Reorganization and Liquidation

A bill that would establish a Federal license for national reinsurers was introduced on December 16, 2010 in the U.S. House of Representatives by Representative Dennis Moore, a six term Democrat from Kansas who is the outgoing chair of a subcommittee of the House Financial Services Committee. The bill – “Federal License for Reinsurers Act of 2010” (H.R. 6529) – seeks to create a more harmonized reinsurance regulatory system that would apply to the operation of both U.S. and foreign domiciled reinsurers. The bill creates a licensing scheme for national reinsurers that would be administered by the Director of the Federal Insurance Office (“FIO”). Under the bill, FIO’s Director is charged with setting criteria for the licensing and operation of a national reinsurer. Both U.S. entities and non-U.S. entities that establish a branch may apply for a Federal license to transact reinsurance business provided the entity has satisfied unspecified eligibility requirements.

Under the bill, FIO’s Director may revoke, suspend or restrict a Federal license whenever he determines that a national reinsurer is no long operating in a manner consistent with the criteria for licensing and operation. The bill also allows for conversion to a State reinsurance license, subject to notification and approval by FIO’s Director. Additionally, the bill subjects the provisions of Title 11 of the U.S. Bankruptcy Code to a delinquency proceeding for the liquidation or reorganization of a U.S. national reinsurer.

The operation of licensed foreign domiciled reinsurers would be subject to supervisory arrangements negotiated by the Secretary of Commerce and the U.S. Trade Representative with qualified supervisory authorities of non-U.S. jurisdictions that maintain and apply legal standards, regulatory requirements, and enforcement capabilities substantially equivalent to those applied by FIO’s Director, and in which the awards of arbitration panels and judgments of appropriate U.S. courts are enforceable and collectible. An authorized foreign reinsurer will be authorized to transact reinsurance business to the extent authorized by the applicable supervisory arrangement, which must explicitly include certain enumerated conditions relating to reciprocity, dispute resolution, insolvency, among other things.

The bill contains provisions preempting State laws that are contrary to or inconsistent with the purposes of the bill (except those which may be applicable to corporate taxes generally), including state laws that create disparate treatment between national reinsurers or authorized foreign reinsurers and State licensed insurers or reinsurers solely on the basis of the entity’s status. Preemption of State law will be determined by FIO’s Director, which can be judicially reviewed.

The bill prohibits States from interfering, directly or indirectly, with a U.S. insurer or reinsurer (i) applying for a Federal license or operating as a national reinsurer; or (ii) ceding insurance to a national reinsurer or an authorized foreign reinsurer. It also prohibits States from denying credit, either as an asset or a reduction of liabilities, on account of reinsurance ceded to a national reinsurer or an authorized foreign reinsurer. These provisions conflict with: (1) the clear provisions of the Dodd-Frank Act, which explicitly commits decisions as to reinsurance credit to the State of domicile of ceding insurers; (2) guidelines adopted by the NAIC concerning reinsurance credit and collateral; and (3) regulations adopted by Florida and New York concerning reinsurance credit and collateral. If the requirements for a federal reinsurance license do not include financial strength or other risk-based factors, this bill may turn out to be an attractive alternative for reinsurers who wish to operate with relatively modest regulation.

The bill requires cooperation between FIO’s Director and State insurance regulators, requiring the FIO’s Director to: (1) consult, as he deems appropriate, with the relevant State insurance regulators concerning regulatory matters; (2) notify all State insurance regulators of supervisory arrangements entered into; and (3) notify the relevant State insurance regulators of a change in the status of, or any administrative action taken against, a national reinsurer or an authorized foreign reinsurer. It is notable that two of these three “cooperation” requirements merely provide for the FIO’s Director to inform State insurance regulators of actions taken by the FIO, and the third leaves the decision of whether to “consult with” State insurance regulators at all to the discretion of the FIO’s Director. This is not robust consultation or “cooperation.”

In addition, the bill provides that there shall be no determination whether to subject an entity to supervision by the Board of Governors and heightened prudential standards under Section 113 of the Dodd-Frank Act on account of an entity’s status as a national reinsurer or authorized foreign reinsurer.

If the bill is adopted, FIO’s Director must commence licensing of national reinsurers and the entry into supervisory arrangements after the promulgation of regulations, which must occur not later than 2 years from the date of the enactment of the bill.

The bill was referred to the House Committee on Financial Services. The bill does not have any co-sponsors as of the writing of this post, and it is not known whether it is being sponsored by any trade associations.

This post written by Karen Benson.