Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Accounting for Reinsurance

SPECIAL FOCUS: DODD-FRANK REGULATORY MODERNIZATION ACT

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On July 15, 2010, the Senate passed the Dodd-Frank Act (“DFA”), the financial regulatory modernization act that has been in the process of development and consideration by the Congress for over a year. Rollie Goss presents a Special Focus analysis of the potential impact of the DFA on the insurance and reinsurance industries and markets.

Carlton Fields will present a free webinar for Reinsurance Focus subscribers and Carlton Fields clients on the DFA’s potential impact on the insurance and reinsurance industries and markets. The webinar also will cover the potential impact of the DFA on actions by New York, Florida and potentially other states with respect to the requirement of collateral for reinsurance transactions, and the NAIC’s proposals for the regulation of reinsurance. Webinar login information will be sent to Reinsurance Focus subscribers by e-mail. To subscribe and participate in this webinar, go to our subscription page.

This post written by Rollie Goss.

SECOND REINSURER APPROVED FOR FLORIDA REDUCED COLLATERAL REGULATION

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The Florida Office of Insurance Regulation (“OIR”) has approved XL Re Ltd. as the second non-Florida reinsurer to operate in Florida without having to post 100 percent collateral. The approval is pursuant to a Florida regulation, 69O-144.007, which allows credit for reinsurance without full collateral for transactions involving reinsurers not domiciled in Florida, provided that certain requirements are satisfied. The requirements include, among other requirements:

  • the reinsurer must obtain financial ratings from no less than two approved rating agencies;
  • the percentage of collateral required is determined based upon the lowest rating;
  • the reinsurer must consent to service of process and jurisdiction;
  • the reinsurer and its regulator must provide periodic financial and other information to the OIR; and
  • the reinsurer must hold surplus in excess of $100 million.

Hannover Re was the first reinsurer approved for reduced collateral transactions under this regulation.

This post written by Rollie Goss.

IRS RULES THAT CAPITIVE REINSURANCE IS INSURANCE FOR TAX PURPOSES

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Using the definition of insurance for tax purposes promulgated by the Supreme Court in 1941 in Helvering v. LeGierse, 312 U.S. 531 (1941), as explained and implemented by later opinions and IRS Revenue Rulings, the IRS has issued a private letter ruling stating that on the facts presented to it, the reinsurance of various workers’ compensation, property and crime risks by a captive constituted insurance for tax purposes, and that the reinsurer was an insurer for tax purposes. The criteria for this determination have been well established: (1) the arrangement must involve both risk shifting and risk distribution; (2) the risk must contemplate the fortuitous occurrence of a stated contingency; (3) the arrangement must not be merely an investment or business risk; and (4) the arrangement must constitute insurance in the commonly accepted sense. IRS No. 200950017 (12/11/2009).

This post written by Rollie Goss.

NAIC PROPOSES CHANGE TO REINSURANCE ACCOUNTING FOR RUN-OFF SITUATIONS

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On June 13, 2009, the NAIC exposed for comment Issue Paper No. 137, which proposed changes to Statement of Statutory Accounting Principle No. 62 – Property and Casualty Reinsurance (SSAP No. 62). The proposed change provides an exception to accounting principles for retroactive reinsurance agreements for reinsurance and/or retrocession agreements that meet the criteria of property and casualty run-off agreements described in the issue paper. This proposal has progressed to the stage that a proposed amendment to SSAP No. 62 has been exposed for comment. The comment period expires October 28, 2009. A public hearing will be held on the proposal, and interested parties may submit written comments and/or seek to speak at the hearing. For more information, go to the web pages of the NAIC’s Statutory Accounting Principles Working Group.

This post written by Rollie Goss.

SEC CHARGES AND SETTLES WITH FORMER AIG EXECUTIVES

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On August 6, 2009, the SEC filed a Complaint in the Southern District of New York against former AIG Chairman and CEO Maurice “Hank” Greenberg and former Vice Chairman and CFO Howard Smith in connection with multiple accounting transaction allegedly inflating AIG’s financial statements between 2000 and 2005. The complaint charges Greenberg and Smith as control persons for AIG with numerous violations of securities laws including sham reinsurance transactions making it appear that AIG had legitimately increased its general loss reserves.

The complaint charges that Greenberg and Smith were aware of and responsible for AIG’s misleading financial statements over the last several years. According to an SEC Release, both Greenberg and Smith, without admitting or denying the allegations in the complaint, consented to a judgment enjoining them from violating several securities laws under penalty of fine. Smith also consented to the entry of an SEC order that will suspend him from appearing or practicing before the Commission as an accountant. Securities and Exchange Commission v. Greenberg, Case No. 09-6939 (USDC S.D. N.Y. Aug. 6, 2009).

This post written by John Black.