the jurisdiction of any competent court pursuant to the service of suit clause in the reinsurance agreements. Dunav Re argued that removal was proper because the service of suit clause’s language was ambiguous and the waiver of the right to removal had to be clear and unequivocal. The court found no ambiguity, citing a New York Court of Appeals decision stating the reinsurance industry has known since a 1949 decision that a service of suit clause waived removal, and granted the motion to remand. Dinallo v. Dunav Ins. Co., Case No. 09-5575 (USDC S.D.N.Y. Nov. 19, 2009).

This post written by Dan Crisp.