Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

OHIO PROPOSED RULE REGARDING ALTERNATIVE RESERVE METHODOLOGY FOR SPECIAL PURPOSE CAPTIVES

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The Ohio Department of Insurance has proposed a new rule, Rule 3901-11-05 (the “Proposed Rule”), to establish a process and method that allow a special purpose financial insurance company captive (a “SPFIC Captive”) to request the use of an alternative reserve methodology other than that found in the National Association of Insurance Commissioner’s (“NAIC”) Accounting Practices and Procedures Manual.

The Proposed Rule requires a request to use an alternative principle-based valuation method to be accompanied by a written actuarial opinion that is signed by the appointed actuary for the SPFIC Captive and the ceding insurer. The Proposed Rule prescribes certain criteria for the alternative reserve methodology being requested:

  • Must be a principle-based valuation method that uses one or more methods or one or more assumptions proposed by the SPFIC Captive.
  • Must address all material risks associated with the contracts being valued and their supporting assets and determined capable of materially affecting the valuation of its obligations with respect to the risks assumed. Examples of risks to be included in the principle-based valuation method include but are not limited to risks associated with policyholder behavior, such as lapse and utilization risk, mortality risk, interest rate risk, asset default risk, separate account fund performance, and the risk related to the performance of indices for contractual guarantees.
  • Must be consistent with current actuarial standards of practice.
  • Must consider the risk factors, risk analysis methods, and models that are incorporated in the SPFIC Captive’s overall risk assessment process. The overall risk assessment process may include, but is not limited to, asset adequacy testing, GAAP analysis, internal capital evaluation process and internal risk management and solvency assessments.
  • Must incorporate appropriate margins for uncertainty and/or adverse deviation for any assumptions not stochastically modeled.

The SPFIC Captive is required to provide any information the superintendent may require to assess the proposed alternative methodology. If an alternative methodology is approved by the superintendent, then the SPFIC Captive must use the alternative methodology until, and unless, the superintendent approves an another alternative method. Finally, upon the superintendent’s request, the SPFIC Captive is required to secure the affirmation of an independent qualified actuary that the alternative methodology complies with the criteria set forth in the Proposed Rule. The independent qualified actuary must be approved by the department and provide a written actuarial opinion detailing their affirmation and a report supporting that opinion to the superintendent. The independent qualified actuary report must comply with division (E)(3) of section 3964.03 of the Ohio Revised Code.

This post written by Kelly A. Cruz-Brown.
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DISTRICT COURT DISMISSES BREACH OF CONTRACT CLAIM, ALLOWS BREACH OF DUTY OF UTMOST GOOD FAITH CLAIM IN REINSURANCE DISPUTE

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The District Court for the Middle District of Florida recently held that defendant First American Title Insurance Company (“First American”) could maintain its breach of the utmost duty of good faith counterclaim against plaintiff Old Republic National Title Insurance Company (“Old Republic”), but that it could not countersue Old Republic for breach of contract. First American alleged that Old Republic breached the Reinsurance Agreement (“Agreement”) the parties shared by 1) paying First American under a reservation of rights to assert claims against First American, 2) disputing Old Republic’s obligation to pay First American, and 3) improperly trying to claw back the $3.8 million payment. The court held that First American’s claims were insufficient because the Agreement did not explicitly prohibit Old Republic’s actions, a necessary basis for a breach of contract claim. The court did, however, find sufficient First American’s claim that Old Republic breached the utmost duty of good faith. As the court noted, “generously construing First American’s allegations under this count in conjunction with its claim that Old Republic breached the Reinsurance Agreement by failing to pay its share of defense costs,” the pleaded facts for First American’s “utmost good faith” claim were sufficient to survive the motion to dismiss stage.

Old Republic Nat. Title Ins. Co. v. First American Title Ins. Co., No. 8:15-cv-126-T-30EAJ, 2015 WL 1530611 (USDC M.D. Fla. Apr. 6, 2015)

This post written by Whitney Fore, a law clerk at Carlton Fields in Washington, DC.

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COUNCIL OF THE EUROPEAN UNION AGREES TO NEGOTIATIONS ON REINSURANCE

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On April 21, 2015, the Council of the European Union (“Council”) issued a mandate to the European Commission (“Commission”) to negotiate an agreement with the United States on reinsurance. The mandate consists of a decision authorizing the opening of talks and directives for the negotiation of the agreement. The Commission will negotiate on the EU’s behalf, in consultation with a Council committee. The agreement will be concluded by the Council with the consent of the European Parliament.

These negotiations would be initial steps towards possible removal of collateral requirements in both jurisdictions in order to ensure a risk-based determination for all reinsurers in relation to credit for reinsurance. The Commission likely will negotiate with the Federal Insurance Office (“FIO”), which has authority under the Dodd-Frank Act to negotiate international agreements on behalf of the United States. Any such agreement reached by the FIO would pre-empt state laws, in this case the Model Credit for Reinsurance Act. It will be interesting to see how the NAIC reacts to this development.

This post written by Kelly A. Cruz-Brown.

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PENNSYLVANIA COURT DENIES MOTION FOR SUMMARY JUDGMENT OVER FACULTATIVE REINSURANCE CERTIFICATES

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The Court of Common Pleas of Philadelphia County denied defendant OneBeacon Insurance Company’s (“OneBeacon”) motion for summary judgment against plaintiffs Century Indemnity Company (“Century”) and Pacific Employers Insurance Company (“Pacific”). Century and Pacific, which held reinsurance policies issued by OneBeacon, sued the reinsurer to recover expenses in addition to the stated policy limits and to recover an award of interest on the payments received. OneBeacon  sought summary judgment on two grounds: 1) that the limit stated in the parties’ reinsurance certificates placed a total cap on its liability, and 2) that plaintiffs were not entitled to an award of interest on payments. The court denied OneBeacon’s motion.  First, the court determined that certain conditions placed on premiums in the reinsurance certificates meant that the premium was subject to a condition that excluded expenses in calculating the total loss limit. “If anything,” the court noted, “the terms of the certificates may have created a presumption of expense-exclusiveness.”

Second, the court denied defendant’s motion for summary judgment on collateral estoppel grounds. OneBeacon cited two prior district court cases that considered the “limit-of-liability” issue, but the court held that this legal authority did not “hold the necessary weight of final judgments at this juncture in order to apply collateral estoppel against plaintiffs.”  Finally, because the court had already granted plaintiffs’ separate motion for summary judgment on payments of interest, it denied OneBeacon’s motion on that issue as well.  Century Indem. Co. v. OneBeacon Ins. Co., No. 02928 (Pa. Com. Pl. Mar. 27, 2015).

This post written by Whitney Fore, a law clerk at Carlton Fields in Washington, DC.

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DISCOVERY OF RESERVE AND REINSURANCE INFORMATION PERMITTED IN COVERAGE AND BAD FAITH ACTION AGAINST INSURERS

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A federal district court in Colorado has denied motions for a protective order filed by the insurers in a coverage litigation where Cantex, a third-party assignee to claims against the insurers, asserts causes of action for breach of contract and bad faith. The discovery dispute concerned the scope of Cantex’s Rule 30(b)(6) deposition designations which sought discovery into areas of reserve and reinsurance, claims handling, underwriting, and insurance contract interpretation. The court found that the 30(b)(6) deposition topics on reserve and reinsurance information were relevant when claims of bad faith were still pending. The court therefore denied the motion for a protective order as to those areas of discovery, but permitted the insurers to interpose objections based on privilege as they deem fit. The court further found that discovery seeking testimony relating to the (1) drafting, marketing, and underwriting of the policy, (2) handling of the claims made to the insurers, including the evaluation of the underlying litigation, and (3) interpretation of the insurance policies, was also relevant. The court denied the insurers’ motions for a protective order in their entirety. Phoenix Insurance Co. v. Cantex, Inc., No. 13-cv-00507 (USDC D. Colo. Apr. 14, 2015).

This post written by Renee Schimkat.

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