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New reinsurance-related and arbitration developments from Carlton Fields

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Accounting for Reinsurance

WISCONSIN ADOPTS NEW CREDIT FOR REINSURANCE RULE BASED ON CERTIFIED REINSURERS

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On November 7, 2017, the Commissioner of Insurance for the State of Wisconsin issued an order approving a new rule to be added to Section Ins. Ch. 52, Wis. Adm. Code. The rule is intended to modernize Wisconsin’s credit for reinsurance provisions by aligning them with the Nonadmitted and Reinsurance Reform Act of 2010 and amendments to the NAIC Credit for Reinsurance Model Law.

As currently written, reinsurers are required to post collateral equal to their total liability for ceding insurers in order for the insurers to take full credits for reinsurance. The new rule allows for the use of certified reinsurers. Certifications will be made at different levels based on financial strength ratings and will allow certified reinsurers to post less than 100 percent collateral on the risk they assume. Reinsurers with the three highest financial ratings will have lower collateral requirements of 0-10-20 percent, respectively. Reinsurers with the three lowest financial ratings will have collateral requirements of 50-75-100 percent, respectively. By making these revisions, Wisconsin’s reinsurance provisions will be consistent with changes made in other states. The new rule becomes effective on January 1, 2018.

This post written by Alex Silverman.
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U.S. COVERED AGREEMENT POLICY STATEMENT AFFIRMS U.S. STATE-BASED REGULATION OF INSURANCE

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We have posted several times on the negotiation and finalization of the Covered Agreement (“the Agreement”) negotiated by the Obama Administration and approved by the Trump Administration with the European Union. The agreed text of the Agreement was released in January of this year, and the House Financial Services Committee held a hearing on the Agreement the following month. The Trump Administration’s decision to sign the Agreement was announced in July, and included a statement that the U.S. would issue a “U.S. policy statement on implementation.” That statement intrigued many, prompting speculation as to the positions that would be taken in that policy statement. We posted an analysis of the complicated timeline for the implementation of the Agreement later that month.

In conjunction with the signing of the Agreement on September 22, the U.S. released the anticipated policy statement. The policy statement is not remarkable, and is based upon a theme that the Agreement affirms, preserves, and builds upon the U.S. state-based structure for the regulation of the business of insurance. The policy statement summarizes various provisions of the Agreement, stating in part that the Agreement:

  • with respect to the collateral requirement, “does not prevent a state insurance regulator from imposing non-collateral requirements that do not have substantially the same regulatory impact as collateral requirements as conditions for ceding companies to enter into reinsurance agreements with EU reinsurers or to allow credit for such reinsurance, if the state insurance regulator applies the same requirements in the case of reinsurance agreements with U.S. reinsurers domiciled in that state;”
  • does not prevent parties to reinsurance agreements to contractually require collateral for reinsurance;
  • excludes the US parent of US-domiciled reinsurers from the need to comply with the requirements of Solvency II just because it has an affiliate doing business in the EU; and
  • preserves the authority of the states (in conjunction with the NAIC) to set capital requirements for US insurance groups.

The principal text of the Conclusion section of the policy statement provides:

The Agreement supports the principles specified in the Presidential Executive Order on Core Principles for Regulating the United States Financial System (Feb. 3, 2017) by enabling U.S. companies to be competitive with foreign firmshttps://www.reinsurancefocus.com/wp-admin/edit.php in domestic and foreign markets; advancing U.S. interests in international financial regulatory negotiations and meetings; and making regulation efficient, effective, and appropriately tailored. The United States looks forward to promoting the interests of U.S. stakeholders, U.S. insurance regulators, and the U.S. economy as the Agreement is implemented. The United States also shares with the EU the goal of protecting insurance and reinsurance consumers while respecting one another’s system for supervision and regulation.

This post written by Rollie Goss.
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SPECIAL FOCUS: THE COVERED AGREEMENT

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The United States and the European Union have agreed on the final wording of a Covered Agreement which covers several topics, including the provision of collateral by foreign reinsurers.  We discuss the Covered Agreement and the initial responses to the agreement in a Special Focus article.

This post written by Rollie Goss.
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FEDERAL COURT FINDS THAT THE MCCARRAN FERGUSON ACT BARS PLAINTIFF’S RICO CLAIMS ARISING FROM CERTAIN REINSURANCE TRANSACTIONS

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In a putative class action seeking damages for alleged violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”) arising from certain reinsurance transactions, the United States District Court for the Western District of Missouri held that Plaintiff’s claims were barred by the McCarran-Ferguson Act, granting defendants’ motion to dismiss. Plaintiff Dale Ludwick and others purchased annuities from F&G Life Insurance Company, which was acquired by Harbinger Group, Inc. Plaintiff brought suit alleging that F&G, Harbinger and Harbinger’s chairman and CEO engineered a fraudulent accounting scheme to hide F&G’s liabilities, artificially inflate its reported assets, and create a false appearance of capital adequacy through reinsurance transactions with certain entities, including defendants Raven Reinsurance Company and Front Street Re (Cayman), Ltd, in violation of RICO.

Defendants moved to dismiss the action, arguing that plaintiff’s RICO claims impermissibly interfered with state statutory and regulatory insurance schemes, and were thus barred by the McCarran-Ferguson Act. The court granted defendants’ motion, finding that: (a) RICO does not specifically relate to the business of insurance, thus satisfying this prong of McCarran-Ferguson’s criteria; (b) the states relevant to the transactions at issue – Missouri and Iowa – have statutory schemes which regulate the business of insurance and governed said transactions; and (c) the application of RICO to the subject claims would intrude upon the insurance regulatory schemes in those states, and thus “invalidate, impair or supersede” the schemes in violation of McCarran-Ferguson. Moreover, the court rejected plaintiff’s argument that its common law claims negated the effect of McCarran-Ferguson and that such claims were not barred by the statute, as the transactions at issue were subject to the states’ insurance codes. Ludwick v. Harbinger Group, Inc., No. 15-cv-00011 (USDC W.D.MO. Feb. 12, 2016).

This post written by Rob DiUbaldo.

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NAIC ADOPTS AMENDMENTS TO CREDIT FOR REINSURANCE MODEL LAW

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The NAIC Executive (EX) Committee and Plenary adopted amendments to the Credit for Reinsurance Model Law (#785). These amendments are part of a larger effort to modernize reinsurance regulation in the United States. The changes allow a commissioner to adopt additional requirements relating to: “(1) the valuation of assets or reserve credits; (2) the amount and forms of security supporting reinsurance arrangements…; and/or (3) the circumstances pursuant to which credit will be reduced or eliminated.”

This new regulatory authority was added in response to reinsurance arrangements entered into, directly or indirectly, with life/health insurer-affiliated captives, special purpose vehicles, or similar entities that may not have the same statutory accounting requirements or solvency requirements as U.S.-based multi-state life/health insurers. To assist in achieving national uniformity, the NAIC has asked commissioners to strongly consider adopting regulations that are substantially similar in all material aspects to NAIC-adopted model regulations in the handing and treatment of such reinsurance arrangements.

This post written by Whitney Fore, a law clerk at Carlton Fields in Washington, DC.

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