NAIC Task Force Advances Credit for Reinsurance Reforms in Response to Covered Agreements

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On a May 15 conference call, the Reinsurance Task Force of the National Association of Insurance Commissioners (NAIC) advanced model legislation on reciprocal treatment for reinsurers as between the United States, on the one hand, and the EU and the U.K., on the other.

The proposals amend the NAIC’s “credit for reinsurance” model statute and regulation, which govern the circumstances under which a U.S.-based insurer can record, as an asset on its balance sheet, reinsurance protection obtained from another carrier. The NAIC has been in the process of amending these rules to accommodate the 2017 “covered agreement” between the United States and the EU and the analogous 2018 pact between the United States and the U.K. (to apply if and when Brexit occurs). These agreements, generally, require each jurisdiction to treat a reinsurer from the other jurisdiction as such other jurisdiction would treat a reinsurer from its own jurisdiction, assuming conditions are met. In other words, the covered agreements impose uniform rules as to the availability of credit for reinsurance across these jurisdictions, and the NAIC’s model rules are being amended to conform to these important international agreements.

Under the model law amendments advanced on May 15, balance sheet credit would be available to a ceding company domiciled in the adopting U.S. state when each of the conditions set forth below is met. Such credit may be taken only for reinsurance agreements entered into or renewed on or after the date on which the assuming insurer has satisfied these requirements, and only with respect to losses incurred and reserves reported on or after the later of (i) the date on which the reinsurer (referred to in the model rules as the “assuming insurer”) has met all eligibility requirements and (ii) the effective date of the new reinsurance agreement or renewal.

All task force members voted in favor other than New York and Indiana, each of which abstained. The proposals were approved by the task force subject to technical amendments on two points, one concerning the state insurance commissioner’s published list of qualifying reinsurers and other concerning the effective date of the amendments.

Following the May 15 action, the proposed legislation and regulation will be put before the task force’s parent body, the NAIC’s Financial Condition Committee, and, if approved by that Committee, will thereupon be reported out to the NAIC’s Executive Committee and Plenary for final approval.

The conditions for credit under the proposals are all of the following:

  • The assuming insurer must have its head office or be domiciled in, as applicable, and be licensed in a Reciprocal Jurisdiction. A “Reciprocal Jurisdiction” includes, among other things, the EU and the U.K., which are subject to covered agreements with the United States.
  • The assuming insurer must maintain minimum capital and surplus calculated according to the methodology of its domiciliary jurisdiction, in an amount to be set forth in regulation.
  • The assuming insurer must maintain a minimum solvency or capital ratio, to be set forth in regulation.
  • The assuming insurer must provide adequate assurance to the state insurance commissioner that it
    • Will give notice if it falls below those capital and solvency thresholds.
    • Submits to the jurisdiction of the state’s courts and appoints the insurance commissioner as agent for service of process.
    • Consents to pay all enforceable judgments.
    • Will post security in an amount equal to 100% of its reinsurance liabilities if it resists a judgment.
    • Is not participating in a solvent scheme of arrangement.
  • The assuming insurer must provide, if requested by the commissioner, certain documentation as specified by the commissioner in regulation.
  • The assuming insurer must maintain a practice of “prompt payment of claims.”
  • The assuming insurer’s supervisory authority must confirm to the state insurance commissioner on an annual basis that the assuming insurer complies with the solvency requirements indicated above.

The model statute requires the state insurance commissioner to publish a list of Reciprocal Jurisdictions and notes that a list of Reciprocal Jurisdictions is published by the NAIC. The commissioner is required also to publish a list of assuming insurers that have satisfied the conditions described above.

The model regulation as amended on May 15 provides additional guidance on when credit is available, setting out the following conditions:

  • The assuming insurer must be licensed to transact reinsurance by, and have its head office or be domiciled in, a Reciprocal Jurisdiction.
  • The assuming insurer must maintain at least $250 million of capital and surplus or its equivalent.
  • The assuming insurer, if domiciled in the EU or the U.K., must maintain a minimum solvency or capital ratio specified in the applicable covered agreement (other capital ratios apply in the case of reinsurers from jurisdictions qualifying under the regulation but not party to a covered agreement, such as so-called “accredited” and “qualified” jurisdictions).
  • The assuming insurer must file a “Form RJ-1” in which it agrees to the following:
    • It will notify the state insurance department if it falls below the financial thresholds described above.
    • It consents to the state’s jurisdiction and the appointment of the insurance regulator as agent for service of process.
    • It consents to pay all final judgments.
    • Each reinsurance agreement must include a provision requiring the assuming insurer to provide security in an amount equal to 100 percent of its liabilities attributable to the agreement if the assuming insurer resists enforcement of a final judgment.
    • The assuming insurer confirms that it is not presently participating in any solvent scheme of arrangement.
    • The assuming insurer agrees in writing to meet the applicable information filing requirements as set forth in the next bullet point.
  • The assuming insurer must submit to the state insurance regulator, if requested:
    • For the two years preceding entry into the reinsurance agreement and on an annual basis thereafter, its annual audited financial statements, including the external audit report.
    • For the two years preceding entry into the reinsurance agreement, the solvency and financial condition report or actuarial opinion, if filed with the assuming insurer’s supervisor.
    • Prior to entry into the reinsurance agreement and not more than semiannually thereafter, an updated list of all disputed and overdue reinsurance claims outstanding for 90 days or more on all reinsurance provided to U.S. cedents.
    • Prior to entry into the reinsurance agreement and not more than semiannually thereafter, information regarding the reinsurer’s assumed reinsurance by ceding insurer, ceded reinsurance by the assuming insurer and reinsurance recoverable on paid and unpaid losses.
  • The assuming insurer must maintain a practice of prompt payment of claims under reinsurance agreements. A lack of prompt payment is deemed to occur if any of the following is present:
    • More than 15 percent of the reinsurance recoverables from the assuming insurer are overdue and in dispute.
    • More than 15 percent of the assuming insurer’s ceding insurers or reinsurers have overdue reinsurance recoverable on paid losses of 90 days or more which are not in dispute and which exceed for each ceding insurer $100,000, or as otherwise specified in a covered agreement.
    • The aggregate amount of reinsurance recoverable on paid losses which are not in dispute, but are overdue by 90 days or more, exceeds $50 million, or as otherwise specified in a covered agreement.
  • The assuming insurer’s supervisory authority must confirm to the commissioner on an annual basis that the assuming insurer complies with the capital and surplus and solvency ratio requirements set forth above in the second and third bullets of this section.

These proposals have been advancing through the NAIC legislative process, which features widespread consultation with insurers, reinsurers and other stakeholders. The states have until the September 2022 effective date of the covered agreements to conform their laws to the reciprocity requirements imposed by the agreements; the NAIC model amendments are intended to enable this result.

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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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