The National Association of Insurance Commissioners (NAIC) Reinsurance (E) Task Force has approved proposed revisions to the Credit for Reinsurance Model Law (Model Law) and the Credit for Reinsurance Model Regulation (Model Regulation) to address the reinsurance collateral provisions of the covered agreement between the US and the European Union and the covered agreement between the US and the United Kingdom. The proposed revisions will now be sent to the Financial Condition (E) Committee for approval and then to the NAIC Executive Committee and Plenary for adoption.
For background on the EU/UK covered agreements, their reinsurance collateral provisions and their genesis, see our previous Legal Alert.
The proposed revisions to the Model Law and Model Regulation would eliminate reinsurance collateral requirements for qualified reinsurers that are licensed to write reinsurance by, and have their head office or are domiciled in, a “Reciprocal Jurisdiction.” A “Reciprocal Jurisdiction” is a jurisdiction that meets one of the following:
(1) any non-US jurisdiction that is subject to an in-force covered agreement with the US similar to the EU/UK covered agreements;
(2) any NAIC-accredited US jurisdiction; or
(3) any jurisdiction that does not qualify under (1) or (2) that has been deemed a “qualified jurisdiction” by the state insurance commissioner for purposes of reduced reinsurance collateral requirements and satisfies additional requirements that mirror the mutual recognition and reciprocity provisions in the EU/UK covered agreements.
The Model Regulation requires each commissioner to create and publish a list of Reciprocal Jurisdictions but also calls for the NAIC to develop and publish a list through its committee process. The commissioner is required to include jurisdictions that qualify under (1) and (2) above but retains discretion to make determinations about “qualified jurisdictions” that are not the subject of an in-force covered agreement or an NAIC-accredited jurisdiction. Currently, that would include Bermuda, Switzerland and Japan. A drafting note to the Model Regulation states that it is anticipated that the NAIC will develop a process with respect to Reciprocal Jurisdictions that is similar to the NAIC’s current passporting process for developing and maintaining the NAIC list of “qualified jurisdictions,” provided the process does not conflict with an in-force covered agreement. The NAIC intends to coordinate with the US Department of the Treasury (Treasury) and the US Trade Representative in this process.
The requirements for qualified reinsurers under the proposed revisions to the Model Regulation mirror the requirements for qualified reinsurers under the EU/UK covered agreements. Notably, qualified reinsurers would be required to:
- Maintain minimum capital and surplus of not less than $250 million;
- Maintain a minimum solvency or capital ratio of (i) if domiciled in a Reciprocal Jurisdiction that is subject to a covered agreement, as specified in the covered agreement; (ii) if a US Reciprocal Jurisdiction, a Risk-Based Capital (RBC) ratio of 300% of the authorized control level; and (iii) if a non-covered agreement Reciprocal Jurisdiction, such solvency or capital ratio as the state insurance commissioner determines to be an effective measure of solvency after consultation with the Reciprocal Jurisdiction and considering any recommendations published through the NAIC Committee Process;
- 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; 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 accordance with specified criteria.
As with Reciprocal Jurisdictions, each commissioner is required to create and publish a list of qualified reinsurers. A commissioner may defer to another state’s determination that a reinsurer is qualified, and it is contemplated that a passporting process with NAIC committee review similar to the current process for “certified reinsurers” will apply.
During its May 15 meeting, the Reinsurance Task Force reported that the proposed revisions to the Model Law and Model Regulation are believed to address concerns Treasury raised with respect to a prior draft. Treasury previously expressed concerns that the proposed revisions would grant state insurance regulators discretion that could result in reinsurance collateral requirements that were inconsistent with the EU/UK covered agreements or similar agreements that might be negotiated in the future. Under the proposed revisions that were adopted by the Task Force, state insurance regulators no longer have the discretion to determine whether non-US jurisdictions that have entered into a qualified covered agreement with the US should be recognized as “Reciprocal Jurisdictions,” or whether those jurisdictions are in compliance with their covered agreement.
As adopted by the Task Force, the revised Model Law and Model Regulation eliminate individual state commissioner discretion to disallow credit for reinsurance ceded to reinsurers domiciled in EU member states, the UK or other countries that may enter into covered agreements with the US in the future, so long as the reinsurers meet objective criteria set out in the Model Regulation that mirror criteria for the elimination of collateral set out in the EU/UK covered agreements. The revised Model Law and Model Regulation also give parity to reinsurers domiciled in the US and in “qualified jurisdictions” that meet criteria for mutual recognition and reciprocity that mirror provisions in the EU/UK covered agreements.
Timetable for implementation and next steps
Now that the Reinsurance Task Force has approved the proposed revisions to the Model Law and Model Regulation, they will be sent to the Financial Condition (E) Committee for approval and then to the NAIC Executive Committee and Plenary for ultimate adoption. One issue that the Financial Condition (E) Committee is expected to consider is whether revisions are needed for the language governing what reinsurance agreements qualify for collateral elimination. Section 2(F)(7) of the Model Law currently provides:
Credit may be taken under this subsection only for reinsurance agreements entered into, amended, or renewed on or after the date on which the assuming insurer has satisfied the requirements to assume reinsurance under this subsection, and only with respect to losses incurred and reserves reported on or after the later of (i) the date on which the assuming insurer has met all eligibility requirements pursuant to Section 2F(1) herein; and (ii) the effective date of the new reinsurance agreement, amendment, or renewal.
The European Commission and some interested parties have expressed the view that this language is inconsistent with the EU/UK covered agreements, which provide:
This Agreement shall apply only to reinsurance agreements entered into, amended, or renewed on or after the date on which a measure that reduces collateral pursuant to this Article takes effect, and only with respect to losses incurred and reserves reported from and after the later of (i) the date of the measure; or (ii) the effective date of such new reinsurance agreement, amendment, or renewal.
The language of the proposed revisions is focused on the date the reinsurer satisfies the requirements for collateral elimination, while the language of the covered agreements is focused on the date the statute authorizing collateral elimination takes effect (relevant language in both provisions is in bold italics above). The European Commission has expressed some concern that the language currently proposed could grant state insurance regulators discretion to determine whether a reinsurer domiciled in a covered agreement Reciprocal Jurisdiction qualifies for collateral elimination.
The Financial Condition (E) Committee’s next meeting is scheduled for Tuesday, May 28, 2019, at 3:30 p.m. ET/2:30 p.m. CT. If the proposed revisions to the Model Law and Model Regulation are approved during this meeting, it is expected that the NAIC Executive Committee and Plenary will adopt them sometime in June.