The IRS has proposed a regulation (full text here) which would postpone the tax deduction for an incurred loss arising from related party business until the loss is paid, instead of permitting an earlier deduction for certain loss reserves. This proposal has surprised the industry, as it was issued without any notice. The proposal would affect a single parent captive filing a consolidated tax return with its parent. There is concern among the US captive regulators that this would eliminate an important tax incentive for US domiciled captives, resulting in captives moving offshore. The Captive Insurance Companies Association has posted a frequently asked question document relating to this proposal. There is a comment period open on this proposal until December 27, 2007.
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UK COURT GRANTS AVOIDANCE OF REINSURANCE AGREEMENTS DUE TO MISREPRESENTATIONS IN THE PLACEMENT PROCESS
The UK Commercial Court, Queen’s Bench Division, has granted a request to avoid several reinsurance agreements based upon misrepresentations in the placement of the treaties. The treaties were first loss facultative reinsurance agreements, and the court found that there had been material misrepresentations of the cedent’s underwriting policies. Specifically, the court found that although the placement materials had represented that the cedent insured risks subject to deductibles of from £500,000 to 1 million, the reinsured risks in actuality had deductibles of from £100,000 – 200,000. The court found that the misrepresentations were of a present fact, rather than of future intention, and were highly material to the acceptance of the risk given the conditions of the particular market. The court found that if the actual underwriting practices of the cedent had been disclosed, the reinsurer would not have agreed to the reinsurance agreements. The fact that the reinsurance was a first loss cover made the amount of the deductibles particularly important. Limit No. 2 Limited v. Axa Versicherung AG [2007] EWHC 2321 (Comm. Queen’s Bench October 17, 2007).
NAIC REINSURANCE TASK FORCE ADVANCES COLLATERAL AND REINSURANCE REGULATION PROPOSAL
The NAIC’s Reinsurance Task Force has advanced a proposal “to comprehensively modernize reinsurance regulation in the United States.” The proposal is outlined in a press release issued in conjunction with the recent meeting of the Annual Conference of the International Association of Insurance Supervisors. The proposal is in two parts: (1) NAIC Reinsurance Supervision Review Department; draft proposal to grant recognition of regulatory equivalence to non-U.S. insurance supervisors; and (2) Port of Entry State Criteria for Reinsures [sic] Supervised in Jurisdictions Approved by the NAIC Reinsurance Supervision Review Department and U.S. Licensed Reinsurers. Generally, the proposals provide for the regulation of US domiciled reinsurers through a single state, and the agreement to allow non-US domiciled reinsurers to be regulated in the United States through a single state “port of entry” if the foreign regulatory authorities provide a regulatory regime for the company that is functionally equivalent” to that in the United States The proposals also partially change the collateral requirements to a credit-based system, but do not by any means completely eliminate the collateral requirements. The NAIC has also posted on its website a PowerPoint presentation titled NAIC Reinsurance Collateral Update. The next step in this process is a meeting on November 7-8 in Atlanta in conjunction with the NAIC Financial Summit. Comments on the proposal are posted on the NAIC Reinsurance Task Force’s web site.
SENATE COMMITTEE PASSES TRIA EXTENSION
The Senate Banking Committee has approved an extension of the Terrorism Risk Insurance Act. Principal differences between the Senate Committee's version and the version approved by the full House are:
- duration: the House version provides for a 15 year extension, the Senate Committee version 7 years;
- coverage trigger level: the House version reduces the threshold for triggering coverage from $100 million to $50 million, while the Senate Committee version maintains the $100 million trigger level;
- coverage: the House version adds credit life insurance and nuclear, biological, chemical and radiological attacks, while the Senate Committee version does not broaden the scope of coverage.
A copy of the Senate Committee's version is not yet available on the Thomas legislative site.
NEW YORK INSURANCE DEPARTMENT PROPOSES NEW REGULATION ON REINSURANCE COLLATERAL
The New York Insurance Department has proposed a new regulation that moves from collateral-based security for reinsurance agreements to “principles-based” regulation based in large part on the financial rating of reinsurers, regardless of their domicile. A press release from the department provides a good summary of the reasons behind the change, as well as a summary of the new regulation, and touts the revised regulation as a substantial accomplishment, seemingly portraying it as an accomplished fact. A redlined version of the proposed regulation was also released, which will be published for comment. The target date for the effectiveness of the new regulation is July 1, 2008.