Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Reinsurance Regulation

BERMUDA ADOPTS ENHANCED SOLVENCY AND DISCLOSURE RULES AND PROVIDES FOR SPECIAL PURPOSE VEHICLES

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With the adoption of the Insurance Investment Act of 2008, Bermuda has adopted risk-based capital adequacy standards for “high impact insurers” and instituted a structure which will be equivalent to those in Europe's Solvency II Directive. The requirements include enhanced financial statement disclosures for Bermuda's Class 4 insurers which comply with Generally Accepted Accounting Principles (GAAP), re-classification of the Class 3 insurance sector, with sub-categories based upon risk profiles, and a new category of Special Purpose Insurer, which is focused on fully collateralized special purpose vehicles that are established to conduct certain transactions, especially those related to asset-backed securitizations. One goal of this new classification is to make it less costly for SPVs to be established in Bermuda. A press release issued by the Bermuda Monetary Authority briefly summarizes the Act.

This post written by Rollie Goss.

SPECIAL FOCUS: NAIC, FLORIDA AND NEW YORK REINSURANCE COLLATERAL PROPOSAL UPDATE

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The NAIC's Reinsurance Regulatory Modernization Framework is now the subject of an redlined exposure draft, with a short comment period open until September 5, 2008. Florida and New York also have reinsurance collateral-related proposals pending. Carlton Fields partner Anthony Cicchetti summarizes these proposals in a Special Focus feature. Read the article.

This post written by Rollie Goss.

EIGHTH CIRCUIT HOLDS THAT ACTION AGAINST FCIC SHOULD HAVE BEEN DISMISSED

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In 2001, American Growers Insurance Company (“Insurer”) filed an action in Iowa district court against Federal Crop Insurance Corporation (“FCIC”) alleging that the FCIC erred under 7 U.S.C. § 1508(j)(3) by adding prevented planting coverage to basic federal crop insurance policies without increasing the premium rate that the insurance company could charge. The district court granted summary judgment in favor of the FCIC for crop year 1996 and in favor of Insurer for crop year 1997, awarding it over $950,000 in damages. Both sides appealed.

The Eighth Circuit found that the indemnification requirement of 7 U.S.C. § 1508(j)(3), under which insurance providers that provide federal crop insurance may seek indemnification due to errors or omissions on the part of the FCIC, was intended to apply only where a crop insurer had been sued by a producer to recover on a claim for loss and not for errors in calculating premiums. Therefore the insurer did not have a cause of action and its claim should have been dismissed by the district court. American Growers Insurance was declared insolvent in 2005 and liquidated. Am. Growers Ins. Co. v. Federal Crop Ins. Corp., No. 07-1655, 07-1749 (8th Cir. July 15, 2008).

This post written by Lynn Hawkins.

SEC FILES AND SETTLES ANOTHER FINITE REINSURANCE ENFORCEMENT ACTION, THIS TIME WITH pRUDENTIAL FINANCIAL

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The Securities and Exchange Commission has filed a lawsuit against Prudential Financial, Inc., alleging violations of the financial reporting, books-and-records and internal control provisions of the Securities Exchange Act of 1934, based upon its former property and casualty subsidiaries (“Prupac”) entering into so-called finite reinsurance contracts with General Reinsurance Corporation. The SEC contends that the reinsurance agreements “had no economic substance and no purpose other than to build up and then draw down on an off-balance sheet asset, or 'bank,' that Gen Re held for Prupac.” Securities and Exchange Commission v. Prudential Financial, Inc., Case No. 08-3916 (USDC N. N.J. Aug. 6, 2008). The SEC reports that it has reached a settlement with Prudential, which has consented to a permanent injunction against further violations of certain sections of the Exchange Act and associated Rules. This is similar to an enforcement action filed by the SEC against Rennaisance Re (see November 6, 2006 blog post).

This post written by Rollie Goss.

NEW HAMPSHIRE SUPREME COURT CLEARS THE WAY FOR SETOFF OF REINSURANCE CLAIMS SUBJECT TO A “PUT-BACK” PROVISION

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The Supreme Court of New Hampshire has reversed a trial court’s ruling denying a reinsurer’s (CIC) asserted setoff of reinsurance claims in the liquidation of the Home Insurance Company (Home). CIC reinsured Home, remitting money to Home under a claims protocol that provided for a right of setoff controlled by a New Hampshire statute. Separately, CIC also reinsured certain affiliated insurance companies that had ceded a participation in their liabilities under certain policies in exchange for, among other things, an assignment of all rights to reinsurance recoverables relating to those policies. However, this assignment was qualified by a “put-back” provision that required CIC to return to its affiliated cedents any reinsurance recoverables deemed by CIC to be uncollectible, together with the rights to any related collateral. Among the reinsurance claims assigned to CIC were reinsurance obligations of Home to the affiliated cedents, i.e., reinsurance recoverables. Accordingly, pursuant to the claims protocol between CIC and Home, CIC sought to setoff amounts payable by it to Home against these recoverables.

Home’s liquidator objected to the attempted setoff, arguing that the New Hampshire statute referenced in the claims protocol required that setoff debts be “mutual,” and that the put-back provision destroyed mutuality by rendering the assignment conditional, not absolute. The liquidator contended that the provision made the affiliated cedents, not CIC, ultimately liable for the reinsurance. A referee ruled in favor of the liquidator, and the trial court sustained that ruling, reasoning that the mutuality requirement was not satisfied because the terms of the assignment required the return of uncollectible reinsurance, and so the assignment was conditional. On appeal, the New Hampshire Supreme Court reversed, concluding the assignment was, in fact, absolute, the put-back provision notwithstanding. The Supreme Court found that, although the provision allocated risk to the affiliated cedents, this “retained interest” was not fatal. Importantly, CIC, not the affiliated cedents, controlled implementation of the provision; thus, “the provision did not constitute a prohibited means of control over the reinsurance recoverables or ‘any form of revocation’ in the hands of the affiliated cedents.” In the Matter of the Liquidation of the Home Insurance Company, Case No. 2007-794 (July 25, 2008).

This post written by Brian Perryman.