New York-domiciled insurers may soon be able to take advantage of more-relaxed provisions on balance sheet credit for reinsurance where the assuming reinsurer is in a “reciprocal” jurisdiction to the United States. New York-based carriers should consider amendments just announced to New York’s credit-for-reinsurance rules, which conform to the U.S.-European “covered agreements” on reciprocity, for opportunities for balance sheet credit in new reinsurance agreements.
The covered agreements between the U.S. and the EU in 2017 and the UK in 2018, respectively, imposed uniform treatment between the jurisdictions on credit for reinsurance and other prudential aspects of insurance regulation. The international pacts effectively require the U.S. states to conform their credit-for-reinsurance regulations to this new reciprocity regime, and accordingly in 2019, the National Association of Insurance Commissioners (NAIC) adopted amendments to its model regulation on reinsurance credit. On Dec. 9, 2020, the New York Department of Financial Services announced its own proposed changes to 11 NYCRR Part 125, the New York regulations on credit for reinsurance for New York-domiciled insurers. The amendments, which are subject to a 60-day public comment period, can be found here and resemble the NAIC model.
Under the amendments, New York will allow a New York-domiciled insurer to claim balance sheet credit for reinsurance ceded to an assuming insurer meeting the conditions outlined below. A ceding insurer may take credit under these provisions for reinsurance agreements entered into, amended or renewed on or after the effective date of these amendments to Part 125, with respect to losses incurred and reserves reported on or after the later of (i) the date on which the assuming insurer has met the eligibility requirements below and (ii) the effective date of the new, amended or renewed reinsurance agreement. The new conditions are:
- the assuming insurer is licensed to transact reinsurance by, and has its head office or is domiciled in, a “reciprocal jurisdiction.” A reciprocal jurisdiction, generally, is
- a non-U.S. jurisdiction that is subject to an in-force covered agreement with the U.S.;
- an NAIC-accredited jurisdiction; or
- a “qualified jurisdiction” that the Superintendent of Financial Services determines to have met certain additional requirements. A “qualified jurisdiction” is a jurisdiction designated by the Superintendent, under amendments to Part 125 enacted in 2011, as a jurisdiction meeting certain specified criteria of regulatory and legal rigor. The new, additional criteria for a “qualified” jurisdiction to be deemed a “reciprocal” one are that the jurisdiction:
- provides that an insurer that has its head office or is domiciled in such qualified jurisdiction will receive credit for reinsurance ceded to a U.S.-domiciled assuming insurer in the same manner as the U.S. insurer is permitted to claim credit for reinsurance ceded into that jurisdiction;
- does not require a U.S.-domiciled assuming insurer to have a local presence as a condition for entering into a reinsurance agreement with a local insurer or recognition of credit for such reinsurance;
- confirms that it recognizes the U.S.’s state regulatory approach to group supervision and group capital; and
- confirms in writing that information regarding insurers and their parent, subsidiary or affiliated entities, if applicable, will be provided to the Superintendent pursuant to a memorandum of understanding or similar document;
- the assuming insurer has at least $250 million in capital and surplus;
- the assuming insurer has a specified minimum solvency or capital ratio, which must be 300% in the event that the assuming insurer is from a jurisdiction qualifying as a reciprocal jurisdiction by virtue of being an NAIC accredited jurisdiction;
- the assuming insurer (a) agrees to give the Superintendent prompt notice in the event that it falls below the above-described capital and surplus and solvency ratio thresholds, (b) consents to the jurisdiction of New York courts, (c) consents to pay all final judgments, (d) includes in its reinsurance agreements a provision that requires the assuming insurer to post security in the event it resists enforcement of a judgment and (e) confirms that it is not subject to a solvent scheme of arrangement;
- the assuming insurer provides specified financial statements as requested by the Superintendent;
- the assuming insurer maintains a practice of prompt payment of claims under reinsurance agreements; and
- the assuming insurer’s domestic regulator confirms to the Superintendent in writing that the assuming insurer complies with the capital and surplus and solvency ratio requirements described above.
The Superintendent may determine that an assuming insurer invoking the above criteria no longer meets one or more of them. Before making such a determination, the Superintendent is required to (i) communicate the deficiency to the ceding insurer, the assuming insurer and the assuming insurer’s domestic regulator and (ii) provide the assuming insurer with 30 days to submit a remedial plan and 90 days to remedy the defect, “except in exceptional circumstances in which a shorter period is necessary to protect the interests of policyholders, contract holders, or the people of this State.” After the expiration of the remedial period, if the Superintendent determines the remedial effort is insufficient, the Superintendent may deny balance sheet credit or impose a collateral requirement. Moreover, if the assuming insurer becomes subject to rehabilitation, liquidation or conservation, then the ceding insurer may seek an order in New York state court requiring that the assuming insurer post security for all outstanding liabilities.