Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Reinsurance Transactions

CREDIT FOR REINSURANCE ISSUES TAKING NEW TURNS?

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We have posted many times on the slowly developing changes in the area of credit for reinsurance and reinsurance collateral requirements. The recent report on insurance regulation from the Federal Insurance Office contained a recommendation in this area: “To afford nationally uniform treatment of reinsurers, FIO recommends that Treasury and the United States Trade Representative (USTR) pursue a covered agreement for reinsurance collateral requirements based on the National Association of Insurance Commissioners Credit for Reinsurance Model Law and Regulation.” FIO Report, page 37. Such an agreement likely would be an international agreement which, pursuant to the Dodd-Frank Act, would preempt and supersede state laws in this area.

At the same time, the NAIC has been monitoring the adoption by the states of the Credit for Reinsurance Model, and has pursued a process of certifying foreign jurisdictions as “qualified jurisdictions” for purposes of of permitting reinsurers licensed or domiciled in such jurisdictions to seek certification by states for reduced collateral requirements under the Credit for Reinsurance Model. The NAIC has announced the addition of four international supervisory authorities as Conditional Qualified Jurisdictions: the Bermuda Monetary Authority; the German Federal Financial Supervisory Authority; the Swiss Financial Market Supervisory Authority; and the United Kingdom Prudential Regulation Authority of the Bank of England. According to the NAIC article, this approval permits states to begin certifying reinsurers licensed or domiciled in those jurisdictions for collateral reduction purposes, with the full review of these four jurisdictions by the NAIC continuing during 2014. Individual states have the authority to approve jurisdictions not on the NAIC’s list of qualified jurisdictions. Since the NAIC/Model approach depends upon action by individual states, this route is unlikely to achieve the uniformity advocated by the FIO Report, at least in the short term.

This post written by Rollie Goss.

See our disclaimer.

AIG MIGHT GAIN ACCESS TO ELIOT SPITZER’S PERSONAL EMAILS IN CONNECTION WITH REINSURANCE ENFORCEMENT ACTION

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In 2005, former New York Attorney General Eliot Spitzer commenced a civil enforcement action against AIG, AIG’s former CEO, and AIG’s former CFO Howard Smith for allegedly engaging in fraudulent reinsurance transactions. In response, Smith submitted a Freedom of Information Law (“FOIL”) request seeking the disclosure of the AG’s communications with the press regarding the complaint. A New York Supreme Court held that the AG’s office has a responsibility and obligation to gain access to Spitzer’s personal email account to determine if it contains documents that should be disclosed in accordance with the FOIL request. The court, however, also allowed the AG’s office to appeal the issue. On appeal, the Appellate Division determined that Spitzer is a necessary party and remanded the case without deciding the issue so the Supreme Court can order Spitzer’s joinder. Smith v. New York State Office of the Attorney General, No. 515758 (N.Y. App. Div. Oct. 17, 2013).

This post written by Abigail Kortz.

See our disclaimer.

MORE TRACTION FOR THE CREDIT FOR REINSURANCE MODELS

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In an effort to implement reduced collateral requirements for ceding insurers, New Hampshire and Delaware have both enacted legislation that conforms with the NAIC’s amendments to its Credit for Reinsurance Model Law and Regulations. New Hampshire’s amended Reinsurance law, introduced as House Bill 231 on January 1, 2013, took effect on September 13, 2013. N.H. Rev. Stat. Ann. § 405:45-:52-a. New Hampshire is also considering amending its related regulation, N.H. Code Admin. R. Ins. 600, as originally proposed on July 18, 2013. Delaware’s amended Credit for Reinsurance regulation was first published for comments on May 1, 2013, and became effective on August 15, 2013. 18 Del. Admin. Code § 1003. Though not a Model state, Hawaii also recently adopted amendments, effective July 1, 2013, relating to conditions under which risk retention captive insurers may qualify for reinsurance credits on risks ceded to a reinsurer. Haw. Rev. Stat. § 431:19-111.

This post written by Kyle Whitehead.

See our disclaimer.

FASCINATING DEVELOPMENTS IN THE INSURANCE-LINKED SECURITIES AND LONGEVITY TRANSFER SPACES

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There are two interesting regulatory developments of interest to the insurance-linked securities space. First, the Securities and Exchange Commission is considering a proposed rule which would change the regulation of money market mutual funds under the Investment Company Act of 1940. One alternative being considered is to require funds to sell and redeem shares based on the current market-based value of the securities, i.e., that they transact at a “floating” net asset value per share. If funds in cat bond reinsurance trusts or more traditional collateralized reinsurance trusts were invested in such floating value instruments, the value of the collateral might decline and adversesly affect the amount of reinsurance or the amount of collateral available to a ceding insurer. However, the proposed rule exempts from the floating NAV requirement funds which are 80% or more invested in cash, government securities or fully collateralized repurchase agreements. The investment guidelines of most new cat bonds and collateral agreements would come within this exception, and the conservative investment of trust assets should avoid the potential adverse impact of the floating NAV requirement in the current proposed rule.

Second, the European Union’s Joint Forum, which is composed of the EU’s banking, insurance and securities regulators, has issued a report titled Longevity risk transfer markets: market structure, growth drivers and impediments, and potential risks (August 2013). This report describes the three types of transactions that are being used to transfer longevity risk: buy-out transactions; buy-in transactions; and longevity swaps or insurance. Given that the total global amount of annuity and pension related longevity risk exposure ranges from $15-25 trillion, understanding these risks, the alternative risk transfer methods of dealing with them and the views of regulators concerning such issues is important for anyone interested in the potential development of the equivalent of a cat bond market for longevity risks.

This post written by Rollie Goss.

See our disclaimer.

NAIC TAKES FURTHER ACTION ON CAPTIVES – TRANSACTION LEVEL REVIEWS TO COME

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We have previously posted on the NAIC’s initiatives with respect to captives and the NY Department’s captives report. The NAIC’s Executive Committee and Plenary, in a joint teleconference, have adopted the Reinsurance Task Force’s proposed White Paper on the activities of captives. Activity regarding captives at the NAIC continues on several fronts, including:

Financial Analysis Working Group of the Financial Condition (E) Committee

Additional responsibilities relating to captives have been assigned to this working group:

  • Perform analytical reviews of transactions (occurring on or after a date as determined by the NAIC membership) by nationally significant US life insurers to reinsure XXX and/or AXXX reserves with affiliated captives, special purpose vehicles (SPVs), or any other US entities that are subject to different solvency regulatory requirements than the ceding life insurers, to preserve the effectiveness and uniformity of the solvency regulatory system.
  • For such transactions entered into and approved prior to this date and still in place, collect specified data in order to provide regulatory insight into the prevalence and significance of these transactions throughout the industry.
  • Provide recommendations to the domiciliary state regulator to address company specific concerns and to the PBR Implementation (EX) Task Force to address issues and concerns regarding the solvency regulatory system.

It was noted that some state insurance departments already conduct reviews of some individual transactions involving captives.

Principle-Based Reserving Implementation (EX) Task Force of the Executive (EX) Committee

This task force will consider the Report’s recommendations in the context of the proposed Principal-Based Reserving system and make further recommendations, if any, to the Executive (EX) Committee. This activity may be conducted through a new Captive Working Group, which will report to this task force. The Captive Working Group will consider the following issues:

  • Address any remaining XXX and AXXX problems without encouraging formation of significant legal structures utilizing captives to cede business;
  • Address confidentiality of information; and
  • Recommend enhancement to the Financial Analysis Handbook Guidance to allow for a consistent approach for states’ review and ongoing analysis of transactions involving captives and SPVs.

Blanks Working Group of the Accounting Practices and Procedures Task Force of the Financial Condition (E) Committee

This working group is evaluating an exposure draft of a definition of “captive affiliate,” which, if adopted, would result in enhanced disclosure in Schedule F of transactions with captives. (see recent agenda item).

Reinsurance Task Force of the Financial Condition (E) Committee

The Reinsurance Task Force may implement other recommendations from the White Paper.

This post written by Rollie Goss.

See our disclaimer.