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NAIC Exposes New Draft Credit for Reinsurance Model Law Provisions, Defers to Federal Covered Agreements

During a regulator-only conference call of the National Association of Insurance Commissioners (NAIC) Reinsurance (E) Task Force on March 7, 2019, state insurance regulators agreed to expose proposed revisions to the Credit for Reinsurance Model Law(#785) and the Credit for Reinsurance Model Regulation (#786) (respectively, the Exposed Draft Law and the Exposed Draft Regulations; collectively, the Exposed Draft) for a 25-day public comment period ending Monday, April 1, 2019.

The revisions are intended to incorporate relevant provisions of the Bilateral Agreement Between the United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance and a substantially similar agreement between the United States and the United Kingdom that accounts for Brexit (collectively, the Covered Agreements), which were signed in September 2017 and December 2018, respectively.

The Covered Agreements address three areas of prudential insurance supervision: group supervision, reinsurance, and exchange of information between supervisory authorities.

Successful implementation of the Covered Agreements contemplate action by the states to pass relevant laws, particularly those regarding the conditions for elimination of collateral requirements currently applicable to European Union (EU) and/or U.K. reinsurers accepting business from U.S. ceding insurers.

Comments

The latest revisions come after a number of commenters noted that several provisions of the prior draft (the Approved Draft Law if referring to the Model Law, the Approved Draft Regulations if referring to the Model Regulation, or collectively, the Approved Draft) approved by the Financial Condition (E) Committee in November 2018 questioned whether its terms were consistent with the Covered Agreements.

These comments – and perhaps continued discussions between NAIC staff and the federal government – prompted the E Committee to refer the Credit for Reinsurance Model Law and Regulation back to a drafting group to address whether additional changes were required for:

  • Recognition of Reciprocal Jurisdictions
  • Determination of Compliance with the Bilateral Agreement
  • Commissioner Discretion to Impose Additional Requirements
  • Effective Date
  • Service of Process
  • Other Issues

The drafting group’s resulting work product is the Exposed Draft that was published for public comment on March 7.

Revisions to the Exposed Draft

In general, revisions made to the Exposed Draft represent a significant increase in deference to the terms of the Covered Agreements and/or the NAIC, as the case may be, and often at the expense of state insurance regulators’ discretion. A few of the more significant revisions are as follows:

1. Commissioner Discretion:

i. Discretionary authority of state insurance commissioners to determine whether a jurisdiction that is subject to a covered agreement is considered a Reciprocal Jurisdiction is deleted. In general, any non-U.S. jurisdiction that enters into a covered agreement with the United States is, by definition, a Reciprocal Jurisdiction.

ii. Jurisdictions that are not subject to a Covered Agreement may be treated as a Reciprocal Jurisdiction provided that they meet the definition of a qualified jurisdiction as determined by the commissioner.

iii. Discretionary authority of state insurance commissioners with respect to assuming insurers domiciled in jurisdictions that have entered into Covered Agreements with the United States is curtailed to the extent that any such discretion conflicts with the terms of the Covered Agreements.

iv. Discretionary authority of state insurance commissioners with respect to assuming insurers domiciled in jurisdictions that have entered into Covered Agreements with the United States is added to the extent that such discretion is required by the terms of the Covered Agreements.

2. Effective Date of Collateral Reduction:

i. Among other things, the Exposed Draft focuses on the date that the assuming insurer satisfies the requirements to assume reinsurance under the new law and regulation. However, the Covered Agreements maintain that an assuming insurer may take credit only for reinsurance agreements entered into on or after the date on which a measure (i.e., law) that reduces collateral pursuant to this Article takes effect. This could result in two very different dates: while the Exposed Draft is focused on the assuming insurer meeting the requirements for reduced collateral, the Covered Agreements are focused on the law implementing the reduction of collateral generally.

3. Other Changes:

i. Approved Draft provided that service of process to the commissioner shall be included in each reinsurance agreement. The Exposed Draft Law provides that the commissioner may require that consent for service of process be provided to the commissioner.

ii. The Approved Regulations incorporated the concept of an assuming reinsurer needing to satisfy a solvency ratio of 100% of the Solvency Capital Requirement (SCR) as calculated under the EU’s Solvency II provision. The Exposed Draft Regulations simply require that the assuming reinsurer satisfy the solvency ratio specified in the applicable Covered Agreement.

iii. The Approved Regulations added a number of instances where an assuming insurer would be compelled to provide prompt written notice and an explanation to the commissioner for noncompliance with applicable law. The Exposed Draft Regulations delete these provisions, which were more specific than what is provided in the Covered Agreements.

iv. The Approved Regulations provided a method to calculate the exchange rate for certain amounts. The Exposed Draft Regulation attempts to respond to the comment that the specified rate was not consistent with the covered agreement by adding the language “or as otherwise specified in the covered agreement.”

v. The Approved Regulations authorized the commissioner to remove jurisdictions from the list of Reciprocal Jurisdictions. The Exposed Draft Regulations now restrict the ability of the commissioner to remove Reciprocal Jurisdictions that are on the list as a result of a Covered Agreement.

Summary

It remains to be seen whether these revisions will ultimately be accepted by the Reinsurance (E) Task Force, the Financial Condition (E) Committee, or the Executive (EX) Committee, all of which must approve the draft prior to its adoption as the new model. Presumably, all relevant committees will consider the Exposed Draft at the Spring National Meeting in Orlando, Florida, to be held April 6−9. Should the Exposed Draft be adopted by the NAIC, it would then be incumbent upon state legislatures – working closely with their state insurance commissioners – to enact the model law swiftly and in a manner that is consistent with the terms of the model and the Covered Agreements.

For its part, the federal government – namely, the U.S. Department of the Treasury (through the Federal Insurance Office) − and the United States Trade Representative have yet to provide public assurances that the Exposed Draft is consistent with its interpretation of the terms of the Covered Agreements.

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About this Author

John Finston, Insurance Lawyer, Drinker Biddle
Partner

John F. Finston is a former General Counsel and Deputy Insurance Commissioner for the State of California who advises clients on insurance-related financial transactions, with a focus on highlighting and resolving insurance regulatory issues.

John’s practice involves representing reinsurance companies, insurance companies and insurance associations in mergers and acquisitions, transactional business restructuring, insolvency, and regulatory matters. He has extensive experience in transactional matters, and frequently advises...

415-591-7574
Daniel McCarty, Drinker Biddle, insurance lawyer
Associate

Daniel P. McCarty advises U.S. and international insurers on a wide range of insurance regulatory and corporate matters. He has policymaking and regulatory experience on issues including InsurTech, reinsurer and surplus lines regulation, producer licensing and the federal government’s involvement in insurance. Daniel actively monitors state and federal legislative developments in a variety of areas, with particular interest in developments related to the National Association of Registered Agents and Brokers, the Federal Insurance Office, the Terrorism Risk Insurance Program and the National Flood Insurance Program.

Prior to joining Drinker Biddle, Daniel served as a policy adviser for the United States Department of the Treasury. In that capacity, he was senior adviser to the Director of the Federal Insurance Office and regularly met with senior Treasury leadership to discuss insurance policy and regulation at the state and federal levels.

(212) 248-3251