Although it has been more than two years since the National Association of Insurance Commissioners (“NAIC”) amended its credit for reinsurance model laws, the NAIC remains active in assisting state insurance regulators with procedural aspects of the new laws. By way of background, in November 2011, the NAIC adopted amendments to its Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model Regulation (#786) (“CFR Model Laws”). In 2014, the RTF will re-examine the current (reduced) collateral requirements set forth in the Model to determine whether changes are needed (raising or lowering collateral amounts). When the Model was drafted, new collateral amounts were set with the intent that they be reviewed within two years of their use by Certified Reinsurers. Since 2011, a number of states have adopted the CFR Model Laws or are in the process of doing so. New York and Florida (propertycasualty only) had already amended collateral requirements by the time the CFR Model Laws were passed. The CFR Model Laws allow for a reduction in posted collateral from an unauthorized reinsurer that is approved by states as a “Certified Reinsurer.” In deciding whether to certify a reinsurer, state insurance regulators evaluate a number of factors, including whether a reinsurer is domiciled in a jurisdiction the state considers to be a “Qualified Jurisdiction” (i.e., one that “effectively” regulates reinsurers domiciled in the jurisdiction). States that have begun certifying reinsurers include Connecticut, Florida, New Jersey and New York. Since passing the CFR Model Laws, the NAIC through its Reinsurance (E) Task Force has been providing a forum for multiple-state review of Certified Reinsurer applications and has also created a process to help states determine what constitutes a “Qualified Jurisdiction.” Certified Reinsurer Application Review The Reinsurance Financial Analysis Working Group (“RFAWG”) was created to address specific applications by reinsurers that have already been approved as Certified Reinsurers in Florida, Connecticut, New York and New Jersey. RFAWG provides a forum for multi-state review of Certified Reinsurer applications and for “peer review” by state insurance regulators of decisions made by other states on applications. Peer reviews allow states to access diligence already conducted by other states during the approval process. RFAWG has reported that, as of year-end 2013, of the twenty-one reinsurer applications that had been peer reviewed, eighteen were approved and two were still pending. One application was denied (so that the reinsurer, certified in one state, must seek individual approval in all other states).
Qualified Jurisdiction Process To assist states in determining whether a reinsurer’s domicile is a “Qualified Jurisdiction,” the NAIC adopted a written process in August 2013 for developing and maintaining a list of qualified jurisdictions (Qualified Jurisdiction Process). In drafting the Qualified Jurisdiction Process, the NAIC recognized the importance of consistency among states and took into account that some states (e.g., Florida and New York) had already, in effect, made decisions on certain countries when they certified 29 reinsurers domiciled in Bermuda, the UK, Switzerland, and Germany. An “expedited review” is used for jurisdictions that have already been vetted by states that granted Certified Reinsurer status to reinsurers domiciled in those jurisdictions. Qualified Jurisdiction Working Group The NAIC created a specific group to perform the jurisdictional analysis – the Qualified Jurisdiction Working Group of the Reinsurance (E) Task Force (“Working Group”). The Working Group is responsible for: •• initiating the evaluation process and coordinating the review of a jurisdiction; •• making a preliminary determination as to whether the jurisdiction under consideration meets the Qualified Jurisdiction Process’ Standard of Review and is deemed acceptable to be included on the NAIC List of Qualified Jurisdictions; •• communicating this information in written form to the supervisory authority of the jurisdiction under review; •• considering any response from the jurisdiction, and then preparing a final report for recommendation to the Reinsurance Task Force and ultimately the NAIC’s Executive/Plenary Committees; and •• coordinating the process for ongoing and periodic reviews. Once a jurisdiction is approved, it is added to the NAIC’s List of Qualified Jurisdictions (if not approved, reapplication is allowed at the NAIC’s discretion). A Qualified Jurisdiction must agree to share information and cooperate on a confidential basis with US state insurance regulatory authority with respect to all certified reinsurers domiciled within that jurisdiction. The NAIC has also created a Memorandum of Understanding (“MOU”) template for negotiation by the NAIC with the Qualified Jurisdiction; the MOU will memorialize confidentiality safeguards with respect to information shared between jurisdictions. After approval, a Qualified Jurisdiction is subject to re-evaluation every five years. Further, Qualified Jurisdictions are required to notify the NAIC of “any material change in the applicable reinsurance supervisory system” that may affect the status of the Qualified Jurisdiction. U.S. jurisdictions are expected to notify the NAIC if they receive notice of any such material change, or any “adverse developments with respect to enforcement of final US judgments” that may affect the status of the Qualified Jurisdiction. Expedited Review Process The Qualified Jurisdiction Process allows for expedited review of a jurisdiction, after which the jurisdiction is designated as a Conditional Qualified Jurisdiction. The expedited process facilitates the certification of reinsurers domiciled therein until a complete evaluation is completed. Because certain states have already approved reinsurers in Bermuda, Germany, Switzerland and the UK, an expedited review procedure was used by the NAIC in analyzing such jurisdictions. At year-end 2013, the NAIC announced that it had completed its expedited review and had granted these jurisdictions Conditional Qualified Jurisdiction status. Standard of Review and Evaluation Methodology The Qualified Jurisdiction Process emphasizes that jurisdictional evaluations are intended to be “outcomes-based” comparisons to financial solvency regulation under the NAIC ‘s accreditation program, adherence to international supervisory standards and relevant international guidance for recognition of reinsurance supervision. The Standard of Review for a jurisdiction’s qualification is that the NAIC must reasonably conclude that: •• the jurisdiction’s reinsurance supervisory system achieves a level of effectiveness in financial solvency regulation that is deemed acceptable for purposes of reinsurance collateral reduction; •• the jurisdiction’s demonstrated practices and procedures with respect to reinsurance supervision are consistent with its reinsurance supervisory system; and •• the jurisdiction’s laws and practices satisfy the criteria required of Qualified Jurisdictions as set forth in the CFR Model Laws. In evaluating a jurisdiction, the Working Group uses a specific Evaluation Methodology set forth in the Qualified Jurisdiction Process, which considers the jurisdiction’s: •• laws and regulations; •• regulatory practices and procedures; •• requirements applicable to US-domiciled reinsurers; •• regulatory cooperation and information sharing; •• history of performance of domestic reinsurers; •• enforcement of final US judgments; and
allowance of solvent schemes of arrangement. The specific laws, regulations, and regulatory practices are outlined below in Appendices A and B. Conclusion States that have adopted reinsurance collateral reform (thus far, nineteen states and at least five with pending bills) are beginning to process applications for Certified Reinsurers, and many are using the NAIC’s uniform, multi-state process. At year-end 2013, the NAIC announced that it will now review the regulatory supervisory systems of Ireland and France, which have requested approval as Qualifying Jurisdictions. It is expected that additional jurisdictions, such as Japan, will be considered in the near future. Appendix A: Laws and Regulations 1. Examination Authority Does the jurisdiction have the authority to examine its domestic reinsurers? This description should address the following: a. Frequency and timing of examinations and reports. b. Guidelines for examination. c. Whether the jurisdiction has the authority to examine reinsurers whenever it is deemed necessary. d. Whether the jurisdiction has the authority to have complete access to the reinsurer’s books and records and, if necessary, the records of any affiliated company. e. Whether the jurisdiction has the authority to examine officers, employees and agents of the reinsurer when necessary with respect to transactions directly or indirectly related to the reinsurer under examination. f. Whether the jurisdiction has the authority to share confidential information with U.S. state insurance regulatory authorities, provided that the recipients are required, under their law, to maintain its confidentiality. 2. Capital and Surplus Requirement Does the jurisdiction have the authority to require domestic reinsurers to maintain a minimum level of capital and surplus to transact business? This description should address the following: a. Whether the jurisdiction has the authority to require reinsurers to maintain minimum capital and surplus, including a description of such minimum amounts. b. Whether the jurisdiction has the authority to require additional capital and surplus based on the type, volume and nature of reinsurance business transacted.
c. Capital requirements for reinsurers, including reports and a description of any specific levels of regulatory intervention. 3. Accounting Practices and Procedures Does the jurisdiction have the authority to require domestic reinsurers to file appropriate financial statements and other financial information? This description should address the following: a. Description of the accounting and reporting practices and procedures. b. Description of any standard financial statement blank/ reporting template, including description of content/disclosure requirements and corresponding instructions. 4. Corrective Action Does the jurisdiction have the authority to order a reinsurer to take corrective action or cease and desist certain practices that, if not corrected or terminated, could place the reinsurer in a hazardous financial condition? This description should address the following: a. Identification of specific standards which may be considered to determine whether the continued operation of the reinsurer might be hazardous to the general public. b. Whether the jurisdiction has the authority to issue an order requiring the reinsurer to take corrective action when it has been determined to be in hazardous financial condition. 5. Regulation and Valuation of Investments What authority does the jurisdiction have with respect to regulation and valuation of investments? This description should address the following: a. Whether the jurisdiction has the authority to require a diversified investment portfolio for all domestic reinsurers as to type, issue and liquidity. b. Whether the jurisdiction has the authority to establish acceptable practices and procedures under which investments owned by reinsurers must be valued, including standards under which reinsurers are required to value securities/investments. 6. Holding Company Systems Does the jurisdiction have laws or regulations with respect to supervision of the group holding company systems of reinsurers? This description should address the following:
Whether the jurisdiction has access to information via the parent or other regulated group entities about activities or transactions within the group involving other regulated or non-regulated entities that could have a material impact on the operations of the reinsurer. b. Whether the jurisdiction has access to consolidated financial information of a reinsurer’s ultimate controlling person. c. Whether the jurisdiction has the authority to review integrity and competency of management. d. Whether the jurisdiction has approval and intervention powers for material transactions and events involving reinsurers. e. Whether the jurisdiction has authority to monitor, or has prior approval authority over: i. Change in control of domestic reinsurers. ii. Dividends and other distributions to shareholders of the reinsurer. iii. Material transactions with affiliates. 7. Risk Management Does the jurisdiction have the authority to require its domestic reinsurers to maintain an effective risk-management function and practices? This description should address the following: a. Whether the jurisdiction has Own Risk and Solvency Assessment (ORSA) requirements and reporting. b. Any requirements regarding the maximum net amount of risk to be retained by a reinsurer for an individual risk based on the reinsurer’s capital and surplus. c. Whether the jurisdiction has authority to monitor enterprise risk, including any activity, circumstance, event (or series of events) involving one or more affiliates of a reinsurer that, if not remedied promptly, is likely to have a material adverse effect on the financial condition or liquidity of the reinsurer or its insurance holding company system as a whole. d. Whether the jurisdiction has corporate governance requirements for reinsurers. 8. Liabilities and Reserves Does the jurisdiction have standards for the establishment of liabilities and reserves (technical provisions) resulting from reinsurance contracts? This description should address the following:
a. Liabilities incurred under reinsurance contracts for policy reserves, unearned premium, claims and losses unpaid, and incurred but not reported (IBNR) claims (including whether discounting is allowed for reserve calculation/reporting). b. Liabilities related to catastrophic occurrences. c. Whether the jurisdiction requires an opinion on reserves and loss and loss adjustment expense reserves by a qualified actuary or specialist for all domestic reinsurers, and the frequency of such reports. 9. Reinsurance Ceded What are the jurisdiction’s requirements with respect to the financial statement credit allowed for reinsurance retroceded by its domestic reinsurers? This description should address the following: a. Credit for reinsurance requirements applicable to reinsurance retroceded to domestic and non-domestic reinsurers. b. Collateral requirements applicable to reinsurance contracts. c. Whether the jurisdiction requires a reinsurance agreement to provide for insurance risk transfer (i.e., transfer of both underwriting and timing risk). d. Requirements applicable to special purpose reinsurance vehicles and insurance securitizations. e. Affiliated reinsurance transactions and concentration risk. f. Disclosure requirements specific to reinsurance transactions, agreements and counterparties, if such information is not provided under another item. 10. Independent Audits Does the jurisdiction require annual audits of domestic reinsurers by independent certified public accountants or similar accounting/auditing professionals recognized in the applicant jurisdiction? This description should address the following: a. Requirements for the filing of audited financial statements prepared in conformity with accounting practices prescribed or permitted by the supervisory authority. b. Contents of annual audited financial reports. c. Requirements for selection of auditor. d. Allowance of audited consolidated or combined financial statements. e. Notification of material misstatements of financial condition. f. Supervisor’s access to auditor’s workpapers. g. Audit committee requirements.
h. Requirements for reporting of internal control-related matters. 11. Receivership Does the jurisdiction have a receivership scheme for the administration of reinsurers found to be insolvent? This should include a description of any liquidation priority afforded to policyholders and the liquidation priority of reinsurance obligations to domestic and non-domestic ceding insurers in the context of an insolvency proceeding of a reinsurer. 12. Filings with Supervisory Authority Does the jurisdiction require the filing of annual and interim financial statements with the supervisory authority? This description should address the following: a. The use of standardized financial reporting in the financial statements and the frequency of relevant updates. b. The use of supplemental data to address concerns with specific companies or issues. c. Filing format (e.g., electronic data capture). d. The extent to which financial reports and information are public records. 13. Reinsurance Intermediaries Does the jurisdiction have a regulatory framework for the regulation of reinsurance intermediaries? 14. Other Regulatory Requirements with respect to Reinsurers Any other information necessary to adequately describe the effectiveness of the jurisdiction’s laws and regulations with respect to its reinsurance supervisory system. Appendix B: Regulatory Practices and Procedures 1. Financial Analysis What are the jurisdiction’s practices and procedures with respect to the financial analysis of its domestic reinsurers? Such description should address the following: a. Qualified Staff and Resources The resources employed to effectively review the financial condition of all domestic reinsurers, including a description of the educational and experience requirements for staff responsible for financial analysis. b. Communication of Relevant Information to/from Financial Analysis Staff The process under which relevant information and data received by the supervisory authority are provided to the
financial analysis staff and the process under which the findings of the financial analysis staff are communicated to the appropriate person(s). c. Supervisory Review How the jurisdiction’s internal financial analysis process provides for supervisory review and comment. d. Priority-Based Analysis How the jurisdiction’s financial analysis procedures are prioritized in order to ensure that potential problem reinsurers are reviewed promptly. e. Depth of Review How the jurisdiction’s financial analysis procedures ensure that domestic reinsurers receive an appropriate level or depth of review commensurate with their financial strength and position. f. Analysis Procedures How the jurisdiction has documented its financial analysis procedures and/or guidelines to provide for consistency and continuity in the process and to ensure that appropriate analysis procedures are being performed on each domestic reinsurer. g. Reporting of Material Adverse Findings The process for reporting material adverse indications, including the determination and implementation of appropriate regulatory action. h. Early Warning System/Stress Testing Whether the jurisdiction has an early warning system and/or stress testing methodology that is utilized with respect to its domestic reinsurers. 2. Financial Examinations What are the jurisdiction’s practices and procedures with respect to the financial examinations of its domestic reinsurers? Such description should address the following: a. Qualified Staff and Resources The resources employed to effectively examine all domestic reinsurers. This should include whether the jurisdiction prioritizes examination scheduling and resource allocation commensurate with the financial strength and position of each reinsurer and a description of the educational and experience requirements for staff responsible for financial examinations.
b. Communication of Relevant Information to/from Examination Staff The process under which relevant information and data received by the supervisory authority are provided to the examination staff and the process under which the findings of the examination staff are communicated to the appropriate person(s). c. Use of Specialists Whether the supervisory authority’s examination staff includes specialists with appropriate training and/or experience, or whether the supervisory authority otherwise has available qualified specialists that will permit the supervisory authority to effectively examine any reinsurer. d. Supervisory Review Whether the supervisory authority’s procedures for examinations provide for supervisory review. e. Examination Guidelines and Procedures Description of the policies and procedures the supervisory authority employs for the conduct of examinations, including whether variations in methods and scope are commensurate with the financial strength and position of the reinsurer. f. Risk-Focused Examinations Does the supervisory authority perform and document risk-focused examinations and, if so, what guidance is utilized in conducting the examinations? Are variations in method and scope commensurate with the financial strength and position of the reinsurer? g. Scheduling of Examinations Whether the supervisory authority’s procedures provide for the periodic examination of all domestic reinsurers, including how the system prioritizes reinsurers that exhibit adverse financial trends or otherwise demonstrate a need for examination. h. Examination Reports Description of the format in which the supervisory authority’s reports of examinations are prepared, and how the reports are shared with other jurisdictions under information-sharing agreements. i. Action on Material Adverse Findings What are the jurisdiction’s procedures regarding supervisory action in response to the reporting of any material adverse findings?
3. Information Sharing Does the jurisdiction have a process for the sharing of otherwise confidential documents, materials, information, administrative or judicial orders, or other actions with U.S. state regulatory officials, provided that the recipients are required, under their law, to maintain its confidentiality? 4. Procedures for Troubled Reinsurers What procedures does the jurisdiction follow with respect to troubled reinsurers? 5. Organization, Licensing and Change of Control of Reinsurers What processes does the supervisory authority use to identify unlicensed or fraudulent activities? The description should address the following: a. Licensing Procedure Whether the supervisory authority has documented licensing procedures that include a review and/ or analysis of key pieces of information included in a primary licensure application. b. Staff and Resources The educational and experience requirements for staff responsible for evaluating company licensing. c. Change in Control of a Domestic Reinsurer Procedures for the review of key pieces of information included in filings with respect to a change in control of a domestic reinsurer.