Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

NAIC EXECUTIVE COMMITTEE ADOPTS FRAMEWORK FOR CHANGES TO CAPTIVE RESERVE REQUIREMENTS

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NAIC’s Executive Committee met at NAIC’s annual meeting in Louisville, Kentucky on August 16 and 17, 2014. The Executive Committee furthered its action on reserve requirements for captive reinsurers (as reported here last year) and adopted the “XXX/AXXX Reinsurance Framework” which will guide development of proposed regulatory changes to the types of assets and securities required to meet statutory reserve requirements.

Arising from worries about potentially abusive use of captives creating a “shadow insurance industry (as reported here in 2012), the framework would, among other things, require ceding companies to disclose the assets backing their risk-based-capital (RBC) computations.

As noted in the Principle-Based Reserving (PBR) Implementation (EX) Task Force’s report to the Executive (EX) Committee, the framework:

  • addresses concerns regarding reserve financing transactions without encouraging such transactions to move off-shore. The changes would be prospective and apply to XXX term life insurance business and AXXX universal life with secondary guarantees.
  • requires the ceding company to collateralize a portion of the total statutory reserves with hard assets such as cash and securities, collateralize the remainder with other assets and forms of security identified as acceptable by regulators, disclose the assets and securities used; and hold an RBC cushion as required for other business.
  • will be codified through the Credit for Reinsurance Model Law, with the creation of a new model regulation.

The PBR subcommittee’s report is based on the June 4 Rector & Associates, Inc. report’s recommendations (a copy of which is available on the PBR taskforce’s website: http://www.naic.org/committees_ex_pbr_implementation_tf.htm).

This post written by John Pitblado.

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COURT GRANTS MOTION FOR PARTIAL JUDGMENT ON THE PLEADINGS IN RESPA CLASS ACTION REGARDING PRIVATE MORTGAGE INSURANCE

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We have previously reported on a case styled Munoz v. PHH Corp., one of similar suits alleging putative class actions under the Real Estate Settlement Procedures Act arising from purported “sham” reinsurance transfers covering private mortgage insurance. Defendants in that case filed a motion for partial judgment on the pleadings asserting that plaintiff-intervenor, and all others similarly situated, failed to plead sufficient facts to state a claim for application of equitable tolling and/or equitable estoppel to the one-year statute of limitations for alleged violations of the Act. The court granted defendants’ motion for equitable tolling and equitable estoppel/fraudulent concealment pleadings. The loan document disclosures adequately placed plaintiff on notice of her claim and that she failed to allege extraordinary circumstances that prevented her from timely filing. In particular, the disclosures explained the requirement of mortgage insurance, the purpose of the mortgage insurance, the borrower’s rights and responsibilities under mortgage insurance, and the potential occurrence of captive insurance. The court also found that plaintiff failed to plead an act of concealment separate and apart from an underlying RESPA claim. The court, however, is allowing plaintiff one opportunity to file and serve an amended complaint to cure deficiencies within 20 days from date of the court’s order. Munoz v. PHH Corp., No. 1:08-CV-0759 (USDC E.D. Cal. Aug. 11, 2014).

This post written by Kelly A. Cruz-Brown.

See our disclaimer.

RESPA CLASS ACTION ALLEGING “CAPTIVE REINSURANCE SCHEME” ALLOWED TO PROCEED

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A Pennsylvania federal court recently denied a motion to dismiss a putative class action lawsuit in which homeowners claim violations of the Real Estate Settlement Procedures Act of 1974 based on an alleged “captive reinsurance scheme” related to private mortgage insurance.

The plaintiffs allege that between January 2006 and December 2008, they obtained residential mortgage loans from National City Mortgage (“National City”), which contracted with certain primary insurers to provide private mortgage insurance. These insurers subsequently reinsured with National City’s captive reinsurer, National City Mortgage Insurance Company, Inc. (“NCMIC”), pursuant to a captive reinsurance arrangement. Under this arrangement, the primary insurers paid NCMIC a portion of the borrowers’ insurance premiums in exchange for NCMIC assuming some of the primary insurers’ risk. The plaintiffs claim this reinsurance arrangement violated RESPA’s prohibition on kickbacks because premium payments from the primary insurers to NCMIC were made in return for National City’s referral of business. According to the plaintiffs, this arrangement also violated RESPA’s prohibition on fee-splitting because it was only sham reinsurance. They allege that NCMIC provided no service in return for the portion of the insurance premiums it accepted.

Defendants moved to dismiss the complaint for failure to state a claim, making a variety of arguments. The district court denied the motion, finding that the plaintiffs were entitled to equitable tolling due to alleged fraudulent concealment by the defendants and had set out facts sufficient to meet the federal pleading standards for a violation of RESPA and unjust enrichment. White v. PNC Financial Services Group, Case No. 11-7928 (USDC E.D. Pa., August 18, 2014).

This post written by Catherine Acree.

See our disclaimer.

MARYLAND ADOPTS CREDIT FOR REINSURANCE REGULATIONS

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The Maryland Insurance Commissioner adopted regulations regarding Credit for Reinsurance effective August 18, 2014. The regulations will implement changes made to Title 5, Subtitle 9 of the Maryland Insurance Article, and are based upon recent amendments to model law and regulation developed by the National Association of Insurance Commissioners entitled “Credit for Reinsurance Model Law” (No. 785) and “Credit for Reinsurance Model Regulation” (No. 786), respectively. The regulations provide standards for a licensed ceding insurer to receive credit for reinsurance ceded to a certified reinsurer as a reduction of collateral requirements and include provisions that establish: 1) eligibility requirements to be considered for certification as a certified reinsurer; 2) eligibility requirements of a jurisdiction in which an assuming insurer may be domiciled to be considered a qualified jurisdiction; 3) eligibility requirements to be considered for approval as an accredited reinsurer; 4) a rating method to be used in the certification process; and, 5) a sliding scale with the level of required collateral varying from 0% to 100% of ceded liabilities based on the certified reinsurer’s rating.

This post written by Kelly A. Cruz-Brown.

See our disclaimer.

REINSURER’S EXPOSURE CAPPED AT THE CERTIFICATE LIMITS: NO OBLIGATION TO PAY DEFENSE EXPENSES ABOVE THE LIMITS

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A New York federal court recently was presented with a reinsurance dispute about the amount a reinsurer was required to pay under certain reinsurance Certificates. The issue was whether the reinsurer’s obligation was capped at the stated limit, or whether the reinsurer was also liable for defense costs in excess of the limit that the direct insurer had reimbursed. The court ruled that the “Certificate Limits” stated in the “Reinsurance Accepted” section of the Certificates capped the maximum amount that the reinsurer could be obligated to pay for combined loss and expenses.

The court rejected the direct insurer’s argument that the reinsurer should have to pay additional sums for defense costs above the amount of the “Certificate Limits,” ruling that “the unambiguous language in the ‘Reinsurance Accepted’ sections of the Certificates does not differentiate between reinsurance accepted for loss versus reinsurance accepted for expenses, but simply provides a total cap on liability. If the parties intended to exclude expenses from the total liability cap, they could have made that clear in the language of the Certificates.” Under New York law, for costs to be excluded from the liability cap in a reinsurance certificate, language in the certificate must expressly state that such costs were excluded from the indemnification limit. Because nothing in the Certificates that expenses were to be excluded from the Certificate Limits, the court entered summary judgment in favor of the reinsurer. Global Reinsurance Corp. of America v. Century Indemnity Co., Case No. 1:13-CV-6577 (USDC S.D. N.Y. Aug. 15, 2014).

This post written by Catherine Acree.

See our disclaimer.