Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

S&P ARTICLES ON REINSURANCE MARKET CHANGES

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Standard & Poors, in addition to providing ratings of reinsurance companies, also provides free articles on various aspects of the reinsurance market. These articles often include significant financial analysis and illustrative charts. To access these articles, go to S&P’s Home Page and search for “reinsurance.” You will be asked to register as a user for free access to the site’s content, and we are unable to provide direct access to the articles. There are two recent articles that may be of interest to our readers:

  • Fall in Traditional Reinsurance Pricing Outpaces Decline in ILS Pricing – In an article that is somewhat inconsistent with the ILS reports of some involved in the insurance-linked securities markets, S&P opines that the decline in the price of traditional reinsurance for cat risks is likely to dampen the issuance of ILS as an alternative to traditional reinsurance over the next 12-24 months.
  • The Sluggish Economic Recovery and Emerging Regulatory Changes Are Reshaping the Life Reinsurance Landscape – This article discusses the options of life reinsurers for capital raising and deployment in light of Solvency II, the decline in life reinsurance cessions and limited capital resources.

This post written by Rollie Goss.

POST-DODD-FRANK REGULATORY DEVELOPMENTS

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The implementation of the Dodd-Frank Act (“DFA”) is underway with a flurry of rulemaking and other activity.

NAIC and state actions

Although the DFA did not include any significant requirements with respect to reinsurance collateral requirements, it did include a provision prohibiting states from denying credit for reinsurance if the domiciliary state of the ceding insurer recognizes such credit under certain circumstances. In light of the NAIC’s prior Reinsurance Regulatory Modernization Act (“RRMA”), which is the subject of prior blog entries, this DFA provision, Florida’s existing reinsurance collateral reduction provision (69O-144.007) and the perceived interest of states in moving forward with “individual state-based reinsurance collateral reduction reforms,” the NAIC’s Financial Regulation Standards and Accreditation Committee has made an “informal request” to the Reinsurance Task Force “to consider which key elements of the [NAIC’s RRMA] should be considered in reviewing any individual state initiates, and whether these key elements should be incorporated into the Credit for Reinsurance Model Law and Regulation.” An initial draft recommendation has been exposed for comment, with the comment period expiring September 16, 2010. This document contains many similarities to the Florida regulation, and specifically cites to the Florida regulation. Meanwhile, the New York Insurance Department has published a Notice of Proposed Rulemaking for proposed amendments to New York’s reinsurance collateral requirements. A summary and impact statement for the proposed New York amendment have been published. It appears that rather than promoting uniform collateral reform, the NAIC will be permitting state-by-state variations with some form of guidance.

On another front, at its 2010 Summer Meeting last month, the NAIC’s Executive Committee formed a special task force to consider the issues relating to surplus lines premium taxes raised by the DFA.

Federal actions

As the Office of National Insurance Office and the Financial Stability Oversight Council are being organized, one point of interest for those in the reinsurance and insurance industries is the rulemaking with respect to swaps and other financial products. The principal focal points of those efforts are the SEC and the CFTC. The SEC has issued a press release concerning its comment process and the CFTC and the SEC have published their comment topic lists and schedules. In addition, the CFTC and SEC held a joint swap roundtable.

This post written by Rollie Goss.

SEVENTH CIRCUIT: COURTS MUST DETERMINE WHETHER A CONTRACT EXISTS BEFORE ENTERING STAY

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Recently, the Seventh Circuit issued an opinion in Janiga v. Questar Capital Corp. on the issue of whether the court or an arbitrator is responsible for deciding whether a particular document signed by the parties constitutes a contract and, if so, whether that contract includes an arbitration clause. The Court of Appeals – noting that arbitration itself is a matter of contract – determined that the District Court must decide whether a contract exists before it decides whether to stay an action and order arbitration. The question of enforceability, however, falls squarely on the arbitrator. Applying governing state law on the formation of contracts, the Seventh Circuit then ruled that Janiga had signed a valid contract and thus assented to arbitration. The case was remanded for further proceedings consistent with the opinion. Janiga v. Questar Capital Corp., Case No. 09-2982 (7th Cir. Aug. 2, 2010).

This post written by John Black.

IAIS MID-YEAR REPORT ADDRESSES MACROPRUDENTIAL SURVEILLANCE OF REINSURANCE COMPANIES AND THE REINSURANCE MARKET

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The Global Reinsurance Market Mid-Year Report recently released by the International Association of Insurance Supervisors (“IAIS”) focuses on the extent to which regulators of insurance and reinsurance companies are gathering data and engaging in macroprudential analysis of the reinsurance sector. The report contains three parts: (1) a discussion of what a macroprudential surveillance approach means in this context; (2) examples of such activities in the United States (through the NAIC), India, Europe and globally through the World Bank and the International Monetary Fund; and (3) a “case study” of such surveillance efforts. It is interesting that the fragmentation of regulation in the United States among the states is viewed as beneficial to this analysis, because it illustrates a possible global model in which one entity (the NAIC in the U.S. model) would gather data and provide stress testing on a broad scale across multiple jurisdictional lines. To some, this may overstate the NAIC’s activities in the reinsurance sector. The unspoken assumption is that the IAIS would serve that global role, and the report touts its data gathering activities as a first step along this path.

Highlights from the report:

  • While the meaning of macroprudential surveillance in insurance and reinsurance varies by jurisdiction, such activities are geared towards identifying, assessing and monitoring risks to the financial system. These activities include gathering and analysis of macroeconomic and financial market information, and of how these data interact with each other.
  • The current global financial crisis has highlighted the complexities inherent in capturing and making sense of risks that evolve rapidly in time, and cut across geographical boundaries and financial sectors.
  • Although most supervisory authorities do not have a formalized definition of macroprudential surveillance, nearly all of them carry out some such activities.
  • The two most prevalent macroprudential surveillance activities are insurance market analysis and analysis of the impact of macroeconomic variables on the insurance market. In both instances, the focus tends to be on the analysis of domestic data, with international data analysis receiving comparatively less attention.
  • Under 50% of regulators carry out insurance market-wide stress testing; however, approximately 20% of those who do not stress test their markets have plans in place do so within the next 12 months.
  • Macroprudential surveillance activities appear to assist regulators in: (1) identifying and assessing relevant changes in insurance markets as well as macroeconomic factors affecting these markets; (2) providing early warning signals of emerging risks, and enabling prompt action; (3) providing value-adding information for forward-looking monitoring; and (4) identifying futures issues that may affect the insurance market.
  • There is limited information available on insurance-specific macroprudential surveillance activities at the global level collected and compiled by insurance regulators.

This post written by Rollie Goss.

COURT PUNTS TO ARBITRATOR ON EFFECT OF VOLUNTARY DISMISSAL ON CLAIM AGAINST REINSURER

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A third-party complaint disputing the nature and extent of an obligation to reinsure an insurance company with respect to losses arising from assumed reinsurance risks has been dismissed without prejudice, to allow an arbitrator to decide the scope of a settlement agreement. Through a settlement agreement, the insurance company resolved its dispute with the defendant named in the original complaint. The original complaint was dismissed with prejudice. Thereafter, the insurance company contended that its claims against the third-party defendant reinsurer should be voluntarily dismissed without prejudice to allow arbitration of those parties’ claims. The reinsurer argued the voluntary dismissal should be with prejudice, as the insurance company’s claims in the third-party complaint were derivative of the claims in the original complaint. The court declined to dismiss with prejudice, finding that the question of whether the claims were, in fact, derivative was a question better left for the arbitrator. Eagle Star Insurance Co. v. Highland Insurance Co., Case No. 02-2165 (USDC S.D. Cal. July 22, 2010).

This post written by Brian Perryman.