Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

CAPTIVE INSURANCE TRADE ASSOCIATION OPPOSES PROPOSED REVISIONS TO THE NATIONAL STANDARDS FOR STATE ACCREDITATION

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In a letter dated May 19, 2014, the Captive Insurance Companies Association (CICA) urged the National Association of Insurance Commissioners (NAIC) to reject proposed revisions to the definition of “multi-state reinsurer” in the Part A and Part B preambles of the standards for state accreditation. According to the CICA, the proposed new definition is overly broad and would bring a new regulatory burden for numerous alternative risk structures that have nothing to do with problem that is sought to be addressed by the change, i.e., the utilization of special purpose vehicles and captives as reinsurance mechanisms by life and annuity insurers regarding excess reserves. The CICA argues that the proposed definition would subject most captive reinsurers (including reinsurers in the property/casualty industry) to NAIC accreditation standards, and that there is no evidence that captives need this additional regulatory burden. The CICA argues that if the NAIC is concerned with the life and annuity reinsurance provided by the captive subsidiaries of large commercial insurers that may present “systemic risk” to the global financial system, then the definition should be properly tailored so as to avoid application for the thousands of captives that are not in this category.

Previously, the preamble had excluded “insurers that are licensed, accredited or operating in only their state of domicile but assuming business from insurers writing that business that is directly written in a different state.” The proposed revised definition removes that exclusion, defining a multi-state reinsurer as “an insurer assuming business that is directly written in more than one state and/or in any state other than its state of domicile. This includes but is not limited to captive insurers, special purpose vehicles and other entities assuming business.”

This post written by Catherine Acree.

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COLORADO AMENDS LAWS GOVERNING CREDIT FOR REINSURANCE AND RECEIVERSHIPS

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Colorado has amended its laws regarding credit for reinsurance and receiverships to conform to certain model acts adopted by the National Association of Insurance Commissioners (NAIC). House Bill 14-1315, conforms Colorado Revised Statutes 10-3-701 through 10-3-706 with the NAIC Credit for Reinsurance Model Act to establish criteria that the insurance commissioner is to use in certifying reinsurers, imposes requirements on ceding insurers to take certain steps to manage their concentration of risk, and imposes requirements upon the insolvency of a non-U.S. insurer or reinsurer that provides security to fund its U.S. obligations.

Furthermore, House Bill 14-1315 enacts Colorado Revised Statute 10-3-540.5 to specify the conditions under which insurance companies may offset their obligations to each other when an insurance company becomes insolvent. Colorado Revised Statute 10-3-540.5 adopts section 711 of the NAIC Insurer Receivership Model Act.

The Governor signed House Bill 14-1315 on May 31, 2014. The amendments to Colorado Revised Statutes 10-3-701 through 10-3-706 are effective January 1, 2015. Colorado Revised Statute 10-3-540.5 is effective August 6, 2014.

This post written by Kelly A. Cruz-Brown.

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COURT CONSTRUES DISPUTED INSURANCE POLICY LANGUAGE AND REQUIRES REINSURER TO FOLLOW THE SETTLEMENTS

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The case involved two facultative reinsurance contracts, each of which covered excess liability for similar umbrella liability insurance policies, and each of which contained a “follow the settlements” provision. After the insurer agreed to pay a percentage of the insured’s asbestos injury claims and defense expenses, the insurer began billing the reinsurer, but the reinsurer disputed liability. The reinsurer contended that it was not required to pay defense expenses in the same fashion as indemnity for one of the reinsurance certificates, arguing that the underlying insurance policy covered by that certificate lacked a reference to “defense expense” in the policy limit provision.

The court, however, rejected the reinsurer’s argument and entered summary judgment in favor of the insurer, finding that the reinsurer failed to demonstrate that the cedent was seeking coverage beyond the scope of the agreements. “It may be,” the court explained, “that defendant believes that defense expenses should not be included in the settlement because [the policy] does not use the phrase ‘defense expenses’ when defining the total limits of liability. However, … the provision does not affect the type of expenses that are covered, only the amount.” The court also considered two issues raised in later briefing: (1) whether the cedent proved the extent to which it exceeded the retention amounts; and (2) whether the cedent calculated prejudgment interest correctly, but reserved ruling on those issues, pending supplemental briefing. Employers Insurance Co. of Wausau v. R & Q Reinsurance Co., No. 13-cv-709 (USDC W.D. Wisc. May 16, 2014).

This post written by Michael Wolgin.

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CFTC ISSUES NO ACTION LETTER ON APPLICATION OF SWAP RULES TO LONGEVITY REINSURANCE TRANSACTION

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There has been considerable concern in the insurance and reinsurance industries that certain hedging and reinsurance activities that companies have engaged in for a number of years, particularly with respect to life insurance and annuity products, might be viewed as swaps under regulations implementing the swap regulation provisions of the Dodd-Frank Act, complicating those transactions and increasing their costs.  A division of the Commodity Futures Trading Commission recently issued a no-action letter indicating that it would not recommend that the Commission take enforcement action based upon the view that certain longevity risk reinsurance transactions are “swaps.”  This is the first time that the Commission has addressed whether a specific insurance transaction is covered by the swap rules.  The transaction at issue encompassed longevity and inflation risks from a pool of plan beneficiaries under a non-U.S. defined benefit pension plan.  The risks were the subject of longevity swap hedging transactions and reinsurance through a Bermuda domiciled cell insurance company.  The Dodd-Frank Act contains an insurance safe harbor provision, which was intended to provide a basis for finding that certain enumerated traditional insurance products and activities, including annuities and reinsurance, are not regulated swaps.  The no-action letter analyzes the described transaction and finds that it involves an insurance policy and a “traditional reinsurance contract,” which should not be characterized as a swap.  This no-action letter provides insight into how the CFTC views the insurance safe harbor provision of the Dodd-Frank Act.  CFTC Letter No. 14-67 (April 8, 2014).

This post written by Rollie Goss.

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COURT AWARDS $5.6 MILLION IN DAMAGES FOR COVERED CLAIMS UNDER RETROCESSION AGREEMENTS

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A federal district court has awarded Munich Re $5.6 million in damages in its breach of contract action against American National Insurance Company for ANICO’s nonpayment of certain claims the court previously determined were covered by the parties’ retrocession agreements. In previous opinions, reported here on March 10 and May 29, 2014, the court concluded that ANICO breached its payment obligations to Munich Re for claims properly and timely ceded to ANICO under those agreements. In awarding damages, the court determined that Munich Re was entitled to a sum certain based on all claims previously identified and billed by Munich Re at the time of trial, along with the appropriate amount of prejudgment interest. The court also determined that ANICO was entitled to (1) offset some damages claimed by Munich Re by the amount of outstanding premium ANICO was owed and (2) “particulars and estimates” under the reporting obligations of the retrocession agreements which obligate Munich Re, when reporting claims, to provide information sufficient for ANICO to determine that the claims fall within the scope of its obligations.  The court denied ANICO’s request that the court to take judicial notice of certain alleged admissions Munich Re made in prior litigation. Munich Reinsurance America, Inc. v. American National Insurance Co., Case No. 09-6435 (USDC D.N.J. May 27, 2014).

This post written by Renee Schimkat.

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