Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

OFFICE OF FINANCIAL RESEARCH ISSUES BRIEF ANALYZING DISCLOSURES BY INSURERS OF 2014 DATA RELATED TO CAPTIVE TRANSACTIONS

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On March 17, 2016, the Office of Financial Research, an agency created by the Dodd-Frank Act of 2010 to analyze risk to the financial system, released a brief discussing “recent policy measures” by the NAIC “and the data that insurers began reporting in 2015 about their captive transactions.” The brief analyzes financial data for the year-end 2014, which revealed that U.S. life insurers’ use of captives totaled $213.4 billion in reserve credit. The brief observes that a “little more than a third of the reserve credit backs higher-risk product lines, such as variable annuities and long-term care.” The brief notes that state regulators have begun to revise reporting standards to improve publicly available data to measure the risks from captives and the impact on insurers’ financial condition, but that certain “gaps” in disclosure remain. For example, the brief notes that insurers have disclosed the quality of assets for only 55% of term and universal life captives, measured by reserve credit, largely due to statutory “exemptions.” The brief also cautions that recent NAIC asset quality requirements for new term life and universal life captives can also be bypassed by exemptions — a concern that the OFR believes should be addressed.

This post written by Michael Wolgin.

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SPECIAL FOCUS: THE METLIFE DECISION AND SIFI DESIGNATIONS FOR REINSURANCE COMPANIES

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The designation of MetLife as a systemically significant nonbank financial institution (SIFI) by the Financial Stability Oversight Council (FSOC) was recently rescinded by the United States District Court for the District of Columbia.  The Treasury Department has indicated that the government will appeal the decision.  In a SPECIAL FOCUS article, Roland Goss profiles the court decision and the prospects for a reinsurance company being designated by FSOC as a SIFI.

This post written by Rollie Goss.
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FEDERAL COURT CONFIRMS REINSURANCE ARBITRATION AWARD, FINDING THAT PANEL’S ALLEGED CALCULATION ERROR DID NOT JUSTIFY MODIFICATION OF THE AWARD

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A federal court recently granted a reinsurer’s motion to confirm an arbitration award, and denied a cedent’s petition to modify the same, holding that the panel’s alleged error in computing the amount due to the cedent was not apparent from the face of the award, and thus subject to the highly deferential review of review provided by the Federal Arbitration Act. Scottsdale Insurance Company sought indemnification from its reinsurers for an underlying settlement of a consolidated class action brought against its insured. Scottsdale allocated the settlement payment equally between two insurance policies implicated by the underlying suit, and billed its reinsurers on the grounds that there were ten “occurrences” under each policy. One of the reinsurers, John Deere Insurance Company, disputed the amount of Scottsdale’s settlement and its allocation methodology. The operative reinsurance agreements contained an arbitration provision, and thus the parties resolved their dispute before a three-person arbitration panel of insurance and reinsurance professionals. After a three-day hearing and post-arbitration briefing, the panel issued a final award that required John Deere to pay certain sums based on an “adjusted settlement amount” for “reinsurance billing purposes.” John Deere complied with the award.

Thereafter, Scottsdale commenced an action in the United States District Court for the District of Arizona seeking an order to modify or correct the panel’s award, on the grounds that the award contained a computational error. John Deere cross-moved to confirm. The Federal Arbitration Act, and not Arizona law, governed judicial review of the award, because the relevant provisions in the reinsurance agreements at issue provided that Arizona law only applied to the arbitration process, and not to judicial proceedings to challenge or confirm the award. Applying the federal standard, the court held the panel’s alleged calculation error was not apparent from the face of the award, and thus should not be disrupted, given the highly deferential review afforded by federal law. The court further noted that the panel was not obligated to detail its computational reasoning in the award, nor was it appropriate for the court to second-guess the panel’s legal conclusions or factual findings, even if erroneous. Accordingly, John Deere’s cross-motion to confirm was granted and Scottsdale’s Petition to Modify or Correct denied. Scottsdale Insurance Co. v. John Deere Insurance Co., No. 15-cv-00671 (USDC D. Ariz. Feb. 17, 2016).

This post written by Rob DiUbaldo.

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SECOND CIRCUIT RULES ON ARBITRABILITY QUESTION

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After a de novo review of the District Court’s ruling denying a bank’s motion to compel arbitration, the United States Court of Appeals for the Second Circuit reversed and remanded a district’s court order. The plaintiff argued that there was a factual issue whether a valid overdraft protection agreement existed and this needed to be determined by the court prior to order the matter to arbitration. However, this argument “put the cart before the horse.” As far as the motion to compel arbitration, the court considered whether a valid arbitration clause existed and if so, was the dispute within the scope of the arbitration agreement. There was a valid arbitration agreement and the dispute was covered by it. Therefore, the issue of whether there was a valid overdraft protection should be decided pursuant to the arbitration agreement. The matter was reversed and remanded to the district court to comply with the order. Hatemi v. M&T Bank, No. 14-4338-cv (2d Cir. Mar. 4, 2016).

This post written by Barry Weissman.

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NEW YORK FEDERAL COURT ADDRESSES UMPIRE’S “PRE-SELECTION” DISCLOSURE OBLIGATIONS IN REINSURANCE DISPUTE

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In a dispute arising out of a series of contentious reinsurance arbitrations over a seven-year period between National Indemnity Company (“NICO”) and IRB Brasil Ressegurous S.A., the court confirmed three awards issued by an arbitration panel in NICO’s favor. IRB had sought coverage for a significant property and business interruption loss under a retrocessional reinsurance contract entered into with NICO. A dispute arose concerning NICO’s indemnification obligations for the loss, which was submitted to arbitration before a three-person panel. Other issues between the parties, including whether NICO was entitled to keep certain premium paid under another retrocessional agreement between the parties, and its request for attorneys’ fees and costs, were also submitted to the panel. Ultimately, the panel issued three awards in NICO’s favor.

Each party sought confirmation and vacatur of the awards through various lawsuits filed in federal court, which were consolidated. One of the primary bases upon which IRB sought vacatur was that the umpire failed to disclose his appointment as party-arbitrator for an entity that was an alleged affiliate of NICO in a separate dispute during the period of time between his nomination as umpire (after his umpire questionnaire was completed) and his eventual appointment some two-years later. For this reason, IRB asserted that the umpire demonstrated evident partiality towards NICO, requiring vacatur of the awards under the Federal Arbitration Act. The court disagreed with IRB, finding that the umpire had no obligation to disclose the appointment during the period after he completed the umpire questionnaire, while he was up for consideration, and that the umpire’s voluntary disclosure post-selection (and decision not to withdraw) was sufficient. Further, the court noted that there was no case law supporting the notion that an arbitrator’s disclosure after being selected as umpire, instead of during the period in which his nomination was pending, constituted sufficient grounds to vacate an arbitration award. Notably, the decision cited to the ARIAS-US Code of Conduct in analyzing the umpire’s conduct, finding that he acted in accordance with the Code in addressing the situation. National Indemnity Co. v. IRB Brasil Ressegurous S.A., No. 15-cv-3975 (USDC S.D.N.Y. Mar. 10, 2016).

This post written by Rob DiUbaldo.

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