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Reinsurance Regulation

Minnesota Court of Appeals Affirms Dismissal of Claims Against Reinsurer Under Filed-Rate Doctrine

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The filed-rate doctrine precluded recovery of deficiency assessments the Workers’ Compensation Reinsurance Association (WCRA) levied against employers which were alleged to have been wrongfully collected in 2013 and 2014 when the WCRA no longer had a deficit.

The employers argued that the filed-rate doctrine “does not apply to deficient-premiums assessments and deficiency assessments, and that the doctrine does not bar their claims because they seek only to enforce the WCRA statutes and the commissioner’s orders imposing those assessments.” A Minnesota trial court disagreed, and its dismissal of the claims was affirmed by Minnesota’s Court of Appeals, which noted:

  1. the separation-of-powers concerns favor application of the filed-rate doctrine as the challenged assessments were recommended by a legislatively created nonprofit entity;
  2. justiciability concerns favor application of the filed-rate doctrine because “a court order requiring WCRA to refund millions of assessments dollars would substantially reduce the funding base that WCRA uses to pay claims” potentially triggering the need for future assessments and the “courts are ill-equipped to fashion relief that appropriately contextualizes deficient-premiums assessments and deficiency assessments within this complex and evolving scheme; and
  3. non-discrimination concerns favor application of the filed-rate doctrine, because a “retroactive judicial damages award that effectively adjusts a rate for some ratepayers but not others would create discrimination in the rate schedule.”

Ambassador Press, Inc., et al. v. Trifac Workers’ Compensation Fund, et al., 62-CV-16-1713 (Minn. Ct. App. Dec. 11, 2017).

This post written by Nora A. Valenza-Frost.
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UPDATE ON NAIC ACTION TO IMPLEMENT THE COVERED AGREEMENT

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We recently posted a Special Focus article on a hearing held by the NAIC’s Reinsurance Task Force concerning the implementation of the reduced collateral for reinsurance provisions of the Covered Agreement between the U.S. and the E.U. The NAIC is attempting to move quickly on the implementation of the Covered Agreement, with a recent flurry of activity.  At the NAIC Spring National Meeting earlier this week, the Reinsurance Task Force approved and forwarded to the Financial Condition (E) Committee a Memorandum report on the February 20, 2018 public hearing, which also contained a number of recommendations for action.  The next day the Financial Condition (E) Committee adopted those recommendations and included them in its report to the Executive (EX) Committee, which “received” the report of the (E) Committee the following day.

The description of the hearing in the report of the Task Force and its recommendations are consistent with the discussion in our Special Focus article.  The basic approach in the Task Force’s Memorandum report is to revise the Model Credit for Reinsurance Model Law and Model Regulation so that they comply with the requirements of the Covered Agreement, and to extend the reduced collateral benefit of the Covered Agreement to reinsurers domiciled in the non-E.U. NAIC-approved Qualified Jurisdictions, on condition that those jurisdictions agree to the group supervision, group capital, and information-sharing provisions in the Covered Agreement.  Qualified jurisdictions outside the E.U. that would benefit from this approach include Bermuda, Japan, Switzerland, and, after Brexit, the United Kingdom.  This portion of this process is anticipated to be completed by the NAIC’s 2018 Fall National Meeting in November of this year.  The concern raised in the context of the public hearing concerning the possible need for “guardrails” due to the increased credit and collection risk to which ceding insurers would be exposed as a result of reduced collateral resulted in recommendations by the Reinsurance Task Force for review and monitoring of the financial and risk impact of the collateral changes, and recommendations for modifications to the Models, risk-based capital rules, and financial statement presentation requirements, if needed, with this portion of the process to take longer, with target completion dates for different aspects of this part of the implementation process of the NAIC’s 2019 and 2020 Fall National meetings.

The Task force made a number of specific recommendations to the Financial Condition (E) Committee, which took the following action:

  1. Adopted the Reinsurance Task Force’s request for the development of revisions to the Model Credit for Reinsurance Model Law and Model Regulation to bring the Models into compliance with the terms of the Covered Agreement.  The NAIC has a process for the development of model laws and regulations.
  2. Adopted charges to the Reinsurance Task Force, the Qualified Jurisdiction (E) Working Group, and the Reinsurance Financial Analysis (E) Working Group, which would have to develop processes to implement the anticipated revisions to the Models.
  3. Adopted charges to the Capital Adequacy (E) Task Force and the Statutory Accounting Principles (E) Working Group to address related reduced reinsurance collateral issues.

Details of the actions of the Financial Condition (E) Committee are found in the Reinsurance Task Force’s Memorandum report.  This process anticipates a very aggressive schedule, with the proposed revisions to the Models (and possibly other changes) being ready for consideration by the Reinsurance Task Force at the NAIC’s 2018 Summer National meetings in August, and by the NAIC’s membership at the NAIC’s 2018 Fall National meetings in November.  One possible timing complication is that any agreement of non-E.U. Qualified Jurisdictions to the group supervision, group capital, and information-sharing provisions in the Covered Agreement might have to be documented through a Memorandum of Understanding with each such jurisdiction, which might take more time to negotiate and finalize.  It was the clear sense of the participants in the public hearing, and of the Reinsurance Task Force’s subsequent Memorandum report to the Financial Condition (E) Committee, that reinsurers domiciled outside the E.U. should not have the benefit of reduced collateral for reinsurance without there being an agreement with their domiciliary jurisdictions with respect to group supervision, group capital, and information-sharing issues.  Absent such an agreement, reinsurers domiciled in non-E.U. jurisdictions would, from the standpoint of the United States and U.S. domiciled ceding insurers, have a more favorable agreement than those domiciled in Covered Agreement jurisdictions.  There is likely to be great resistance to such a potential scenario.

This post written by Rollie Goss.
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NINTH CIRCUIT REAFFIRMS THAT WASHINGTON STATE’S PROHIBITION OF ARBITRATION CLAUSES IN INSURANCE CONTRACTS REVERSE-PREEMPTS FAA

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This case concerned a coverage dispute between Technical Security Integration Inc. and its insurer, Philadelphia Indemnity. The District Court for the District of Oregon denied Philadelphia Indemnity’s motion to compel arbitration, which prompted this interlocutory appeal. Because Washington Code § 48.18.200 prohibits mandatory arbitration agreements in insurance contracts, while Oregon lacks any analogous provision, the issue on appeal was whether the district court erred when it applied Washington law, rather than Oregon law, to the dispute. Reviewing de novo and applying Oregon’s multi-factor test for determining “the most appropriate” law in the absence of an effective choice of law provision, the Ninth Circuit affirmed that Washington law applied, and therefore, it affirmed the denial of Philadelphia Indemnity’s motion to compel arbitration. The court found that the district court properly followed Washington Supreme Court precedent interpreting Washington’s statute as prohibiting mandatory arbitration clauses in insurance contracts, and moreover, that the statute “reverse-preempts” the Federal Arbitration Act, rather than being preempted by it.  Tech. Sec. Integration, Inc. v. Philadelphia Indem. Ins. Co., No. 15-35683 (9th Cir. Feb. 1, 2018).

This post written by Gail Jankowski.
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WYOMING ENACTS LEGISLATION AND ADOPTS NEW REGULATIONS GOVERNING CREDIT FOR REINSURANCE AND TERM AND UNIVERSAL LIFE INSURANCE RESERVE FINANCING

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New regulations relating to credit for reinsurance and term and universal life insurance reserve financing took effect in Wyoming on November 30, 2017. The regulations implement amendments to Wyoming statutes that took effect last July, which were summarized by the Wyoming Legislative Service Office.

The statutory amendments revised requirements for insurers assuming liabilities of Wyoming domestic insurers in order for those domestic insurers to count the reinsurance as an asset. They also authorized the Insurance Commissioner to reduce an assuming insurer’s reserve requirements subject to certain conditions and granted her discretion to allow domestic insurers to take credit for reinsurance without posting 100% collateral. The Wyoming Department of Insurance revised Chapter 50 of the Department’s regulations to account not only for these statutory changes, but also to make the remainder of Chapter 50 consistent with the current NAIC model regulation.

In addition, the Department promulgated an entirely new chapter, Chapter 69, relating to term and universal life insurance reserve financing, so as to fully implement the statutory changes rendered last summer. The new Chapter 69 is also based on the associated NAIC model regulation. These changes ensure that the Wyoming Department of Insurance maintains its financial accreditation with the NAIC. Wyoming credit for reinsurance reg effective 1.5.1

This post written by Benjamin E. Stearns.
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