On June 21, 2018, the National Association of Insurance Commissioners (NAIC) Reinsurance (E) Task Force exposed proposed revisions to the Credit for Reinsurance Model Law and the Credit for Reinsurance Model Regulation (Credit for Reinsurance Models) to address the reinsurance collateral provisions of the Bilateral Agreement Between the United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance (Covered Agreement). The public comment period ends July 23, 2018. For background on the Covered Agreement, its reinsurance collateral provisions and its genesis, see this Eversheds Sutherland Legal Alert.
The proposed revisions to the Credit for Reinsurance Models would eliminate reinsurance collateral requirements for qualified reinsurers that have their head office or are domiciled in either:
(i) an EU-member country (or any other non-US jurisdiction that enters into an agreement similar to the Covered Agreement with respect to credit for reinsurance) that is recognized as a “Reciprocal Jurisdiction” by the state insurance commissioner, or
(ii) any other jurisdiction deemed qualified by the state insurance commissioner to be a Reciprocal Jurisdiction (non-covered agreement Reciprocal Jurisdictions).
As currently proposed, the NAIC would maintain a list of Reciprocal Jurisdictions that state insurance commissioners could defer to in their recognition of Reciprocal Jurisdictions. It is contemplated that the NAIC will develop criteria and a process with respect to Reciprocal Jurisdictions that is similar to the NAIC’s current process for developing and maintaining the NAIC list of “qualified jurisdictions” for purposes of reduced reinsurance collateral requirements, and the NAIC intends to coordinate with the US Department of Treasury and the US Trade Representative in this process. Notwithstanding the NAIC’s list, as currently proposed, state insurance commissioners would have the ultimate authority to determine which jurisdictions are deemed qualified to be Reciprocal Jurisdictions, and the Covered Agreement or another agreement or treaty with respect to a jurisdiction would not automatically make such jurisdiction a Reciprocal Jurisdiction.
With respect to non-covered agreement Reciprocal Jurisdictions, the proposed revisions to the Credit for Reinsurance Model Regulation provide that the jurisdiction must: (i) be a “qualified jurisdiction” for reduced reinsurance collateral purposes (which currently includes the non-EU jurisdictions of Bermuda, Japan, Switzerland and the United Kingdom (post-Brexit)), (ii) comply with specified requirements that ensure reciprocity for US-domiciled insurers conducting business in those jurisdictions (as the Covered Agreement does with respect to the EU), and (iii) satisfy “additional factors as may be considered in the discretion of the commissioner.” For example, to qualify as a non-covered agreement Reciprocal Jurisdiction, a jurisdiction must not require US-domiciled reinsurers to maintain a local presence in the jurisdiction as a condition to entering into a reinsurance agreement, and must “provide through statute [or] regulation … that insurers and insurance groups that are domiciled or maintain their headquarters in this state or another jurisdiction accredited by the NAIC shall be subject only to worldwide prudential insurance group supervision . . . by the commissioner or the commissioner of the domiciliary state and will not be subject to group supervision at the level of the worldwide parent undertaking of the insurance or reinsurance group by the qualified jurisdiction.”
The requirements for qualified reinsurers under the proposed revisions to the Credit for Reinsurance Models mirror the requirements for qualified reinsurers under the Covered Agreement. Notably, as currently proposed, qualified reinsurers would be required to:
Maintain minimum capital and surplus of not less than $250 million;
Maintain a minimum solvency or capital ratio, as applicable, of 100% of the solvency capital requirement (SCR) or a risk-based capital (RBC) ratio of 300% of the authorized control level;
Provide certain commitments to the state insurance commissioner on a new certification form (Form RJ-1), which include providing prompt notice to the state insurance commissioner in the event of non-compliance with the minimum capital and surplus and minimum solvency requirements specified above, consent to service of process, including specified collateral funding obligations in the reinsurer’s reinsurance agreements and other assurances;
Provide annual audited financial statements and certain other financial information for the two years preceding entry into the reinsurance agreement, file annual audited financial statements and regularly report on the reinsurer’s reinsurance program; and
Maintain a practice of prompt payment of claims under reinsurance agreements.
In addition, the reinsurer must “satisfy any other requirements for recognition deemed relevant by the commissioner.” However, to the extent that any information or agreement required by the commissioner under this authority is not required by the Covered Agreement or other treaty or international agreement, then the reinsurer’s failure to satisfy such requirement will not prevent the ceding insurer from taking credit for reinsurance ceded to such reinsurer.
As currently proposed, each state insurance commissioner would maintain a list of qualified assuming reinsurers that have been deemed to satisfy the applicable requirements for collateral elimination, and if an NAIC-accredited jurisdiction determined that a reinsurer was qualified, other states could (but need not) defer to that determination. This is similar to the certified reinsurer passporting process for reduced reinsurance collateral under the current Credit for Reinsurance Models (although it is unclear whether the NAIC’s Reinsurance Financial Analysis Working Group (Re-FAWG) would have any role in this new process).
Under the proposed revisions to the Credit for Reinsurance Models, reinsurance collateral requirements would only be eliminated for reinsurance agreements entered into, amended, or renewed on or after the date the revised Credit for Reinsurance Models are adopted into law, and only with respect to losses incurred and reserves reported from and after the later of (i) the date the revisions are adopted into law, or (ii) the effective date of such new reinsurance agreement, amendment or renewal.
The NAIC is targeting adoption of the proposed revisions to the Credit for Reinsurance Models by year-end in an effort to avoid potential federal preemption of state credit for reinsurance rules that have not been conformed to the Covered Agreement by September 2022. As a result, the proposed revisions to the Credit for Reinsurance Models are likely to generate significant attention at the NAIC’s 2018 Summer National Meeting in August.