key legislative and regulatory developments concerning reinsurance: 2015 and beyond arias us fall...

Key Legislative and Regulatory Developments Concerning

Reinsurance: 2015 and Beyond

ARIAS US Fall Conference – November 13, 2015

Presenters:• Robert A. Whitney, Principal, Sparhawk Advisors• Daniel Schelp, Managing Counsel, National Association ofInsurance Commissioners• Elizabeth Kelleher Dwyer, Esq., General Counsel, Rhode Island Department of Business Regulation – Insurance Division• Robert Alan Wake, General Counsel, Maine Bureau of Insurance• Tracey Laws, Senior Vice-President and General Counsel, Reinsurance Association of America

Key Legislative and Regulatory Developments 2

Robert A. Whitney, Sparhawk Advisors

“Introduction to the Key Legislative and

Regulatory Issues”


• The insurance industry is now global in scope, which insurance and reinsurance companies operating all over the world.

• The greatest concern for regulators in the United States has always

been insurer insolvency. Even after the recent recession, however, insurer insolvencies have been negligible. Other than the well-reported case of AIG accepting funds from the Troubled Asset Relief Program (or “TARP”) only two other troubled insurers - Allstate and Lincoln National - ultimately received any relief funds whatsoever.

• On the whole, the financial condition of the world-wide insurance and

reinsurance industry has proved to be strong and resilient, and at no point did any insurance activity result in any significant impact to the reinsurance market, let alone the larger economy.


• Nevertheless, there have been sustained calls for reform of U.S. insurance and reinsurance regulation. Much of the complaints have centered on the fact that the insurance sector is alone among financial services in being subject primarily to a state-based regulatory system. • Under such a system, it is presumed that that efficiency, fairness,

economic growth, and transparency have not been maximized as they could have been under a single, national system of regulation. • Also, the complainants point to other developed countries in the

world that have national insurance regulatory frameworks in place, and many – such as those in the European Union (“EU”) - have moved to a single regulatory paradigm across national boundaries.


• The primary goal of reinsurance regulation is to ensure that reinsurers are able to meet their obligations for losses paid by ceding companies. Like a primary insurer, a reinsurer licensed in a state is subject to that state’s solvency requirements. • These requirements (e.g., minimum capital levels) vary among the states. However, unlike a primary insurer, a reinsurer does not have to be licensed in each state in which it operates.


• An individual state is typically unable to directly impose its solvency standards on reinsurers in other states or countries. As such, each state is able to focus only on the regulation of those ceding insurers and reinsurers within its own jurisdiction.• In an attempt to deal with this situation, the National

Association of Insurance Commissioners (“NAIC”) has worked to develop minimum standards to encourage uniform reinsurance regulation within the country.


• A reinsurer licensed by a state is subject to the full spectrum of insurance regulations to which a primary insurer is subject. While state insurance laws vary, most are based in large part on model laws and regulations developed by the NAIC.• U.S. regulators uniformly recognize that given the

enormity of the insurance marketplace, the reinsurance capacity can only be satisfied by allowing non-U.S. insurers to assume reinsurance business in the U.S. In fact, nearly one-half of the reinsurance premiums are reinsured outside of the U.S.


• The NAIC has increased reinsurance reporting requirements for the annual financial statements that insurers file with state regulators. These requirements allow state regulators to better assess the impact of reinsurance on the financial condition of insurers. • In particular, new reporting requirements quantify overdue reinsurance and enable regulators to better detect potential problems with uncollectible reinsurance.


• Potentially uncollectible reinsurance has always been seen as a significant problem to insurance regulators and well as industry members. One challenge for regulators has been where there has been a lack of oversight over reinsurers domiciled abroad and not licensed in any U.S. state. • Since U.S. regulators cannot directly regulate such non-

U.S. companies, the indirect mechanism by which state regulators have exerted control over the reinsurance market has been through the “credit for reinsurance” laws.


Dan Schelp, National Association ofInsurance Commissioners

“NAIC and Captive Reinsurance Transactions Involving

XXX/AXXX Financial Transactions – Latest Developments”



State Regulation Of XXX/AXX Captive Reinsurance Transactions

• Traditional captive insurers may not be subject to Statutory Accounting Principles (“SAP”), and were excluded from the NAIC Accreditation Program.

• National Association of Insurance Commissioners (“NAIC”) became concerned with captive reinsurance being done by life insurers on XXX/AXXX policies.

• Section 6, NAIC Model 830 (“XXX”): Reserving requirements for level term life (and similar) products. Reserves based on specified interest rates and mortality tables.

• Section 7, NAIC Model 830 (“AXXX”): Reserving requirements for Universal Life Insurance policies that Contain a Secondary Guarantee (“ULSG”).

XXX/AXXX Regulatory Problem

• XXX/AXXX Reserves were established too high, sometimes 3-4 times the economic value of reserves.

• Insurers began reserve financing transactions by ceding reserve values to captives and Special Purpose Vehicles (“SPVs”), which backed reserves with letters of credits (“LOC”) and parental guarantees (“PG”) for the non-economic portion. Reserves at ceding insurer stayed the same.

• Captive reinsurance increased statutory surplus for the ceding insurer, but decreased admitted assets backing reserves (because LOCs and PGs are not admitted assets). Insurers considered the result to be a more reasonable regulatory reserve (closer to economic reality).


XXX/AXXX Reinsurance Framework

NAIC addressed these concerns through adoption of XXX/AXXX Reinsurance Framework in 2014, which requires the direct ceding company to do following: • Book the full statutory reserve.• Reserves are supported by reinsurance requiring a

tiered system of collateral supporting the reserves.• Disclose assets/securities supporting reserves.• Hold appropriate RBC capital charge.


Implementation of Framework: AG 48

• AG 48 defines the “Actuarial Method” used to determine the reserve level that must be supported by certain defined assets called “Primary Security”. This reserve level is called the “Required Level of Primary Security.” Actuarial Method is based on Principle-Based Reserving (“PBR”) and modified VM-20 of the Valuation Manual.

• Reserves above-PBR requirements would be supported by “Other Security” deemed acceptable by the commissioner.

• AG 48 requires the appointed actuary to issue a Qualified Actuarial Opinion if the required amount of either Primary Security or Other Security is not held by a covered captive reinsurer in a XXX/AXXX reinsurance transaction.


Statutory Reserves

(No change in calculation)

Statutory Reserves Minus

PBR-Level Reserves

PBR-Level Reserves (“Actuarial Method”)

“Other Security”

“Primary Security:” Cash, some SVO-Listed,

Comm. Loans CM3+, policy loans, certain derivatives

CollateralReserves

XXX/AXXX Reinsurance Framework Tiers


Implementation: XXX/AXXX Model Regulation

• NAIC Reinsurance Task Force exposed revisions to Credit for Reinsurance Model Law (#785) and new XXX/AXXX Model Regulation on August 16, 2015.

• Model Regulation is designed to incorporate requirements of AG 48, and will eventually become the new Accreditation Standard for all states.

• Task Force had conference call on October 26, 2015 to discuss .


Other Key NAIC Issues: • Accreditation. In Summer 2015, the NAIC revised Part

A Accreditation Preamble to scope in captive reinsurance transactions involving XXX/AXXX, variable annuity (VA) , and long-term care (LTC) business into the accreditation requirements effective January 1, 2016, although VA and LTC provisions not yet effective.• PBR. PBR should largely address the perceived

reserving redundancies that have precipitated captive financing transactions. PBR is expected to become operative on January 1, 2017.


Remaining issues:

• Should #785 be applicable to reinsurance other than XXX/AXXX?• Consequence Options (credit for reinsurance penalty

rather than nonqualified actuarial opinion).

• Revisions to Actuarial Method and timing issues.

• Exemption for “Professional” Reinsurers.

Model Law to be adopted in 2015, Model Regulation expected in 2016.


Elizabeth Kelleher Dwyer, Esq., Rhode Island Department of Business Regulation –

Insurance Division

“Rhode Island’s Voluntary Restructuring of Solvent Insurers Statute – Recent

Developments”



Rhode Island Statute – Title 27, Chapter 14.5• Created as an Economic Development Measure in 2002 to foster

a “center of excellence” in run-off

• Insurer MUST be a Rhode Island domiciled insurer, commercial lines property and casualty insurer in run-off and solvent and adequately reserved

• Provides an alternative to the traditional options available for insurers in run-off

• All statutes and regulations applicable to Rhode Island domiciled Insurance Companies are applicable

Procedure• Redomestication of Company to Rhode Island

• Commutation Plan• Approval of Commutation Plan by the Department

• Approval of Commutation Plan by the Court

• Final Discharge of Obligations

• Insurance Business Transfer• Approval of IBT Plan by the Department

• Approval of IBT Plan by the Court

• Novation of Insurance Contracts


Department Review

• Standard – plan would not materially adversely affect the interest of creditors or policyholders• Department will focus on the actuarial calculations – purpose to analyze

whether proposal shortchanges creditors

• Notice – Manner of identifying last know address could lend credibility to plan

• Timeframe for review depends upon completeness of information• Regulations detail information required

• Any unusual circumstance should be explained.

• Not designed for insurer that wants to commute obligations at less than the equivalent of full value or novate policies into a undercapitalized company


Ultimate Goals• Establish Rhode Island as the center of excellence for insurer

run-offs in the United States

• Build a suitable regulatory infrastructure to ensure efficient and appropriate implementation and oversight of commutation plans and insurers in run-off

• Reduce the number of insolvencies (and therefore the costs of insolvencies to the industry and to the public)

• Reduce administrative expenses of long term run-offs making more funds available for creditors and shareholders


Successful Commutation Plan• Commercial reinsurer

oHas not issued policy in 20 yearsoRedomesticated specifically to take advantage of statute

• Department conducted “due diligence” examination and allowed redomesticationoAt request of company reviewed proposed Plan during

examination to inform company of any immediate problems

oThis was not a binding opinion and Department could change position if additional information developed


• Proceedings took place before Superior Court business calendar with significant experience in insolvencies and non insurer receivershipsoConstitutional challenge under contract clauseoCourt held their was no “substantial impairment” oState interest in Orderly Resolution of Insurance Run-Offs


Robert Alan Wake, Maine Bureau of Insurance

“Emerging Reinsurance Issues”



Emerging Reinsurance Issues

• Collateral Reform• Alternative Markets• Impact on Arbitration


Collateral Reform

• Reinsurance is a global market

o “Unlicensed” reinsurers must post collateral means “non-U.S.” reinsurers must post collateral

• NAIC answer: Certified Reinsurers

• FIO answer? Covered Agreement

Certified Reinsurers

• Reinsurer must be domiciled in Qualified Jurisdiction

• Collateral reduction depends on rating• Rating standards and minimum capital

($250M) set by regulation

• Parties can agree contractually tohigher collateral than law requires

Key Legislative and Regulatory Developments

Alternative Markets• Cat Bonds and Other

Insurance-Linked Securities• Sidecars, Protected Cells, and Other

Alternative Structures• XXX/AXXX and AG48 • Variable Annuities and Long-Term Care• New Frontiers


What Does It Mean for Arbitrators?

• Disputes Over Reduced Collateral• “Other Security” for XXX/AXXX Treaties• What if Captive Treaties Need to be Enforced?

Key Legislative and Regulatory Developments32

Enforcement of Captive Treaties

• “These are just financing arrangements”

• “This is just self-insurance”• Related Parties Don’t Always Stay

“Related”


Enforcement of Captive Treaties - What’s the Problem?

• Not Drafted With Enforcement in Mind• Long-tail liabilities• Spin-offs• Third-party investors• Ceding Company Receivership• Holding Company Bankruptcy


Tracey Laws, Reinsurance Association of America

“(Re)insurance Regulatory Issues

between U.S. & EU”


• US/EU Issues – Equivalence & “Covered Agreements”

• (Re)insurance Regulatory Issues between U.S. & EU • U.S. Companies Operating in EU

oMarket Access (Poland)oAdditional Requirements for Market Access (Netherlands)oSolvency II being applied to U .S. companies/branches (U.K.)oCollateral (could continue)oWhat else?



EU Companies operating in U.S. • Collateral• Group Capital?

How to Solve These Issues?

Solution(s) needs to be: •Timely (Solvency II in effect on 1/1/16)•Provide Uniformity and Predictability•Enforceable


Solutions:Equivalence Process in EU • Equivalence for: Reinsurance, Group Supervision for non-EU

based companiesoTemporary (5 year) or Full/Permanent Equivalence

Switzerland (Full)Bermuda (Full expected)Japan (?)8 countries have applied for Temporary Equivalence

• Would Still Need to Resolve Issues of EU Based Companies in U.S.


“Covered Agreement” between U.S. and EU

•What is it?oCreated by Dodd-Frank; Executed by USTR and the Federal Insurance Office

• Process IssuesoEUoU.S.

•What Can It Address?


Players/Politics

• Treasury & USTR•NAIC/State Regulators• Industry• Congress• European Commission/Parliament/Member States/European Industry


Important for these two large, well-regulated jurisdictions – U.S. and EU - to resolve their issues because of (increasing) trade barriers around the world


QUESTIONS?


key legislative and regulatory developments concerning reinsurance: 2015 and beyond arias us fall...

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