Georgia and Virginia have become two of the latest states where bills have been introduced to amend existing credit for reinsurance laws to adopt the reinsurance risk-based collateral reforms embodied in the recently amended National Association of Insurance Commissioners (“NAIC”) model law. Meanwhile, the New Jersey Department of Banking and Insurance (“NJDOBI”) has released for comment proposed new rules and amendments to existing rules to implement New Jersey’s recently amended credit for reinsurance statute based on the NAIC model law. As we have previously reported, the following states have already adopted reduced collateral requirements:
- Florida (property and casualty only)
- Indiana (life, property and casualty)
- New Jersey (life, property and casualty)
- New York (life, property and casualty)
For more information on the NAIC reforms, please see our article from the October 2011 Mayer Brown Global Corporate Insurance & Regulatory Bulletin, NAIC Fall 2011 Meeting Notes. For background on the progression of reinsurance collateral requirements reform in the US, please see our article, US reinsurance collateral reform picks up pace, which can be found here.
Both the recently introduced Virginia House Bill 1139 and Georgia Senate Bill 385 contain provisions that track the amended NAIC model law and would make a significant change to the credit for reinsurance rules of those states by potentially allowing full credit to insurers that cede risk to unauthorized reinsurers that post less than 100% collateral. Under the newly proposed legislation in Virginia and Georgia, credit will be allowed to a domestic insurer when risk is ceded to an assuming insurer that has been “certified” as a reinsurer by the state insurance regulatory authority and that secures its obligations in accordance with the requirements of the relevant state’s insurance code. In order to be eligible for certification, an assuming insurer must meet certain requirements, including being domiciled and licensed in a “qualified jurisdiction” as determined by the relevant state under its statute, maintaining financial strength ratings, maintaining minimum capital and surplus, submitting to the jurisdiction of the relevant state, meeting filing requirements and satisfying any other requirements of the relevant state. A rating will be assigned to each certified reinsurer, giving consideration to the financial strength ratings of the certified reinsurer. Most significantly, the proposed legislation provides that a certified reinsurer must secure its obligations at a level consistent with its ratings, as specified in rules to be adopted by the state insurance regulatory authorities, opening the door for the possibility of risk-based collateral requirements under which a certified reinsurer will be able to post less than 100% collateral, with the ceding insurer still receiving credit for the ceded insurance.
The Virginia bill also contains provisions concerning the concentration of risk, following amendments to the NAIC models that were added in the wake of similar provisions added to New York’s Regulation 20, Credit for Reinsurance from Unauthorized Insurers. Under the proposed Virginia legislation, a ceding insurer would have to take steps to manage its reinsurance recoverable proportionate to its own book of business. A domestic ceding insurer would have to notify the Virginia State Corporation Commission (the “Commission”) within 30 days after reinsurance recoverable from any single assuming insurer, or group of affiliated assuming insurers, exceeds 50% of the domestic ceding insurer’s last reported surplus to policyholders, or after it is determined that reinsurance recoverables are likely to exceed this limit. The proposed legislation would also require a ceding insurer to take steps to diversify its reinsurance program and notify the Commission within 30 days after ceding to any single insurer, or group of affiliated assuming insurers, more than 20% of the ceding insurer’s gross written premium in the prior calendar year, or after it is determined that the reinsurance ceded is likely to exceed this limit. In both situations, the notification to the Commission is intended to demonstrate that the exposure is being safely managed by the domestic ceding insurer.
Under the Virginia bill, the ability of reinsurers to reduce their collateral obligations on in force business that is already reinsured and for which collateral has already been posted will be limited by “effective date” language that tracks last minute changes that were added to the NAIC models. The relevant language provides that credit for reinsurance from certified reinsurers “shall apply only to reinsurance contracts entered into or renewed on or after the effective date of the certification of the assuming insurer. Any reinsurance contract entered into prior to the effective date of the certification of the assuming insurer that is subsequently amended after the effective date of the certification of the assuming insurer, or a new reinsurance contract, covering any risk for which collateral was provided previously, shall only be subject to [this section] with respect to losses incurred and reserves reported from and after the effective date of the amendment or new contract”.
Interestingly, the proposed Georgia bill does not contain the risk concentration provision or the effective date limitation. Whether those last minute additions to the amended NAIC models will ultimately find their way into the Georgia bill in the legislative process remains to be seen.
On 21 February 2012, NJDOBI issued proposed new rules and amendments to existing rules to implement the amendments to its credit for reinsurance statute that were enacted last year. The proposed new rules are based on the recent amendments to the NAIC model law and regulation, and NJDOBI is proposing amendments to the existing rules to more closely track the NAIC model law and regulation. Highlights of the proposed rules include procedures by which an insurer may become a certified reinsurer, the basis by which a certified insurer would be rated, standards for determining whether a jurisdiction is a qualified jurisdiction, the creation of a sliding scale based on ratings to determine the amount of collateral required and the addition of a provision addressing concentration risk, similar to the provision in the recently introduced Virginia bill and discussed above. The NJDOBI proposal is currently in the comment stage, with comments due on 21 April 2012.
We expect a number of other states to consider similar legislation this year to amend their laws and regulations to bring them into line with the amendments to the NAIC Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model Regulation (#786) that were adopted at the NAIC’s 2011 Fall Meeting. Although NAIC model laws and regulations do not become effective in any given state unless and until they are enacted by the legislature or promulgated by the insurance regulatory authority of that state, the NAIC model law and regulation generally have an influence on state laws and regulations to the extent that certain aspects of the amended models become accreditation standards of the NAIC. States strive to maintain their NAIC accreditation so that other states will defer to them as the primary regulatory authority for insurers domiciled in their states. Inclusion of the amended versions of the Credit for Reinsurance Model Law and Credit for Reinsurance Model Regulation in the NAIC accreditation standards will create a strong incentive for states to adopt them.
In Illinois, legislation has already been introduced to amend the existing credit for reinsurance laws to conform with the revised NAIC models. For more information on the legislation introduced in Illinois, please see our article from the January 2012 Mayer Brown Global Corporate Insurance & Regulatory Bulletin, Illinois continues to pursue credit for reinsurance reform.
During 2012, the NAIC will continue its consideration of credit for reinsurance reform through the Reinsurance (E) Task Force, which will be conducting discussions to determine which aspects of the amendments to the models will become accreditation standards. The task force will also be establishing a new process to evaluate reinsurance supervision in non-U.S. jurisdictions and will be forming a subgroup to review applications to become a certified reinsurer.