New York has joined the handful of states that are now accepting applications from non-US reinsurers for recognition as a reciprocal jurisdiction reinsurer under new rules that allow US domestic ceding insurers to receive credit for reinsurance ceded to qualified unauthorized reinsurers without the requirement for the reinsurer to provide collateral.
The new rules implement the 2019 amendments to the National Association of Insurance Commissioners (NAIC) Model Credit for Reinsurance Law and Regulation (Model Law and Regulation) that were adopted to carry out the provisions of the covered agreements between the United States, the European Union and the United Kingdom.
The rules in New York became effective on September 29, 2021, and the New York Department of Services (DFS) has published a checklist and prescribed forms for reinsurers seeking recognition as a reciprocal jurisdiction reinsurer.
As of the date of this Alert, the other states accepting applications are California, Iowa, Maryland, Pennsylvania, South Dakota and Virginia.
State insurance laws governing credit for reinsurance have historically required non-US reinsurers to post 100% collateral in the US for risks reinsured from US ceding insurers. Global reinsurers long complained about these collateral requirements as a protectionist trade barrier, and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) provided a pathway for relief by authorizing the US Treasury Secretary and the US Trade Representative (USTR) to negotiate “covered agreements” with one or more foreign governments on the recognition of prudential measures with respect to the business of insurance or reinsurance, with authority to preempt US state insurance measures that are inconsistent with a covered agreement and result in less-favorable treatment of a non-US insurer under the covered agreement.
On January 13, 2017, the US Treasury Secretary, USTR and European Commission, acting under the authority of Dodd-Frank, announced the successful completion of the US-EU covered agreement involving three areas of prudential insurance oversight: reinsurance, group supervision and exchange of information among supervisors. A nearly identical US-UK covered agreement was negotiated to extend the benefits of the US-EU covered agreement to UK reinsurers doing business in the United States and US reinsurers doing business in the United Kingdom following Brexit.
Broadly, among other things, the covered agreements eliminate requirements in one signatory jurisdiction for qualified reinsurers based in the other signatory jurisdiction to post collateral or have a local presence, either as a requirement for the reinsurance placement or as a condition for receiving credit for reinsurance on the ceding insurer’s financial statements.
NAIC Model Law and Regulation
In 2019, the NAIC adopted amendments to the Model Law and Regulation to conform to the terms of the covered agreements. However, the revisions go beyond mere conforming changes to accommodate future covered agreements between the US and other foreign jurisdictions; they also provide an equivalent elimination of reinsurance collateral for reinsurers domiciled in the United States and in non-US jurisdictions, designated as “qualified jurisdictions,” that meet criteria for mutual recognition and reciprocity that mirror the covered agreements. Specifically, under the 2019 amendments, a “reciprocal jurisdiction” includes:
- All EU member states and the United Kingdom and any other non-US jurisdiction that enters into a covered agreement with respect to credit for reinsurance.
- US states and other US jurisdictions that are accredited by the NAIC.
- Other qualified jurisdictions that are subsequently designated as a reciprocal jurisdiction by the ceding insurer’s domestic state insurance commissioner.
In order to qualify under the Model Law and Regulation as a reciprocal jurisdiction reinsurer that is exempt from a state’s requirement to post collateral, a reinsurer must:
- Be licensed by, and maintain its head office or be domiciled in, a reciprocal jurisdiction.
- Maintain capital and surplus of no less than $250 million.
- Maintain a Solvency Capital Ratio of 100% as determined under the Solvency II Directive (for reinsurers that have their head office in the European Union), 300% Authorized Control Level risk based capital (for US domestic reinsurers) or as designated by the commissioner for reinsurers in other qualified jurisdictions.
- Provide certain commitments to the state insurance regulator on Form RJ-1 that include providing prompt notice in the event of noncompliance 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, upon the request of the commissioner, 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.
- Maintain a practice of prompt payment of claims under a reinsurance agreement, in accordance with specified criteria.
Notably, unlike “certified reinsurers,”1 reciprocal jurisdiction reinsurers are not required to maintain ratings from two rating agencies, and lower-rated reinsurers are not required to provide partial collateral.
Approval process for reciprocal jurisdiction reinsurers
As with certified reinsurers, individual state insurance departments retain ultimate jurisdiction over approvals. To promote uniformity across states, the NAIC has promulgated a uniform application checklist for individual states to use. To streamline the process for reinsurers that wish to be approved in multiple states, the NAIC is instituting a “passporting” process similar to the process it has deployed for certified reinsurers. Under this process, the NAIC Reinsurance Financial Analysis Working Group (ReFAWG) will review information provided by the first state to review the reinsurer’s initial application (known as the lead state) to determine whether to recommend that other states recognize the reinsurer as a reciprocal jurisdiction reinsurer on an expedited basis based on a shortened application in deference to ReFAWG’s approval of the reinsurer for passporting. Draft documents published by the NAIC indicate that the passporting process and timeline for initial applications and renewals will be substantially similar to the process and timeline currently in place for certified reinsurers. Important among these: applications to the lead state must be filed by June 30 of each year, and passporting documents must be submitted to ReFAWG by August 31 in order to be approved for the ensuing calendar year.
New York’s new rules
The new rules in New York closely follow the Model Law and Regulation, and the checklist published by DFS closely tracks the NAIC’s uniform checklist. One important difference, at least for now, is that DFS only lists EU member states, the United Kingdom, and US states and territories as qualified jurisdictions; Bermuda, Switzerland and Japan are not listed, even though they have been approved by the NAIC as qualified jurisdictions.
Timetable for other states
The reinsurance collateral reduction elements of the covered agreements are to be fully implemented by September 22, 2022. The covered agreements require the United States to begin evaluating US state insurance laws and regulations for preemption by March 1, 2021, prioritizing those states with the highest volume of gross ceded reinsurance, and to complete any necessary preemption determinations by September 1, 2022 (these tasks will be performed by the Director of the Federal Insurance Office).
Forty-six US states have passed the 2019 revisions to the Credit for Reinsurance Model Law, and 19 states have adopted the 2019 revisions to the Credit for Reinsurance Model Regulation. We are aware of only a small number of states (California, Iowa, Maryland, New York, Pennsylvania, South Dakota and Virginia) that are currently accepting reciprocal jurisdiction reinsurer applications, although we expect the number of insurance departments accepting applications to rise considerably in the near future.
1 In 2011, before the covered agreement with the European Union, the NAIC adopted amendments to its Credit for Reinsurance Model Law and Regulation (Reinsurance Models) to allow non-US reinsurers with $250 million in capital and ratings from at least two nationally recognized rating agencies domiciled in a qualified jurisdiction to be designated as certified reinsurers that can reinsure US ceding insurers with reduced collateral. The reduced collateral requirements of the revised Reinsurance Models became mandatory for all states as of January 1, 2019, under the NAIC’s accreditation program, and all but three states and the District of Columbia currently process certified reinsurer applications.