Accounting for Reinsurance

The U.S. Treasury Department and the U.S. Trade Representative have given notice to Congress of the initiation of discussions with the European Union to enter into a Covered Agreement essentially addressing two major issues: (1) the equivalence of the U.S. insurance and reinsurance regulatory regime in the context of the EU’s Solvency II initiative; and (2) credit for reinsurance collateral requirements.  Covered Agreements were introduced by the Dodd-Frank Act as a vehicle for limited federal intrusion into the regulation of the business of insurance and reinsurance by the states.  Rollie Goss describes the Covered Agreement process and this initial utilization of that process in a Special Focus article.

This post written by Rollie Goss.
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We previously reported on putative class actions pending against life insurers for allegedly misleading customers by engaging in “shadow” or “hollow” reinsurance transactions, doing so most recently on August 3, 2015. In early October, another judge in the Southern District of New York faced the same arguments and ultimately reached the same conclusion that Article III standing was lacking. Plaintiffs alleged that Metropolitan Life Insurance Company and MetLife, Inc. had not properly disclosed their reinsurance agreements to customers as part of their transaction purchasing life insurance. According to plaintiffs, MetLife engaged in such conduct as obtaining a reserve credit of over $1 billion based upon letters of credit that were backed by contractual parent guarantees. In particular, plaintiffs pointed to a $315 million letter of credit that the New York Department of Financial Services determined was a “hollow asset” even though MetLife reported it as an admitted asset.

Plaintiffs filed a putative class action seeking damages against MetLife for failure to disclose these transactions and for violating sections of the New York Insurance Law. Plaintiffs, however, could not prove an injury-in-fact and, therefore, lacked Article III standing. Plaintiffs lacked Article III standing, the court found, because they could not show a concrete injury as a result of this conduct. In fact, rather than resulting in higher premiums, as Plaintiffs alleged, “according to an economic study annexed as an exhibit to the complaint, using shadow insurance actually reduces the cost of life insurance policies and, if companies discontinued using shadow insurance, premiums might rise by as much as 10–21%.” Finding that the alleged risk of harm was in the future and not concrete, the court dismissed the case for lack of Article III standing. Robainas v. Metropolitan Life Insurance Co., No. 14-cv-09926-DLC (USDC S.D.N.Y. Oct. 9, 2015).

This post written by Zach Ludens.

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