To: Government Relations Leadership Council
From: Commissioner John Oxendine, Chair – Reinsurance Task Force
Date: December 20, 2007
Re: Survey of regulators on the reinsurance section of the Nonadmitted and Reinsurance Reform Act 2007
At the NAIC 2007 Winter National Meeting, the Government Relations Leadership Council asked that the Surplus Lines Task Force and the Reinsurance Task Force provide input and report on the reinsurance section of the Nonadmitted and Reinsurance Reform Act of 2007. The Council has asked that this report be completed no later than December 20, 2007.
Background
During the last several years, the NAIC and individual member jurisdictions have provided technical comments on the language, but the industry weighed in with almost universal support of the bill. Stand-alone-legislation was not introduced until June 19, 2006 and was presented to federal legislators as “low-hanging fruit,” or a compromise between OFC and state-based insurance modernization (first introduced as a title of SMART).
Supported by virtually every industry group, the bill garnered broad-based bipartisan support and passed the House of Representatives 417-0 during the 109th Congress. It was not considered in the Senate during 2006. Reintroduced this Congress, the bill again passed unanimously in the House on a voice vote and there is some pressure for the Senate to attempt to advance this legislation in the future.
NAIC staff sent a survey to regulators including Commissioners, chief financial examiners, chief financial regulators and chief financial analysts on the provisions contained within the reinsurance section of the bill in order to get feedback to send to the Government Relations Leadership Council for their response to Congress.
Twenty-six regulators responded. The majority of regulators consider that to the extent that HR 1065/S 929 enhances reinsurance regulatory modernization efforts, or could be reasonably modified to enhance these efforts, the NAIC could consider supporting the reinsurance aspect of the bill with specific modifications.
The responses are being forwarded to the Government Relations Leadership Council in order to respond to Congressional inquiries about the bill. Please contact Bryan Fuller, NAIC staff, at or at (816) 783-8139 if you require further assistance.
Survey Results
1. In HR 1065/S 929, credit for reinsurance is governed only by the ceding insurance company’s domiciliary state and the laws of the ceding company’s domiciliary stat apply to a reinsurance contract. Please indicate the level of agreement your state has with this aspect of the bill:
Response / Number of response / Percentage of responsesStrongly agree with / 8 / 31 %
Agree with / 7 / 27 %
Moderately agree with / 3 / 12 %
Moderately disagree with / 1 / 4 %
Disagree with / 4 / 15 %
Strongly disagree with / 3 / 12 %
Total / 26 / 100%*
*Numbers may not equal 100 due to rounding.
2. In HR 1065/S 929, the reinsurer’s solvency shall only be governed by the reinsurer’s domiciliary state. Please indicate the level of agreement your state has with this aspect of the bill:
Response / Number of response / Percentage of responsesStrongly agree with / 7 / 29 %
Agree with / 12 / 50 %
Moderately agree with / 0 / 0 %
Moderately disagree with / 0 / 0 %
Disagree with / 2 / 8 %
Strongly disagree with / 3 / 13 %
Total / 24 / 100%
3. HR 1065/S 929 prohibits the assuming insurer’s regulator from reviewing, suspending, modifying, or voiding reinsurance transactions. Please indicate the level of agreement your state has with this aspect of the bill:
Response / Number of response / Percentage of responsesStrongly agree with / 1 / 4 %
Agree with / 2 / 8 %
Moderately agree with / 5 / 21 %
Moderately disagree with / 4 / 17 %
Disagree with / 5 / 21 %
Strongly disagree with / 7 / 29 %
Total / 24 / 100%
4. Do U.S. insurance regulators consider the following to be important considerations for the host state regulator of the assuming insurer:
a. The authority to regulate transactions such as assumption reinsurance and bulk reinsurance that directly might impact stakeholders in the assuming reinsurance entity?
Response / Number of response / Percentage of responsesYes / 20 / 87 %
No / 3 / 13 %
Total / 23 / 100%
If so, please provide comments concerning constructive suggestions to address Question 4a within the bill?
All state insurance departments have an obligation to protect the interests of policyholders located in their state.
We support an approach & amended language for Sect 201 providing both the ceding insurer’s and reinsurer’s domiciliary states with authority to regulate the reinsurance contract.
We would propose adding language to §203(3), the definition of “reinsurance” clarifying that reinsurance does not include a transaction that abrogates or alters the obligations of the ceding insurer to its insured.
Note: “Host state” is not a term used in the legislation and is not defined in the survey. If “host state” means the reinsurer’s primary regulator, it should regulate all significant reinsurance transactions (e.g., bulk reinsurance) for solvency concerns. If “host state” means a state in which the reinsurer is licensed, it should retain the authority to regulate all significant reinsurance transactions of the reinsurer because failure of the reinsurer may adversely impact ceding insurers writing business in the host state.
Deletion of Section 201(b)(4) would permit states to continue to regulate such transactions if they presently do so.
A domestic insurer shall notify the superintendent within 30 days after assuming through an assumption reinsurance or bulk reinsurance more than 20% of the assuming insurer’s gross written premium in the prior calendar year, or after it has determined that the reinsurance assumed is likely to exceed this limit. The notification shall demonstrate that the exposure assumed is safely managed by the domestic ceding insurer.
Comment: Abusive inter-affiliate transactions can come in forms, including reinsurance contracts.
Comments: SSAP 61 states regulatory approval of assumption reinsurance agreements is usually required. Regulators may want authority to review bulk transactions affecting assuming company stakeholders, similar to a new line of business. This also applies then to novations. Section 202 of HR 1065 regulates reinsurer solvency. This section can be expanded to specifically include assumption reinsurance and permitted the domestic regulator to review those contracts.
SEC. 201. REGULATION OF CREDIT FOR REINSURANCE AND REINSURANCE AGREEMENTS.
(a) Credit for Reinsurance- If the State of domicile of a ceding insurer is an NAIC-accredited State, or has financial solvency requirements substantially similar to the requirements necessary for NAIC accreditation including, but not limited to, rules for risk transfer and risk-based capital, and recognizes credit for reinsurance for the insurer's ceded risk, then no other State may deny such credit for reinsurance; and provided that the books, accounts, and records of each party will be so maintained as to clearly and accurately disclose the precise nature and details of the transactions.
b. Consistent applicable uniformity requirements on assuming reinsurers?
Response / Number of response / Percentage of responsesYes / 20 / 91 %
No / 2 / 9 %
Total / 22 / 100%
If so, please provide comments concerning constructive suggestions to address Question 4b within the bill?
Yes - If the uniform requirements are strong solvency regulation.
Again, not entirely clear what this means. If it means that it is important to allow states to impose their own unique credit-for-reinsurance requirements for their domestic ceding insurers (as long as they are nondiscriminatory), we are not inclined to be supportive.
It is unlikely that uniform requirements could be agreed upon in time to include in this legislation. The Reinsurance Task Force should propose minimum requirements to determine whether quick consensus is possible.
Prompt payment standards should be established for all reinsurers with such incorporated in a uniform set of documentation requirements for all contracts of reinsurance. Additional features for such standards could include posting of collateral in the event a claims dispute develops.
SEC. 202. REGULATION OF REINSURER SOLVENCY.
(a) Domiciliary State Regulation- If the State of domicile of a reinsurer is an NAIC-accredited State or has financial solvency requirements substantially similar to the requirements necessary for NAIC accreditation, such State shall be solely responsible for regulating the financial solvency of the reinsurer provided that;
(1) STATUTORY ACCOUNTING REQUIREMENT-The reinsurer shall be solvent as determined in accordance with statutory accounting principles consistently applied including rules for risk transfer.
(2) BOOKS AND RECORDS The books, accounts, and records of each party will be so maintained as to clearly and accurately disclose the precise nature and details of the transactions;
(b) Nondomiciliary States-
(1) LIMITATION ON FINANCIAL INFORMATION REQUIREMENTS- If the State of domicile of a reinsurer is an NAIC-accredited State or has financial solvency requirements substantially similar to the requirements necessary for NAIC accreditation, no other State may require the reinsurer to provide any additional financial information other than the information the reinsurer is required to file with its domiciliary State.
(2) RECEIPT OF INFORMATION- No provision of this section shall be construed as preventing or prohibiting a State that is not the State of domicile of a reinsurer from receiving a copy of any financial statement filed with its domiciliary State.
(3) However, any State may require a reinsurer to:
(A) comply with the unfair claim settlement practices law of the State;
(B) submit to an examination by the State insurance commissioners in any State in which the reinsurer is doing business to determine the reinsurer's financial condition, if –
(i) the commissioner of the jurisdiction in which the reinsurer is chartered has not begun or has refused to initiate an examination of the reinsurer; and
(ii) any such examination shall be coordinated to avoid unjustified duplication and unjustified repetition;
(C) comply with a lawful order issued -
(1) in a delinquency proceeding commenced by the State insurance commissioner if there has been
(i) a finding of financial impairment; or
(ii) in a voluntary dissolution proceeding;
(D) comply with an injunction issued by a court of competent jurisdiction, upon a petition by the State insurance commissioner alleging that the reinsurer is in hazardous financial condition or is financially impaired.
(c) Compliance with federal court orders-- Any district court of the United States may issue an order enjoining a reinsurer from soliciting or selling reinsurance, or operating, in any State (or in all States) or in any territory or possession of the United States upon a finding of such court that such reinsurer is in hazardous financial condition. Such order shall be binding on such reinsurer, its officers, agents, and employees, and on any other person acting in active concert with any such officer, agent, or employee, if such other person has actual notice of such order.
c. Scenarios, such as cut-through arrangements, where the state where the reinsured business is being written may have a legitimate regulatory interest?
Response / Number of response / Percentage of responsesYes / 15 / 68 %
No / 7 / 32 %
Total / 22 / 100%
If so, please provide comments concerning constructive suggestions to address Question 4c within the bill?
It is unlikely that uniform requirements could be agreed upon in time to include in this legislation. The Reinsurance Task Force should propose minimum requirements to determine whether quick consensus is possible.
We propose amending §201(b)(2), to saving “laws regulating the rights of the insured in the State in which the underlying insurance policy was issued, if the insured has explicitly been made a beneficiary of the reinsurance contract” from preemption.
Need more detail as to what the definition of “legitimate regulatory interest” is. We support this concept as it pertains to such areas as solvency.
Cut through arrangements do, at times, subject claimants of insolvent companies to further difficulties in dealing with a new set of insuring entities. Such features also compromise the receiver’s ability to marshal assets of the insurer in keeping with the priority schemes set forth under statute. Cut through arrangements should be rare events and subject to regulatory approval by the cedant’s domiciliary regulator.
These provisions should be treated separately from standard reinsurance agreements. The domestic regulator of the reinsurer must have the right to implement their state statutes and regulations as they may be significantly different state to state. Suggested changes to the bill: Nothing in the Act shall effect statutes concerning assumption/bulk reinsurance.
SEC. 201. REGULATION OF CREDIT FOR REINSURANCE AND REINSURANCE AGREEMENTS.
(a) Credit for Reinsurance- If the State of domicile of a ceding insurer is an NAIC-accredited State, or has financial solvency requirements substantially similar to the requirements necessary for NAIC accreditation including, but not limited to, rules for risk transfer and risk-based capital, and recognizes credit for reinsurance for the insurer's ceded risk, then no other State may deny such credit for reinsurance; and provided that the books, accounts, and records of each party will be so maintained as to clearly and accurately disclose the precise nature and details of the transactions.(b) Additional Preemption of Extraterritorial Application of State Law- In addition to the application of subsection (a), all laws, regulations, provisions, or other actions of a State that is not the domiciliary State of the ceding insurer, except those with respect to taxes and assessments on insurance companies or insurance income, are preempted to the extent that they--
(1) restrict or eliminate the rights of the ceding insurer or the assuming insurer to resolve disputes pursuant to contractual arbitration to the extent such contractual provision is not inconsistent with the provisions of title 9, United States Code;
(2) require that a certain State's law shall govern the reinsurance contract, disputes arising from the reinsurance contract, or requirements of the reinsurance contract;
(3) attempt to enforce a reinsurance contract on terms different than those set forth in the reinsurance contract, to the extent that the terms are not inconsistent with this title; or
(4) otherwise apply the laws of the State to reinsurance agreements of ceding insurers not domiciled in that State. Except, however, no credit shall be allowed, as an admitted asset or deduction from liability, to any ceding insurer for reinsurance placed with a reinsurer qualified subsection (a), unless the reinsurance contract provides, in substance, that in the event of the insolvency of the ceding insurer, the reinsurance shall be payable under a contract reinsured by the assuming insurer on the basis of reported claims allowed by the liquidation court, without diminution because of the insolvency of the ceding insurer. The payments shall be made directly to the ceding insurer or to its domiciliary liquidator except in either of the following instances:
(i) Where the contract or other written agreement specifically provides another payee of the reinsurance in the event of the insolvency of the ceding insurer.
(ii) Where the assuming insurer, with the consent of the direct insured, has assumed the policy obligations of the ceding insurer as direct obligations of the assuming insurer to the payees under the policies and in substitution for the obligations of the ceding insurer to the payees.
(5) Notwithstanding subsection (b) (4), in the event that a life and health insurance guaranty association has made the election to succeed to the rights and obligations of the insolvent insurer under the contract of reinsurance, the reinsurer's liability to pay covered reinsured claims shall continue under the contract of reinsurance subject to the payment to the reinsurer of the reinsurance premiums for the coverage. Payment for the reinsured claims shall only be made by the reinsurer pursuant to the direction of the guaranty association or its designated successor. Any payment made at the direction of the guaranty association or its designated successor by the reinsurer shall discharge the reinsurer of all further liability to any other party for the claim payment.
5. Do U.S. insurance regulators consider the following to be important considerations for the host state regulator of the assuming insurer: