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Reinsurance Regulation

SPECIAL FOCUS: NAIC'S REINSURANCE REGULATORY MODERNIZATION ACT

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The NAIC's Reinsurance Regulatory Modernization Act was supposed to be the solution for the problems surrounding the regulation of reinsurance and the role of collateral in reinsurance transactions. SPECIAL FOCUS Editor John Pitblado describes the critical comments received to the exposure draft of the proposed federal legislation, the consitutional issues involved and the current status of this initiative, in Constitutional Concerns with the Reinsurance Regulatory Modernization Act.

This post written by John Pitblado.

THE IMPLICATIONS OF FEDERAL REGULATORY CHANGES FOR THE REINSURANCE INDUSTRY

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On June 17,2009, the Administration published its proposals for the regulation of the financial services industry. Reinsurance Focus presents its analysis of these proposals as they may affect the reinsurance industry. The prior day, the U.S. House Subcommittee on Capital Markets, Insurance and Government Enterprises held a hearing on the regulation of systemic risk in the economy, which is one of the principal focuses of the Administration's proposals. Franklin Nutter, President of the Reinsurance Association of America, testified at that hearing, and a written copy of his testimony is provided here to add background to the potential reinsurance implications of the regulation of systemic risk. Other written testimonies from the hearing are available on the Subcommittee's web site. There is also a link on that page to a video webcast version of the hearing.

This post written by Rollie Goss.

NAIC SUMMER MEETINGS RESULT IN MINIMAL PROGRESS ON REINSURANCE ISSUES

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The NAIC held its Summer 2009 meetings in Minneapolis last week, and there was only very modest progress on reinsurance-related issues. The Reinsurance Task Force meeting summary relates the following items:

  • Guidance Memorandum regarding reinsurance collateral: The exposure draft of this Guidance Memorandum (see our April 13, 2009 post) was adopted, for distribution to all state insurance commissioners.

  • Reinsurance Regulatory Modernization Framework: There was further discussion of the implementation of this initiative. The exposed draft Congressional bill is on hold pending the receipt of a legal opinion from Sidley Austin, LLP on constitutional issues that have been raised about this initiative.

  • Nonadmitted and Reinsurance Reform Act: An update was received on the status of this Congressional session’s version of this bill (HR 2571) (see our June 9, 2009 legislative update post). This bill was referred to committee upon its filing, without any progress since that time.

  • Credit for Reinsurance Model Act: Comments were received on a proposed amendment to this Act, which would provide a commissioner the authority to lower the minimum trusted surplus requirement applicable to a multiple-beneficiary trust maintained by an assuming insurer in run-off. Staff was directed to initiate the process for consideration of this amendment, and an additional amendment related to the implementation of the Reinsurance Regulatory Modernization Framework.

  • International Association of Insurance Supervisors’ Reinsurance Subcommittee and Reinsurance Transparency Subgroup: An update on recent activity of this group was received.

This post written by Rollie Goss.

REINSURER’S CLAIM FOR SETOFF IN LIQUIDATION PROCEEDING FOR PAYMENT OF LIQUIDATED COMPANY’S OBLIGATION DENIED

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Century Indemnity Company (“CIC”) reinsured The Home Insurance Company (“Home”). Due to Home’s liquidation proceedings, which began in 2003, CIC became fully liable for a $13 million settlement of certain environmental claims for which CIC and Home were both primarily liable under the parties’ respective insurance contracts. CIC, a debtor in the Home proceedings, sought a setoff of $8 million against other obligations owed to Home, for Home’s share of the settlement that CIC paid in full. The New Hampshire Supreme Court reversed the trial court’s order permitting the setoff. Finding that the trial court’s reading of the statute governing setoff was too narrow, the Court cited the remedial nature of the statute, and the legislative purpose of obtaining “full payment from reinsurers despite an insurer’s insolvency.” In Re Liquidation of The Home Ins. Co., No. 2008-407 (N.H. May 27, 2009).

This post written by John Pitblado.

STATE AND FEDERAL LEGISLATIVE UPDATE

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Following are selected bills in the captive insurance area, plus one relating to catastrophe risk, that have now been adopted in the state legislatures:

• South Carolina has amended its captive insurance company law by enacting S. 323, which we previously reported, to make changes relating to incorporation, licensing, capitalization and other requirements. The bill was ratified on May 27, 2009, and it took effect when it was approved by the Governor on June 2, 2009.

• Missouri enacted House Bill No. 577 (mentioned in our May 8, 2009 post), which modifies various provisions of the state’s captive insurance company law and permits an association captive insurance company or an industrial insured captive insurance company to be organized as a reciprocal insurer. On May 29, 2009, the bill was delivered to the Governor for his signature.

• The Governor of Vermont, on May 27, 2009, signed S. 42 into law, which makes amendments to the captive provisions of the Vermont Code including, among other things, providing new captive formations a $7,500 tax credit and increasing state funding for captive regulation and examination.

• On June 1, 2009, the Texas legislature passed House Bill No. 4409, which includes provisions dealing with the reform and funding of the Texas Windstorm Insurance Association (TWIA), the state’s insurer of last resort for wind and hail coverage for certain coastal parts of the state. Among other things, the legislation provides for various layers of funding, including the imposition of certain insurance carrier assessments. Reinsurance to cover an assessment may be purchased at the insurer’s election subject to certain conditions. The bill has been delivered and is awaiting the Governor’s signature.

Congress has also recently introduced three bills relevant to reinsurance or catastrophe funds. These bills are as follows:

• H.R. 2555, 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. The bill has been referred to the Committee on Financial Services.

• H.R. 2571, proposes to streamline the regulation of nonadmitted insurance and reinsurance, and for other purposes. The principal provisions of the Act: (1) regulate premium taxes for nonadmitted insurance; (2) provide that the placement of nonadmitted insurance shall be subject to regulation solely by the insured’s home state; (3) limit the ability of a state to establish eligibility requirements for US domiciled nonadmitted insurers that vary from the Non-Admitted Insurance Model Act; (4) require a GAO study of the nonadmitted insurance market; (5) regulate the extent to which a state may not recognize credit for reinsurance for an insurer’s ceded risk; (6) partially pre-empt the extraterritorial application of the law of a state to a ceding insurer not domiciled in that state; and (7) provide that in most circumstances a state that is the domicile of a reinsurer shall be solely responsible for regulating its financial solvency. This bill has been referred to the Committee on Financial Services, and in addition to the Committee on the Judiciary.

• H.R. 2589, proposes to establish the Office of Public Finance in the Department of the Treasury to make available Federal reinsurance for insurers of tax-exempt municipal bonds. This bill has been referred to the Committee on Financial Services, and in addition to the Committee on Ways and Means.

This post written by Karen Benson.