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Reinsurance Regulation

AIG SETTLES FINITE REINSURANCE DISPUTE WITH PENNSYLVANIA DEPARTMENT OF INSURANCE

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AIG has settled issues with the Pennsylvania Department of Insurance arising out of finite reinsurance and bid-rigging allegations, agreeing to pay over $9 million in penalties and costs. This is the largest penalty ever levied upon an insurer by the department. The finite reinsurance issues arose out of one of the transactions included in the recent criminal conviction in Connecticut. New compliance measures are included to ensure accurate financial reporting and increased transparency of commission payments to agents and brokers. Details of the settlement are generally set out in a press release issued by the Department, and in a detailed settlement agreement.

This post written by Rollie Goss.

SECOND LEGISLATIVE UPDATE

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Following is our second update for this year on reinsurance-related activity in the state legislatures. All three of the bills described in this post were previously described in our March 10, 2008 post.

  • Captive insurers: Michigan SB 1016 was signed by the governor March 13, 2008, and became effective March 18, 2008. Meanwhile, the final version of HB 55, the Utah amendments to its Captive Insurance Companies Act, which include the enactment of a new Chapter, Chapter 37a, titled Special Purpose Financial Captive Insurance Company Act, was signed by the governor March 18, and will become effective May 5, 2008.
  • Financial requirements: Utah SB 143 was signed by the governor March 17, and will become effective July 1, 2008. The final version of this bill modifies the requirements for when a domestic or a foreign ceding insurer is allowed credit for reinsurance and modifies the restrictions on investments by insurers.

This post written by Rollie Goss.

NAIC REINSURANCE TASK FORCE WORK PROCEEDS SLOWLY

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The NAIC's Reinsurance Task Force of the E Committee met on March 29, 2008, and had further discussion of the proposal to revamp the regulation of the reinsurance industry in the United States. The Task Force is projecting further meetings through the end of 2008 on this subject. The materials indicate that representatives from the Florida and New York departments made presentations to the task force at its March 11-12, 2008 meeting regarding their proposals to change the collateral requirements for reinsurance to a financial strength based framework. The minutes of this meeting, as well as materials distributed for the meeting, have been published.

This post written by Rollie Goss.

MULTI-YEAR REINSURANCE AGREEMENT REMAINS IN FORCE DESPITE LIQUIDATION OF CEDENT

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A reinsurance agreement reinsured crop insurance risks from two related cedents over a five year period, with an initial premium amount for the first two years, followed by annual premium payments thereafter. After paying the premium for the first two years, one cedent was placed in liquidation and the other was placed under supervision. Their parent filed for bankruptcy protection. The issue arose as to whether the reinsurance agreement was enforceable for the remaining three years, since the cedents had ceased writing crop insurance. While bankruptcy court ruled in favor of the cedents, a bankruptcy appellate panel of the US Court of Appeals for the Eighth Circuit reversed, finding that the reinsurance agreement was an enforceable five year agreement, allowing a claim by the reinsurer for the remaining $9 million of premium. The court of appeals based its decision on accepted principles of contract interpretation, rejecting the contention that there was a frustration of purpose when the companies stopped issuing crop insurance. The court reasoned that the cessation of writing crop insurance was foreseeable in the event that the companies did not maintain sufficient capital, and did not amount to frustration of purpose. In re Acceptance insurance Companies, No. 07-6027/6029 (8th Cir. Mar. 12, 2008).

This post written by Rollie Goss.

STATE LEGISLATIVE UPDATE

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It's state legislative session time of the year again – time to review what is going on in the state legislatures and insurance departments relating to reinsurance. This year there is considerable activity in three areas: (1) captive insurance companies; (2) catastrophe funds; and (3) reinsurance credit issues.

  • Captive insurers: Connecticut General Assembly Bill No. 281 would allow captive insurance companies to be licensed and domiciled in Connecticut. HB 2151, pending in the Hawaii House, would authorize medical malpractice captive insurance companies. Hawaii Senate Bill No. 3023 would authorize the creation and regulation of special purpose financial captive insurance companies. Hawaii HB No. 3101 is a House version of SB 3023. Michigan SB No. 1061, which has been passed and sent to the governor (bill text; bill analysis), would authorize the formation of captive insurance companies in Michigan, including special purpose financial captives for purposes of securitizations. The Missouri Insurance Department has proposed regulations containing requirements for the financial management and control of captives. New Jersey Assembly Bill No. 1580 would authorize and regulate captives. Utah HB 55 would modify Utah's Captive Insurance Companies Act and enact the Special Purpose Financial Captive Insurance Company Act.

  • Catastrophe funds: Five states have actions pending in this area. There is a bill pending in the Alabama Senate (SB 5) which would establish a coastal insurance authority and cat fund for wind and flood insurance for both residential and commercial property along the Gulf and authorize certain coverages by captive insurers. A bill is pending in the Connecticut General Assembly (No. 167) which would direct the Insurance Commissioner to study the feasibility of establishing a cat fund to offer reinsurance to the private insurance market. HB 1918 (bill text; bill summary), pending in the Missouri House, would create a cat fund for residential property earthquake risks. The fund would reimburse member insurers for a portion of losses paid by the insurers. The Insurance Department would be authorized to issue bonds to support the fund. Senate Bill No. 249, pending in the New Jersey Senate, would create a catastrophic health care claim reinsurance program. New Jersey Assembly Bill No. 2198 would create a state cat fund and fund it at an initial $10 million level. Virginia Senate Bill No. 318 would create a wind joint underwriting association to cover coastal areas.

  • Reinsurance credit: The Utah legislature has adopted a bill (SB 143) (which is awaiting action by the governor) which modifies a number of financial requirements relating to insurers and insurance products, including when domestic and foreign ceding insurers are allowed credit for reinsurance. It also addresses requirements for assumption agreements and reinsurance contracts and grants rulemaking authority on reinsurance credit issues.

This post written by Rollie Goss.