Reserves

The California Department of Insurance (DOI) has adopted a set of amendments, effective January 1, 2018, to its regulations regarding reinsurance accounting, agreements and oversight. These changes were made to conform the regulations with the requirements of the federal Nonadmitted and Reinsurance Reform Act (NRRA), changes to the California Insurance Code, NAIC Model #787, and the practices of the DOI.

The amendments include several changes that clarify which regulations apply only to California domestic insurers versus which apply to both domestic and foreign (i.e., domiciled outside of California) insurers. This is a response to the preemption by the NRRA of certain state laws regarding reinsurance agreements when applied to nondomestic insurers. Among other things, the amendments make it clear that foreign insurers no longer have to file indemnity reinsurance transactions for commissioner approval. The amendments also include changes conforming the regulations to a 2013 change in the California Insurance Code that prevents the Commissioner from denying financial statement credit to a foreign ceding insurer if that credit is recognized by the ceding insurer’s domestic state and that state’s solvency requirement have been accredited by the NAIC or are substantially similar to the NAIC standards.

The largest additions made by the amendments adopt NAIC Model #787, which the NAIC created to establish uniform minimum standards for securing the obligations under captive reinsurance treaties and reserve financing arrangements. Model #787 is expected to become part of the NAIC’s accreditation standards within the next few years, and the adoption of its provisions in these regulations is intended to ensure that California will meet those accreditation standards whenever that occurs.

Additionally, in the section of the regulations providing that a domestic insurer must generally “retain at least 10% of direct premium written per line of business,” the amendments replace the phrase “per line of business” with “per reinsurance agreement,” as the Commissioner has historically exercised his discretion to apply this retention requirement to reinsurance agreements as a whole, which often include multiple lines of business. Further, the amendments remove all references to and requirements for “volume insurers,” a concept that no longer exists under California law.

Cal. Code Regs. tit. 10, §§ 2303 – 2303.29; Cal. Office of Administrative Law, 2017-1012-04 (Nov. 27, 2017); Cal. Dept. of Ins., Initial Statement of Reasons, Reinsurance Oversight, REG-2016-00024 (May 1, 2017)

This post written by Jason Brost.

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Insurance regulators in Iowa and Virginia have adopted the NAIC’s Model Rules regulating term and universal life insurance reserve financing. The stated purpose of the rules is “to establish uniform, national standards governing reserve financing arrangements pertaining to life insurance policies containing guaranteed nonlevel gross premiums, life insurance policies containing guaranteed nonlevel benefits, and universal life insurance policies with secondary guarantees” and to require certain funds or securities to be held in association with such financing arrangements. The regulations “specif[y] additional requirements relating to the valuation of asset or reserve credits, the amount and forms of security supporting certain reinsurance arrangements, and the circumstances pursuant to which credit will be reduced or eliminated.

Both states provide a rule specifically prohibiting an insurer that has policies covered by the rules from “tak[ing] any action … or enter[ing] into any transaction … if the purpose of such action, transaction or arrangement … is to avoid the requirements of this chapter, or to circumvent its purpose and intent.”

The Iowa regulations take effect on January 10, 2018, and can be found at 191 – Chapter 112, Iowa Administrative Code. The Virginia regulations take effect on January 1, 2018, and can be found at Title 14, Chapter 318, Virginia Administrative Code.

This post written by Benjamin E. Stearns.

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A Plaintiff annuity holder was prohibited from pursuing her federal racketeering claims against an insurance company and its affiliates, as doing so would impair state regulation of insurance business, contrary to the McCarran-Ferguson Act.

The question addressed by the Eighth Circuit Court on appeal of the dismissal of Plaintiff’s RICO claim, was whether the RICO charge would impair state insurance regulation. Applying the standard set forth in Humana Inc. v. Forsyth, 525 U.S. 299 (1999), the Court focused on the precise federal claims asserted. Here, it was Plaintiff’s claim the insurer “misrepresented the true financial conditions of the company in its public reports and marketing materials, artificially inflating its purported assets and surplus.” Ruling on those claims would require the Court to decide whether the purported sham transactions left the insurer in the “healthy financial position it reported” or whether Plaintiff was correct that “a proper accounting would have shown liabilities substantially exceeding” the insurer’s assets.

As questions about an insurer’s solvency are “squarely within the regulatory oversight by state insurance departments” a federal court could not rule in Plaintiff’s favor without holding “that state insurance regulators were wrong” – essentially “double-checking” the regulator’s work. Such a result runs contrary to the McCarran-Ferguson Act.

Ludwick v. Harbinger Group, Inc., No. 16-1561 (8th Cir. April 13, 2017)

This post written by Nora A. Valenza-Frost.

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