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New reinsurance-related and arbitration developments from Carlton Fields

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Reinsurance Transactions

NEW YORK DFS AMENDS RESERVE REQUIREMENTS ON CERTAIN UNIVERSAL LIFE POLICIES

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New York’s Department of Financial Services issued an amendment to Insurance Regulation 147 (11 NYCRR 98) which changes reserve requirements on universal life with secondary guarantee policies. The amendment is designed to conform Regulation 147 with NAIC’s revisions to actuarial guidelines calling for reserves for all universal life with secondary guarantee business written between July 1, 2005 and December 31, 2012 to be calculated under a “principles-based” approach. For business issued after January 1, 2013, reserves are to be calculated using a formulaic-based approach. Insurers must also file quarterly financial statements based on minimum reserve standards in effect on the date of filing. New York Department of Financial Services Fourth Amendment to 11 NYCRR 98 (May 17, 2013).

This post written by John Pitblado.

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DISPUTE IN ADMINISTRATION OF CATASTROPHE BOND RESULTS IN LAWSUIT

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A lawsuit has been filed in the United States District Court for the Southern District of New York concerning the administration of the $100 million Mariah Re Ltd. cat bond, which covers severe weather event risks ceded to Mariah Re by American Family Mutual Insurance Company, with an attachment point of $825 million. The Complaint focuses on the modeling and reporting of a particular storm by ISO Services, Inc,. (d/b/a/ Property Claim Service (“PCS”)) and AIR Worldwide Corp. (“AIR”). Payments under the cat bond are based upon estimated loss modeling by PCS, rather than being indemnity based. The Complaint alleges that PCS impropery issued an amended bulletin reporting on the losses resulting from the storm after it had issued its “final report” concerning the storm, and that PCS improperly backdated the replacement report so that it apepared to have been issued prior to the date of its “final report.” It is alleged that as a result of the replacement report, AIR’s calculation of the losses purportedly chargeable to Mariah Re resulting from the storm increased from $62.2 million to approximately $180.1 million. Apparently, American Family withdrew the entire $100 million limit of the cat bond from the cat bond’s reinsurance trust, approximately $37.8 million more than what it is alleged should have been withdrawn.

Disputes over the administration cat bonds are rare. One source has suggested that this is the first lawsuit concerning the administration of cat bonds. This lawsuit raises the interesting question of whether the use of non-indemnity payment triggers in cat bonds exposes ceding insurers to potential litigation risks which an indemnity payment trigger would avoid.

This post written by Rollie Goss.

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FURTHER DEVELOPMENT IN STATE CREDIT FOR REINSURANCE REQUIREMENTS

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As the legislative seasons comes to a close in many states, several states have enacted modifications to their credit for reinsurance requirements to move towards the revised Credit for Reinsurance Model Act. The Missouri legislature adopted HB 133 and the Rhode Island legislature adopted HB 5608. The Georgia Department of Insurance adopted regulations (120-2-78) designed to help implement the Georgia legislature’s earlier adoption of revised credit for reinsurance requirements.

This post written by Rollie Goss.

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NEW YORK DEPARTMENT ISSUES HIGH PROFILE CRITICISM OF CAPTIVES; SOME OTHER COMMISSIONERS NOT IMPRESSED

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On June 11, 2013 the New York Department of Financial Services released a report titled Shining A Light On Shadow Insurance: A Little-Known Loophole That Puts Insurance Policyholders And Taxpayers At Greater Risk (“the NY Report”). The NY Report describes an investigation that the New York Department initiated in July 2012 into the practice of reinsuring term and universal life insurance policies with non-New York domiciled captive insurers which are subject to “looser reserve and regulatory requirements.” Receiving publicity in a New York Times article, the NY Report pledges to continue the investigation, urges the NAIC to develop enhanced disclosure requirements for “shadow insurance,” urges the Federal Insurance Office (“FIO”) and the NAIC to conduct a “similar investigation,” and suggests “an immediate national moratorium on approving additional shadow insurance transactions until those investigations are complete ….”

As reported previously in Reinsurance Focus, the NAIC formed a special working group of the Financial Condition (E) Committee in November 2011, which has been investigating the use of captives, including the possible use of captives to evade regulatory accounting rules concerning reserves. The working group, of which New York has been an active member, approved a white paper containing its recommendations on June 6, 2013, shortly before the release of the NY Report, which inexplicably failed even to mention the existence of the NAIC’s on-going inquiry. The approved NAIC white paper recommends a number of changes to accounting and other rules. In order to promote uniformity of practice, the NAIC working group has recommended that some of the proposed changes be included in the NAIC’s accreditation requirements rather than in merely optional guidelines which may or may not be adopted by individual states. In another instance of curious timing, the NY Report recommended that the FIO establish a task force to look into issues relating to captives, while it is public knowledge that the FIO already had established such a task force.

The insurance commissioners of Delaware, Louisiana (the current NAIC President) and Tennessee have, according to news reports, rejected the call in the NY Report for a moratorium, stating that: (1) many transactions engaged in by captives are appropriate and lawful, not involving the “shadow insurance” allegations contained in the NY Report; (2) captives can be regulated properly, if necessary with additional resources applied by the state insurance departments; and (3) the current NAIC captives initiative will continue and proceed to a proper conclusion.

This post written by Rollie Goss.

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ALABAMA, PENNSYLVANIA, AND LOUISIANA ADOPT CREDIT FOR REINSURANCE REGULATIONS

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Alabama, Pennsylvania, and Louisiana have joined the ranks of several other states that have adopted regulations nearly identical to the NAIC Credit for Reinsurance Model Regulation, which allows a ceding insurer to receive a credit for reinsurance as an asset or reduction from liability when insurance is ceded to a reinsurer that meets certain requirements. Alabama’s Credit for Reinsurance Regulation passed the House and the Senate on April 18, 2013 and May 2, 2013, respectively, and takes effect on January 1, 2014. H. B. 199, Reg. Sess. (Ala. 2013). Pennsylvania amended its Requirements for Qualified and Certified Reinsurers on May 25, 2013 with an effective date of June 24, 2013 to mirror recent amendments to the NAIC Model Regulation. Pa. Ins. Dep’t., Requirements for Qualified and Certified Reinsurers, 43 Pa.B. 2816 (May 25, 2013). Louisiana passed a bill effective May 23, 2013 which allows reinsurance credits to captive insurers under certain conditions. S. B. 120, Reg. Sess. (La. 2013).

This post written by Abigail Kortz.

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