NAIC’s work continues on proposed changes to credit for reinsurance model law and regulation to address Covered Agreements

Eversheds Sutherland (US) LLP

Eversheds Sutherland (US) LLP

Throughout 2018, the National Association of Insurance Commissioners (NAIC) Reinsurance (E) Task Force has been working on 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 covered agreement between the United States (US) and the European Union (EU) (and more recently, the covered agreement between the US and the United Kingdom (UK)).

The proposed revisions were expected to be adopted by the NAIC Executive Committee and Plenary before year-end, but adoption has been deferred until the NAIC can make further changes to address concerns raised by the US Department of the Treasury (Treasury). It has been reported that Treasury’s concerns relate to some inconsistencies between the proposed revisions to the Reinsurance Models and the EU/UK covered agreements, including provisions that grant state insurance regulators discretion that could result in reinsurance collateral requirements that are inconsistent with the EU/UK covered agreements or similar agreements that might be negotiated in the future.

For background on the EU/UK covered agreements, 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 are licensed to write reinsurance by, and have their head office or are domiciled in, either:

(i) any non-US jurisdiction that has entered into an agreement with the US similar to the EU/UK covered agreements that the state insurance commissioner (1) has recognized as a “Reciprocal Jurisdiction”, and (2) deems to be in compliance with all material terms of the agreement, including with respect to the reciprocal treatment of US insurers and reinsurers, 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 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. The NAIC intends to coordinate with 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 EU/UK covered agreements 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) provide reciprocal treatment for US-domiciled assuming insurers (as the EU/UK covered agreement does), (ii) recognize the US state regulatory system, including its approach to group supervision and group capital, (iii) agree to cooperate and share information with the state insurance commissioner, and (iv) “such additional factors as may be considered in the discretion of the commissioner.”

The requirements for qualified reinsurers under the proposed revisions to the Credit for Reinsurance Models mirror the requirements for qualified reinsurers under the EU/UK covered agreements. 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), that 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 be eliminated for only those reinsurance agreements entered into, amended, or renewed on or after the date the commissioner has determined that the assuming insurer is eligible for credit, and may not be taken for reinsurance of losses incurred or reserves reported before that date.

As noted above, the NAIC was expected to adopt the proposed revisions to the Credit for Reinsurance Models before year-end, but adoption has been deferred until the NAIC can make further changes to address concerns raised by Treasury. It is unclear what the new timeline for adoption will be. Any further changes may require review by the Reinsurance Task Force and Financial Condition (E) Committee and another public exposure period.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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