At the 2020 National Association of Insurance Commissioners (“NAIC”) Summer National Meeting, a senior regulator with the Missouri Department of Insurance observed that as of July 7, 2020 only eleven U.S. jurisdictions had adopted 2019 amendments to the Credit for Reinsurance Model Law (#785) and the Credit for Reinsurance Model Regulation (#786) (as amended, the “Credit for Reinsurance Models”), but seventeen states were still evaluating the NAIC’s positions. The Credit for Reinsurance Models set forth specific requirements that must be satisfied before statutory financial statement credit for reinsurance provided by an unauthorized reinsurer will be allowed for insurance business ceded by an insurer in a reinsurance transaction. The 2019 revisions were adopted by the NAIC to make the Credit for Reinsurance Models consistent with “covered agreements” previously entered into by the U.S. with the United Kingdom (UK) on December 19, 2018 and the European Union (EU) on September 22, 2017 (a “Covered Agreement”) with respect to reinsurance collateral requirements (as explained below).
The Missouri regulator also indicated that the adoption process for the 2019 revisions has slowed given COVID-19 and the fact that state legislatures have been focused on the pandemic. Further, an industry group, the Reinsurance Association of America (RAA) suggested that although state legislators have completed a significant amount of work on consideration of the Credit for Reinsurance Models, legislative activity in certain states ceased entirely in early 2020 as a result of the pandemic.
Despite these challenges, Missouri noted that the deadline for state adoption of the Credit for Reinsurance Models remains September 1, 2022 (in the view of some a short deadline in the regulatory community), which is the date on which the 2019 revisions become required “accreditation standards” for state insurance departments and when the Director of the Federal Insurance Office (FIO) is required to complete certain “preemption determinations” with respect to state law and regulation on reinsurance.
The NAIC Accreditation Program was established to develop and maintain standards to promote effective insurance company financial solvency regulation. The purpose of the program is essentially to pressure state insurance departments to meet baseline standards of solvency regulation, particularly with respect to regulation of insurers operating in multiple jurisdictions. NAIC accreditation effectively allows non-domestic states to rely on the accredited domestic regulator to provide a minimum level of effective financial regulatory oversight. Specifically, accreditation is a certification given to a state insurance department once it has demonstrated that it has met and continues to meet various legal, financial and organizational standards. The failure to adopt an accreditation standard would result in a state insurance department losing its accreditation. Consequently, the adoption of the 2019 revisions by the NAIC as accreditation standards would give additional impetus to state legislatures to adopt the Credit for Reinsurance Models prior to their September 1, 2022 effective date.
Last fall, the NAIC’s Reinsurance (E) Task Force submitted a referral to its Financial Regulation Standards and Accreditation (F) Committee requesting that implementation of the 2019 revisions to the Credit for Reinsurance Models be adopted as an accreditation standard in an expedited manner.
In support of its position, the Reinsurance (E) Task Force observed in its referral that the Dodd-Frank Wall Street Reform and Consumer Protection Act had provided that a state insurance law or regulation will be preempted to the extent that the Director of the FIO “determines” that such law or regulation (a) is inconsistent with a Covered Agreement and (b) results in less favorable treatment of a non-US insurer domiciled in a country subject to a covered agreement than a US insurer domiciled, licensed or otherwise admitted in such state. A “Covered Agreement” is an international agreement that relates to the recognition of prudential measures with respect to the business of insurance or reinsurance that achieves a level of protection for insurance or reinsurance consumers that is substantially equivalent to the level of protection achieved under state insurance or reinsurance regulation. Specifically, a Covered Agreement with the EU would eliminate reinsurance collateral and local presence requirements for EU reinsurers that satisfy, inter alia, a $250 million minimum capital and surplus requirement and certain financial reporting requirements. U.S. reinsurers, on the other hand, would not be required to post collateral in an EU jurisdiction or establish and maintain a local presence in the EU to conduct business in the EU so long as they maintain minimum capital and surplus equivalent to 226 million euros and a risk-based capital (RBC) of 300% of authorized control level.
In addition, the Credit for Reinsurance Models would also eliminate reinsurance collateral requirements for certain reinsurers domiciled in reciprocal jurisdictions, which include Bermuda, Japan and Switzerland. This means that reinsurers domiciled in these jurisdictions would receive the same benefits that are afforded to reinsurers domiciled in the EU and UK with respect to reinsurance collateral requirements pursuant to Covered Agreements.
On March 1, 2021 (i.e., forty-two months after the execution of a Covered Agreement), the FIO will begin making determinations as to whether state reinsurance laws are inconsistent with the Covered Agreement and should be preempted by federal law. The FIO is required to prioritize those states with the highest volume of gross ceded reinsurance. The FIO is required to complete such determinations by September 1, 2022 (i.e., sixty (60) months after the execution of the Covered Agreement), which is also the effective date of the new accreditation standards. As a result, the Reinsurance (E) Task Force has urged states to adopt the 2019 revisions in a timely manner in order to avoid potential preemption.
The new regulatory landscape should facilitate less onerous structuring of reinsurance between insurers and reinsurers throughout the U.S. and their counterparts in the EU, UK and reciprocal jurisdictions.