Greg Arnold Collateral Gats 03 23 09

The Impact of an Optional Federal Charter The Impact of an Optional Federal Charter on the Reinsurance Collateral Debate-on the Reinsurance Collateral Debate-

The Latest Red HerringThe Latest Red Herring

By Gregory S. Arnold, LL.MBy Gregory S. Arnold, LL.M

IADC International Surety Claims ConferenceIADC International Surety Claims Conferenceand Appellate Advocacy Programand Appellate Advocacy Program

(Canceled For Insufficient Registration Count)(Canceled For Insufficient Registration Count)

Coral Gables-Miami, FloridaCoral Gables-Miami, FloridaMarch 26-27, 2009March 26-27, 2009

22

Brief historical overview of insurance Brief historical overview of insurance regulation in the U.S.regulation in the U.S. Paul v. VirginiaPaul v. Virginia (1868) (1868) United States v. South-EasternUnited States v. South-Eastern

Underwriters AssnUnderwriters Assn. (1944). (1944) McCarran-Ferguson Act (1945)McCarran-Ferguson Act (1945) Gramm-Leach-Bliley Act (1999)Gramm-Leach-Bliley Act (1999)

“…“…the McCarran-Ferguson Act remains the lawthe McCarran-Ferguson Act remains the law

of the United States.” (Title I, Sec. 104).of the United States.” (Title I, Sec. 104).

“…“…insurance activities…shall be functionallyinsurance activities…shall be functionally

regulated by the States…” (Title III, Sec. 301).regulated by the States…” (Title III, Sec. 301).

33

NAIC Credit for Reinsurance Model LawNAIC Credit for Reinsurance Model Law

NYS Regulation 20NYS Regulation 20

National Insurance Act 2007 (did not pass)National Insurance Act 2007 (did not pass)

44

National Insurance Consumer National Insurance Consumer Protection and Regulatory Protection and Regulatory Modernization Act”Modernization Act”

-- forthcoming 2009-- forthcoming 2009

55

The Controversial Background of The Controversial Background of Reinsurance Collateral Requirements Reinsurance Collateral Requirements

in the United Statesin the United States

66

NAIC Credit For Reinsurance Model Law

NAIC MODEL LAWS, REGULATIONS AND GUIDELINES

Copyright 2007 by the National Association of Insurance Commissioners

Current through Release No. 81 October, 2007

VOLUME V - REINSURANCE

785-1 CREDIT FOR REINSURANCE MODEL LAW

77


Purpose Domestic Reinsurers Licensed Unlicensed Non-U.S. Reinsurers Licensed Unlicensed

88

NAIC Credit For Reinsurance Model LawNAIC Credit For Reinsurance Model Law

NAIC Model Laws, Regulations and Guidelines 785-1, § 1NAIC Model Laws, Regulations and Guidelines 785-1, § 1

Section 1. PurposeSection 1. Purpose The purpose of this Act is to protect the interest of insureds, claimants, ceding The purpose of this Act is to protect the interest of insureds, claimants, ceding insurers, assuming insurers and the public generally. The legislature hereby declares insurers, assuming insurers and the public generally. The legislature hereby declares its intent is to ensure adequate regulation of insurers and reinsurers and adequate its intent is to ensure adequate regulation of insurers and reinsurers and adequate protection for those to whom they owe obligations. In furtherance of that state protection for those to whom they owe obligations. In furtherance of that state interest, the legislature hereby provides a mandate that upon the insolvency of a interest, the legislature hereby provides a mandate that upon the insolvency of a non-U.S. insurer or non-U.S. insurer or reinsurer reinsurer that provides security to fund its U.S. obligations in that provides security to fund its U.S. obligations in accordance with this Act, the assets representing the security shall be maintained in accordance with this Act, the assets representing the security shall be maintained in the United States and claims shall be filed with and valued by the state insurance the United States and claims shall be filed with and valued by the state insurance commissioner with regulatory oversight, and the assets shall be distributed, in commissioner with regulatory oversight, and the assets shall be distributed, in accordance with the insurance laws of the state in which the trust is domiciled that accordance with the insurance laws of the state in which the trust is domiciled that are applicable to the liquidation of domestic U.S. insurance companies. The are applicable to the liquidation of domestic U.S. insurance companies. The legislature declares that the matters contained in this Act are fundamental legislature declares that the matters contained in this Act are fundamental [arguably[arguably meaning the “prudential” carve-out exception applies]meaning the “prudential” carve-out exception applies] to the business of insurance in to the business of insurance in accordance with accordance with 15 U.S.C. §§ 1011-1012.-1012.

Legislative history (annotated page 17) below states this § 1 Purpose is based upon Legislative history (annotated page 17) below states this § 1 Purpose is based upon New York law. There is a reference in the legislative history to a “new” § 1.New York law. There is a reference in the legislative history to a “new” § 1.

99

NAIC Credit For Reinsurance Model LawNAIC Credit For Reinsurance Model Law

Domestic Reinsurer – if (a) licensed Domestic Reinsurer – if (a) licensed or (b) accredited …or (b) accredited …

§ 2. Credit Allowed a Domestic § 2. Credit Allowed a Domestic Ceding Insurer Ceding Insurer

Collateral security not required.Collateral security not required.

1010


U.S., Domestic U.S., Domestic Reinsurer – not Reinsurer – not licensed, licensed, accredited or accredited or otherwise otherwise permitted…permitted…

§ 3. Collateral § 3. Collateral required. required.

1111


Non-U.S. Reinsurer – if Non-U.S. Reinsurer – if (a) licensed or (b) (a) licensed or (b) accredited …accredited …

Section 2. Credit Section 2. Credit Allowed a Domestic Allowed a Domestic Ceding Insurer Ceding Insurer

Collateral security Collateral security not required.not required.

1212


Non-U.S. Reinsurer Non-U.S. Reinsurer – not licensed, – not licensed, accredited or accredited or otherwise otherwise permitted…permitted…

§ 3. Collateral § 3. Collateral requiredrequired

1313

New York State Credit For Reinsurance Law

New York’s collateral for reinsurance law – NY Admin. Code tit. 11 §§ 125.1 to 125.6 (1977/1994) (Regulation 17, 20) (Partially based on model).

1414

Lord Red HerringLord Red Herring

1515

The Latest The Latest Red HerringsRed Herrings: U.S. : U.S. Collateral RequirementsCollateral Requirements

““Currently in the US, alien reinsurers trading on a cross-border basis are required, Currently in the US, alien reinsurers trading on a cross-border basis are required, under National Association of Insurance Commissioners (NAIC) rules, to post under National Association of Insurance Commissioners (NAIC) rules, to post collateralcollateral equal to the full gross amount of their liabilities for the US risks they equal to the full gross amount of their liabilities for the US risks they underwrite. This puts them at a serious competitive disadvantage to domesticunderwrite. This puts them at a serious competitive disadvantage to domestic

companies which are not subject to the same rules.”companies which are not subject to the same rules.”

Remarks of Lloyd’s Head of Government Affairs, Alastair Evans.Remarks of Lloyd’s Head of Government Affairs, Alastair Evans.

SeeSee “Breaking Down The Barriers: Alastair Evans talks to the Market about his work “Breaking Down The Barriers: Alastair Evans talks to the Market about his work as Lloyd’s Head of government affairs”. Lloyd’s Market Newsletter, Issue One, 2006, as Lloyd’s Head of government affairs”. Lloyd’s Market Newsletter, Issue One, 2006, at 14. at 14. AvailableAvailable online at online at www.Lloyds.com, or , or http://works.bepress.com/gregory_arnold/5/. .

FocusFocus//Red HerringRed Herring – collateral – collateral

Ignores – Ignores – 1. With licensing the non-U.S. reinsurers would be on equal footing with U.S.1. With licensing the non-U.S. reinsurers would be on equal footing with U.S. domestic, licensed reinsurers.domestic, licensed reinsurers. 2. Unlicensed, domestic U.S. reinsurers must also post collateral.2. Unlicensed, domestic U.S. reinsurers must also post collateral.

1616

The Latest The Latest Red HerringsRed Herrings: E.U. : E.U. Reinsurance DirectiveReinsurance Directive

““The adoption of the The adoption of the EU reinsurance directiveEU reinsurance directive in November 2005, which will in November 2005, which will remove completely collateral requirements for EU reinsurers across the 25 remove completely collateral requirements for EU reinsurers across the 25 (now 27)(now 27) member states by 2008, will be a critical factor in the EU’s future dialogue with the member states by 2008, will be a critical factor in the EU’s future dialogue with the US on the issue.” US on the issue.” [Parenthetical “now 27” added. This Directive has not been fully [Parenthetical “now 27” added. This Directive has not been fully implemented as of 3-27-09]implemented as of 3-27-09]

Remarks of Lloyd’s Head of Government Affairs, Alastair Evans.Remarks of Lloyd’s Head of Government Affairs, Alastair Evans.

See “See “Breaking Down The Barriers: Alastair Evans talks to the Market about his work Breaking Down The Barriers: Alastair Evans talks to the Market about his work as Lloyd’s Head of government affairs.” Lloyd’s Market Newsletter, Issue One, 2006, as Lloyd’s Head of government affairs.” Lloyd’s Market Newsletter, Issue One, 2006, at 14. at 14. AvailableAvailable online at online at www.Lloyds.com, or , or http://works.bepress.com/gregory_arnold/5/. .

Focus/Focus/RedRed HerringHerring – Reinsurance Directive that, once implemented, will abolish – Reinsurance Directive that, once implemented, will abolish collateral requirements among the 27 EU Member States.collateral requirements among the 27 EU Member States.

Ignores – Under the EU Insurance Mediation Directive, E.U. Member States are Ignores – Under the EU Insurance Mediation Directive, E.U. Member States are permitted to require collateral from third countries, including the U.S.permitted to require collateral from third countries, including the U.S.

Note: These EU Insurance Directives are set forth on slides below for your later Note: These EU Insurance Directives are set forth on slides below for your later review.review.

1717

Licensing, TaxesLicensing, Taxes

1818

What Do The Critics Ignore?What Do The Critics Ignore? The Elephants in The RoomThe Elephants in The Room

1. Unlicensed, U.S. domestic1. Unlicensed, U.S. domestic reinsurers must postreinsurers must post collateral.collateral.

2. Licensed, non-U.S.2. Licensed, non-U.S. reinsurers are not reinsurers are not required to post collateral.required to post collateral.

3. Under the Insurance3. Under the Insurance Mediation Directive, the EUMediation Directive, the EU Member States can Member States can demand collateral from thirddemand collateral from third countries, including countries, including reinsurers in the U.S.reinsurers in the U.S.

1919

OFC Trust Fund RequirementOFC Trust Fund Requirement

2020

Need for Reinsurance Capacity Motivates U.S. Need for Reinsurance Capacity Motivates U.S. Accommodations to Non-U.S. ReinsurersAccommodations to Non-U.S. Reinsurers

So, why don’t the non-U.S. reinsurers just get licensed or So, why don’t the non-U.S. reinsurers just get licensed or accredited?accredited?

Licensing or accrediting in multiple U.S. jurisdictions is time-Licensing or accrediting in multiple U.S. jurisdictions is time-consuming, expensive and requires payment of taxes in the U.S.consuming, expensive and requires payment of taxes in the U.S.

The same problem faced by domestic reinsurers.The same problem faced by domestic reinsurers.

Is the U.S. doing anything to accommodate the non-U.S. Is the U.S. doing anything to accommodate the non-U.S. reinsurers?reinsurers?

• Yes. For practical vs. legal reasons (we need reinsurance capacity and Yes. For practical vs. legal reasons (we need reinsurance capacity and most reinsurance comes from foreign reinsurers), the U.S., through most reinsurance comes from foreign reinsurers), the U.S., through NAIC initiatives, has come up with the following proposal.NAIC initiatives, has come up with the following proposal.

2121

Latest NAIC ProposalsLatest NAIC Proposals Previous, non-implemented proposal – Reinsurance Previous, non-implemented proposal – Reinsurance

Evaluation Office (REO)Evaluation Office (REO) Current, non-implemented proposal – Reinsurance Current, non-implemented proposal – Reinsurance

Supervision Review Department (RSRD Proposal)Supervision Review Department (RSRD Proposal) Non-controversial Aspects (“passporting”)Non-controversial Aspects (“passporting”)

Single State U.S. Regulator – U.S. Domestic and Single State U.S. Regulator – U.S. Domestic and Licensed ReinsurerLicensed Reinsurer

Port of Entry (POE) Regulator – Certified Non-U.S., Port of Entry (POE) Regulator – Certified Non-U.S., Unlicensed ReinsurerUnlicensed Reinsurer

Resemble EU “single Resemble EU “single passport” directivespassport” directives

Controversial – Mutual Recognition FrameworkControversial – Mutual Recognition FrameworkLegal issues under U.S. Legal issues under U.S.

Constitutional and Constitutional and international lawinternational law

2222

Mutual Recognition FrameworkMutual Recognition Framework

Controversial ProvisionsControversial Provisions• Recognition of RegulatoryRecognition of Regulatory

EquivalenceEquivalence• Enforcement of JudgmentsEnforcement of Judgments

• Methodology is ProblematicMethodology is Problematic

Memoranda of Understanding (MUO)Memoranda of Understanding (MUO)

Mutual Recognition Agreement (MRA)Mutual Recognition Agreement (MRA)

2323

The Latest Reinsurance Regulatory Modernization The Latest Reinsurance Regulatory Modernization Framework Proposals from The NAICFramework Proposals from The NAIC

Collateral calibrationsCollateral calibrations Options for conducting reinsurance under the Options for conducting reinsurance under the

RSRD ProposalRSRD Proposal 1. National Reinsurer – licensed in an approved state, with a 1. National Reinsurer – licensed in an approved state, with a

physical presence in the U.S., available to both U.S. and Non-U.S., physical presence in the U.S., available to both U.S. and Non-U.S., licensed reinsurers. licensed reinsurers.

2. Port of Entry Reinsurer – certified by a POE state, the 2. Port of Entry Reinsurer – certified by a POE state, the reinsurer must be from a non-U.S. jurisdiction recommended by reinsurer must be from a non-U.S. jurisdiction recommended by the RSRD; no physical presence in the U.S. is permitted.the RSRD; no physical presence in the U.S. is permitted.

3. Licensed and Accredited Reinsurer, both domestic and non-3. Licensed and Accredited Reinsurer, both domestic and non-U.S., under the current NAIC Credit for Reinsurance Model Law U.S., under the current NAIC Credit for Reinsurance Model Law (CFRML), § 2.(CFRML), § 2.

4. Not licensed or accredited, whether domestic or non-U.S., 4. Not licensed or accredited, whether domestic or non-U.S., reinsurers could continue to access the U.S. market by posting reinsurers could continue to access the U.S. market by posting 100% collateral, per § 3, CFRML.100% collateral, per § 3, CFRML.

2424

The Latest Reinsurance Regulatory Modernization The Latest Reinsurance Regulatory Modernization Framework Proposals from New York StateFramework Proposals from New York State

Collateral calibrations are a moving target…, but the latest Collateral calibrations are a moving target…, but the latest NY proposal is –NY proposal is –

Alien and domestic unauthorized reinsurance companies Alien and domestic unauthorized reinsurance companies

with the highest credit ratings will be treated the same as with the highest credit ratings will be treated the same as authorized companies. Weaker reinsurance companies will authorized companies. Weaker reinsurance companies will be required to post collateral on a sliding scale from 10 to be required to post collateral on a sliding scale from 10 to 100 percent. Unauthorized reinsurers with a triple A credit 100 percent. Unauthorized reinsurers with a triple A credit rating from two rating agencies would not have to post rating from two rating agencies would not have to post collateral. Unauthorized reinsurers with a double A or collateral. Unauthorized reinsurers with a double A or equivalent rating would have to post collateral equal to 10 equivalent rating would have to post collateral equal to 10 percent of claims, single A 20 percent, and triple B 50 percent of claims, single A 20 percent, and triple B 50 percent. Unauthorized reinsurers having a credit rating percent. Unauthorized reinsurers having a credit rating below triple B would still be required to post 100 percent below triple B would still be required to post 100 percent collateral.collateral.

2525

The Latest Reinsurance Regulatory Modernization The Latest Reinsurance Regulatory Modernization Framework Proposals from New York State Framework Proposals from New York State (cont’d)(cont’d)

Other requirements would be as follows:Other requirements would be as follows:

An unauthorized reinsurer must:An unauthorized reinsurer must:

Meet the standards of solvency, including standards for capital adequacy, established Meet the standards of solvency, including standards for capital adequacy, established by its domestic regulator;by its domestic regulator;

Be authorized in its domiciliary jurisdiction to assume the specific kind of reinsurance Be authorized in its domiciliary jurisdiction to assume the specific kind of reinsurance it is offering;it is offering;

Maintain a policyholder's surplus or equivalent in excess of $250,000,000;Maintain a policyholder's surplus or equivalent in excess of $250,000,000; Accept required contract terms, including consent to the jurisdiction of U.S. courts for Accept required contract terms, including consent to the jurisdiction of U.S. courts for

disputes;disputes; Have a primary regulator that has a memorandum of understanding with the NYSID Have a primary regulator that has a memorandum of understanding with the NYSID

that addresses information sharing;that addresses information sharing; Be domiciled in a country that allows U.S. reinsurers access to its market on similar Be domiciled in a country that allows U.S. reinsurers access to its market on similar

terms; andterms; and Post 100 percent collateral upon the entry of an order of rehabilitation, liquidation or Post 100 percent collateral upon the entry of an order of rehabilitation, liquidation or

conservation against the ceding insurance company.conservation against the ceding insurance company.

See N.Y. Moves to Level Playing Field on Collateral for All ReinsurersSee N.Y. Moves to Level Playing Field on Collateral for All Reinsurers, , Insurance Journal, Oct. 18, 2007, Insurance Journal, Oct. 18, 2007, available atavailable at

http://www.insurancejournal.com/news/national/2007/10/18/84395.htm, last viewed , last viewed November 15, 2008.November 15, 2008.

2626

The Latest Reinsurance Regulatory Modernization The Latest Reinsurance Regulatory Modernization Framework Proposals from New York State Framework Proposals from New York State (cont’d)(cont’d)

Removed from the list above for purposes of this PowerPoint Removed from the list above for purposes of this PowerPoint presentation is the following language: presentation is the following language:

“…“…and considers such matters as regulatory equivalency and and considers such matters as regulatory equivalency and enforceability of judgments”, following the words “Have a primary enforceability of judgments”, following the words “Have a primary regulator that has a memorandum of understanding with the regulator that has a memorandum of understanding with the NYSID that addresses information sharing”.NYSID that addresses information sharing”.

This is because "there is some legal debate whether states can This is because "there is some legal debate whether states can compel a foreign regulator to take or require specific legal actions compel a foreign regulator to take or require specific legal actions against a company domiciled there.“against a company domiciled there.“

See See New York Set to Relax Reinsurer Collateral, New York Set to Relax Reinsurer Collateral, Meg Fletcher, Meg Fletcher, Business Journal, July 7, 2008, Business Journal, July 7, 2008, available atavailable at http://www.businessinsurance.com/cgi-bin/article.pl?articleId=25319, last viewed November 15, 2008. , last viewed November 15, 2008.

2727

Legal Analysis of the Latest Reinsurance Regulatory Legal Analysis of the Latest Reinsurance Regulatory Modernization FrameworkModernization Framework

The World Trade Organization and the General The World Trade Organization and the General Agreement on Trade in ServicesAgreement on Trade in Services

““[T]he WTO legal framework for financial services [T]he WTO legal framework for financial services addresses the intersection between financial addresses the intersection between financial services liberalization commitments and the role services liberalization commitments and the role of prudential regulation.”*of prudential regulation.”*

__________ *Douglas W. Arner, Financial Stability, Economic *Douglas W. Arner, Financial Stability, Economic

Growth, and the Role of Law, Cambridge Growth, and the Role of Law, Cambridge University Press (June 4, 2007), at 273.University Press (June 4, 2007), at 273.

2828

Legal Analysis of the Latest Reinsurance Regulatory Legal Analysis of the Latest Reinsurance Regulatory Modernization FrameworkModernization Framework

Federal Preemption Doctrine: World Trade Organization General Agreement on Trade in Services (GATS)

Most Favored Nation Obligations – GATS, Article II

• Prohibits the U.S., even at state level, from treating the services or services suppliers of one WTO Member less Prohibits the U.S., even at state level, from treating the services or services suppliers of one WTO Member less favorably than it treats similar services or service suppliers of any other WTO Member. favorably than it treats similar services or service suppliers of any other WTO Member.

• Exceptions:Exceptions:

• (1) Apply a “like” vs. not sufficiently “like” test to distinguish non-POE WTO Members from those that are POE (1) Apply a “like” vs. not sufficiently “like” test to distinguish non-POE WTO Members from those that are POE WTO Members, based upon “regulatory effectiveness” or “functionally different regulatory regimes”, justifying WTO Members, based upon “regulatory effectiveness” or “functionally different regulatory regimes”, justifying “disparate treatment.” “disparate treatment.”

• (2) Apply the “prudential carve-out exception”. Prudential/regulatory actions taken to protect policyholders or to (2) Apply the “prudential carve-out exception”. Prudential/regulatory actions taken to protect policyholders or to ensure stability and integrity of the financial services sector of a WTO Member. WTO Members “shall not be ensure stability and integrity of the financial services sector of a WTO Member. WTO Members “shall not be prevented from taking measures for prudential reasons, including for the protection of investors, depositors, policy prevented from taking measures for prudential reasons, including for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system”. This applies even when such measures would otherwise be in violation of a stability of the financial system”. This applies even when such measures would otherwise be in violation of a WTO Member’s obligation under GATS, including the MFN obligation. See, GATS Annex on Financial Services, WTO Member’s obligation under GATS, including the MFN obligation. See, GATS Annex on Financial Services, ¶ 2(a).¶ 2(a).

• § 3, CFRML. Same “prudential carve-out” exception analysis applies.§ 3, CFRML. Same “prudential carve-out” exception analysis applies.

• Conclusion – it is unlikely that the RSRD Proposal or § 3, CFRML would be determined to violate the United Conclusion – it is unlikely that the RSRD Proposal or § 3, CFRML would be determined to violate the United States’ MFN obligations under Article II of the GATS.States’ MFN obligations under Article II of the GATS.

2929

Legal Analysis of the Latest Reinsurance Regulatory Modernization Framework

National Treatment Obligations – WTO GATS, Article XVII

• “Schedule of Commitments” National treatment commitment in the reinsurance- and retrocession-related National treatment commitment in the reinsurance- and retrocession-related

services sub-sectorservices sub-sector

• Obligates U.S. to accord to non-U.S. reinsurance supplier and their services, Obligates U.S. to accord to non-U.S. reinsurance supplier and their services, treatment no less favorable than that which it accords to U.S. domestic reinsurance treatment no less favorable than that which it accords to U.S. domestic reinsurance companies.companies.

• See GATS Annex on Financial Services § 5(a)(2).See GATS Annex on Financial Services § 5(a)(2).

• Where non-US WTO Members are not deemed “effective” in reinsurance regulatory Where non-US WTO Members are not deemed “effective” in reinsurance regulatory regimes, at least in terms of outcomes; or where it is regimes, at least in terms of outcomes; or where it is more difficult to satisfy more difficult to satisfy judgmentsjudgments against non-U.S. reinsurers whose assets are outside the U.S., disparate against non-U.S. reinsurers whose assets are outside the U.S., disparate collateral requirements could be justified under the “prudential carve-out collateral requirements could be justified under the “prudential carve-out exception”.exception”.

• Note: The CFRML, Sec. D(2), with respect to incorporated underwriters, gives non-Note: The CFRML, Sec. D(2), with respect to incorporated underwriters, gives non-US reinsurers a right that U.S. companies do not enjoy abroad. 1990 Proc. IB 851. US reinsurers a right that U.S. companies do not enjoy abroad. 1990 Proc. IB 851.

The NAIC noted that the international aspects had been considered and that an The NAIC noted that the international aspects had been considered and that an open market was, in the long term, in the best interest of the United States market open market was, in the long term, in the best interest of the United States market

3030

U.S. Constitutional IssuesU.S. Constitutional Issues The Compact Clause – Art. 1, § 10, cl. 3:The Compact Clause – Art. 1, § 10, cl. 3:

““No State shall, without the Consent of Congress,…No State shall, without the Consent of Congress,…enter into any Agreement or Compact with another enter into any Agreement or Compact with another State, or with a foreign Power...”State, or with a foreign Power...”

• Whether Mutual Recognition Agreements Whether Mutual Recognition Agreements Come Within the Compact ClauseCome Within the Compact Clause

“ “Reciprocal recognition” constitutes an Reciprocal recognition” constitutes an “agreement” for purposes of the Compact Clause. “agreement” for purposes of the Compact Clause. See See Virginia v. TennesseeVirginia v. Tennessee, 148 U.S. 503, 520 , 148 U.S. 503, 520 (1982). Cooperation and information sharing also (1982). Cooperation and information sharing also “agreements.”“agreements.”

3131

Whether Mutual Recognition Agreements Requires Whether Mutual Recognition Agreements Requires Congressional ConsentCongressional Consent Virginia v. TennesseeVirginia v. Tennessee, text of the Compact Clause, , text of the Compact Clause, and Restatement (Third) of the Foreign Relations Law of the and Restatement (Third) of the Foreign Relations Law of the United States, § 302f (1986) all suggest that these United States, § 302f (1986) all suggest that these agreements do require Congressional consent. But, per agreements do require Congressional consent. But, per Louis Henkin, “Congressional consent to an agreement Louis Henkin, “Congressional consent to an agreement between a state and a foreign government [] is required only between a state and a foreign government [] is required only if the agreement tends to give the state elements of if the agreement tends to give the state elements of international sovereignty, interferes with the full and free international sovereignty, interferes with the full and free exercise of federal authority, or deals locally with a matter exercise of federal authority, or deals locally with a matter on which there is or might be national policy.” (Henkins at on which there is or might be national policy.” (Henkins at 155). 155). Ergo,Ergo, not clear there would be a not clear there would be a per seper se invalid invalid encroachment into the federal government’s preeminent encroachment into the federal government’s preeminent authority in the field of foreign affairs.authority in the field of foreign affairs.

3232

• Whether Mutual Recognition Agreements Whether Mutual Recognition Agreements Enlarge State Power and Encroach Upon Enlarge State Power and Encroach Upon Federal SovereigntyFederal Sovereignty

““Market opening” / negotiation activity is outside Market opening” / negotiation activity is outside traditional state regulation of insurance. Certification traditional state regulation of insurance. Certification activity is sufficiently tied to the states’ traditional activity is sufficiently tied to the states’ traditional role of regulating the business of insurance. MFA role of regulating the business of insurance. MFA implies Congressional consent to regulate business implies Congressional consent to regulate business this way and thru MRAs, so long as does not lead to a this way and thru MRAs, so long as does not lead to a GATS violation and stays clear of foreign affairs.GATS violation and stays clear of foreign affairs.

Unilateral agreements safer than MRAs. Need to be Unilateral agreements safer than MRAs. Need to be persuasive that there would be a domestic benefit. persuasive that there would be a domestic benefit. Can treat others more favorably (something other Can treat others more favorably (something other WTO Members not likely to do for U.S).WTO Members not likely to do for U.S).

3333

Whether There is Implied Congressional Consent Whether There is Implied Congressional Consent for States to Enter into Mutual Recognition for States to Enter into Mutual Recognition AgreementsAgreements

• The MFA most likely gives Congressional consent to The MFA most likely gives Congressional consent to MRAs, but only to the extent they are used for MRAs, but only to the extent they are used for information gathering and encourage improvements in information gathering and encourage improvements in non-U.S. regulatory schemes. Instead of MRAs, the U.S. non-U.S. regulatory schemes. Instead of MRAs, the U.S. should consider the alternative of a unilateral should consider the alternative of a unilateral recognition framework, allowing cooperation and recognition framework, allowing cooperation and information sharing agreements that would only address information sharing agreements that would only address issues that would not potentially impact the Compact issues that would not potentially impact the Compact Clause and that more precisely track the traditional Clause and that more precisely track the traditional power of states to regulate the business of insurance.power of states to regulate the business of insurance.

3434

Doctrine of Dormant Foreign Affairs PreemptionDoctrine of Dormant Foreign Affairs Preemption• Expansive, often asserted where there is no conflict with state Expansive, often asserted where there is no conflict with state

law. “Federalism is the vampire of U.S. foreign relations law: law. “Federalism is the vampire of U.S. foreign relations law: officially deceased or moribund at best, but in reality officially deceased or moribund at best, but in reality surprisingly resilient and prone to recover at unsettling surprisingly resilient and prone to recover at unsettling intervals.”*intervals.”*

• Two cases:Two cases:• 1. Zschernig v. Miller, 389 U.S. 429 (1968) (foreign heirs)1. Zschernig v. Miller, 389 U.S. 429 (1968) (foreign heirs)• 2. American Ins. Ass’n v. Garamendi, 539 U.S. 396, 428 (2003) (foreign 2. American Ins. Ass’n v. Garamendi, 539 U.S. 396, 428 (2003) (foreign

claims settlements)claims settlements)

Alternative views: evaluation function and reciprocal recognition Alternative views: evaluation function and reciprocal recognition function. The latter, “opening foreign markets” to U.S. business not function. The latter, “opening foreign markets” to U.S. business not traditional state activity, but no apparent conflict with affirmative traditional state activity, but no apparent conflict with affirmative federal initiatives or negotiations with foreign governments. federal initiatives or negotiations with foreign governments.

__________*Edward T. Swain, *Edward T. Swain, Does Federalism Constrain the Treaty Power?Does Federalism Constrain the Treaty Power?, ,

Columbia Law Review, Vol. 103, No. 3 (Apr. 2003), pp. 403-533, at 404. Columbia Law Review, Vol. 103, No. 3 (Apr. 2003), pp. 403-533, at 404.

The Hanover Insurance Group

3535

Dormant Federal Foreign Commerce Clause – Article 1, § 8Dormant Federal Foreign Commerce Clause – Article 1, § 8

States should not discriminate against foreign States should not discriminate against foreign commerce in favor of their own citizens, should avoid commerce in favor of their own citizens, should avoid imposing multiple taxation, and should avoid impinging imposing multiple taxation, and should avoid impinging the federal government’s ability to speak with one voice the federal government’s ability to speak with one voice in the field of commerce with foreign nations.in the field of commerce with foreign nations.

Metropolitan Life Ins. Co. v. Ward, 470 U.S. 869, Metropolitan Life Ins. Co. v. Ward, 470 U.S. 869, 880 (1985). “The McCarran-Ferguson Act exempts the 880 (1985). “The McCarran-Ferguson Act exempts the insurance industry from Commerce Clause restrictions.”insurance industry from Commerce Clause restrictions.”

Nothing in MFA distinguishes states’ ability to regulate Nothing in MFA distinguishes states’ ability to regulate U.S. insurers from their ability to regulate non-U.S. U.S. insurers from their ability to regulate non-U.S. insurers. insurers.

3636

EU – Insurance Mediation DirectiveEU – Insurance Mediation Directive

The EU Member States will eliminate The EU Member States will eliminate collateral demands upon one another, but, collateral demands upon one another, but, under the Reinsurance Directive, are under the Reinsurance Directive, are permitted to demand “pledging of assets” permitted to demand “pledging of assets” from reinsurers in third countries. This from reinsurers in third countries. This takes precedence over GATS.takes precedence over GATS.

Cannot treat third countries more Cannot treat third countries more favorably than EU Member State. favorably than EU Member State. (Contrast U.S. approach, Legislative (Contrast U.S. approach, Legislative History of CFRML).History of CFRML).

3737

Countries Outside Europe That Have Countries Outside Europe That Have Collateral Requirements for Third CountriesCollateral Requirements for Third Countries

Australia requires collateral security Australia requires collateral security from third-country reinsurers.from third-country reinsurers.

Who is complaining?Who is complaining? Australia also has reinsurance Australia also has reinsurance

capacity issues, like the U.S.capacity issues, like the U.S. Are the criticisms against the U.S. Are the criticisms against the U.S.

system justified?system justified?

3838

Conclusions and Conclusions and RecommendationsRecommendations

Reconsider the wisdom of the current system, including the benefits of the NAIC Reconsider the wisdom of the current system, including the benefits of the NAIC Credit for Reinsurance Model Law (existing provisions for U.S. jurisdiction of disputes Credit for Reinsurance Model Law (existing provisions for U.S. jurisdiction of disputes and recovery from collateral).and recovery from collateral).

CFRML a convenient nexus to overall objectives with proven success, could be CFRML a convenient nexus to overall objectives with proven success, could be salvaged for all purposes with appropriate collateral calibration.salvaged for all purposes with appropriate collateral calibration.

The Hague Convention on Choice of Courts ConventionThe Hague Convention on Choice of Courts Convention

The New York ConventionThe New York Convention

Consider the wisdom of independent credit rating agencies. Are they facing the Consider the wisdom of independent credit rating agencies. Are they facing the same constitutional or international trade scrutiny?same constitutional or international trade scrutiny?

Are there opportunities for companies to enter the market by offering new services, Are there opportunities for companies to enter the market by offering new services, such as independent reviews and opinions of foreign reinsurance regulatory regimes? such as independent reviews and opinions of foreign reinsurance regulatory regimes? If so, could their results/ratings/opinions be tied to the NAIC CFRML and individual If so, could their results/ratings/opinions be tied to the NAIC CFRML and individual state enactments, such as NY Regulation 20?state enactments, such as NY Regulation 20?

Avoid use of MUOs and MRAs, as these result in complex constitutional and Avoid use of MUOs and MRAs, as these result in complex constitutional and international trade issues, when other alternatives are less controversial. Work international trade issues, when other alternatives are less controversial. Work within the CFRML.within the CFRML.

3939

Interplay Between U.S. and E.U. Interplay Between U.S. and E.U. Reinsurance Regulatory ReformReinsurance Regulatory Reform

4040

Preliminary BasicsPreliminary Basics

Institutions of theInstitutions of the

European UnionEuropean Union CouncilCouncil CommissionCommission ParliamentParliament Court of JusticeCourt of Justice Court of the Court of the

AccountingsAccountings

Sources of EU LawSources of EU Law

--The…--The… RecommendationsRecommendations RegulationsRegulations DirectivesDirectives EU TreatyEU Treaty

Prudential / Supervisory Prudential / Supervisory Rules for The Conduct of Rules for The Conduct of

Reinsurance BusinessReinsurance BusinessEU and U.S.EU and U.S.

4242

Sources of Reinsurance Supervision Rules

EUFederal-Like Supervision

US State Supervision

4343

Sources of Reinsurance Supervisory Rules

EUEuropean Parliament

and The CouncilReinsurance Directive (RID)

2005/68/ECAdopted Law, Required to Be

Implemented Into National Law

(Uniform Rules, 27 EU Member Countries, 30 EEA Countries)

U.S.National Association

of Insurance CommissionersCredit for Reinsurance Model Law)

Recommended Model Laws

(Regulation by 50 States, District of Columbia,And Territories)

Europe Dancing for Joy.MOV

4444

Reinsurance Directive 2005/68/ECReinsurance Directive 2005/68/ECInstitutional Arrangements – Third CountriesInstitutional Arrangements – Third Countries

TITLE III

CONDITIONS GOVERNING THE BUSINESS OF REINSURANCE

Cooperation Agreements With Third Countries (Cooperation Agreements With Third Countries (Article 26)Article 26)

TITLE VIREINSURANCE UNDERTAKINGS WHOSE HEAD OFFICES ARE OUTSIDE THE COMMUNITY AND CONDUCTING REINSURANCE

ACTIVITIES IN THE COMMUNITY

Third Country Reinsurance Undertakings (Article 49)Third Country Reinsurance Undertakings (Article 49)

Agreements With Third Countries (Article 50)Agreements With Third Countries (Article 50)

4545

Article 26Article 26Cooperation Agreements with Third CountriesCooperation Agreements with Third Countries

Member States may conclude cooperation agreements providing forexchange of information with the competent authorities of thirdcountries or with authorities or bodies of third countries as defined inArticle 28(1) and (2) only if the information disclosed is subject toguarantees of professional secrecy at least equivalent to thosereferred to in this Section. Such exchange of information shall beintended for the performance of the supervisory task of theauthorities or bodies mentioned.

Where the information originates in another Member State, itmay not be disclosed without the express agreement of thecompetent authorities which have disclosed it and, whereappropriate, solely for the purposes for which thoseauthorities gave their agreement.

4646

Article 49Article 49

Principle and Conditions for Conducting Reinsurance BusinessPrinciple and Conditions for Conducting Reinsurance Business

A Member State shall not apply to reinsurance undertakings having their head offices outside the Community and commencing or carrying out reinsurance activities in its territory provisions which result in a treatment more favourable than that accorded to reinsurance undertakings having their head office in that Member State.

4747

Article 50Article 50

Agreements With Third CountriesAgreements With Third Countries

1. The Commission may submit proposals to the Council forthe negotiation of agreements with one or more thirdcountries regarding the means of exercising supervision over:

(a) reinsurance undertakings which have their head officessituated in a third country, and conduct reinsurancebusiness in the Community,

(b) reinsurance undertakings which have their head offices in theCommunity and conduct reinsurance business in the territory of athird country.

4848

Article 50, Cont’dArticle 50, Cont’d

2. The agreements referred to in paragraph 1 shall in particular seek to ensureunder conditions of equivalence of prudential regulation, effective marketaccess for reinsurance undertakings in the territory of each contracting partyand provide for mutual recognition of supervisory rules and practices onreinsurance. They shall also seek to ensure that:

(a) the competent authorities of the Member States are able to obtain theinformation necessary for the supervision of reinsurance undertakings whichhave their head offices situated in the Community and conduct businessin the territory of third countries concerned,

(b) the competent authorities of third countries are able to obtain the information

necessary for the supervision of reinsurance undertakings which have theirhead offices situated within their territories and conduct business in theCommunity.

3. Without prejudice to Articles 300(1) and (2) of the Treaty, the Commission shall with

the assistance of the European Insurance and Occupational Pensions Committee

examine the outcome of the negotiations referred to in paragraph 1 of this Article and

the resulting situation.

4949

Insurance Mediation Directive, IMDInsurance Mediation Directive, IMDDirective 2002/92/EC of the European Parliament and of the Council of Directive 2002/92/EC of the European Parliament and of the Council of 9 December 2002 on Insurance Mediation, also known as the Insurance 9 December 2002 on Insurance Mediation, also known as the Insurance Mediation Directive, or simply IMD.[1] Mediation Directive, or simply IMD.[1]

Under the IMD, Article 1, “Scope”, paragraph 3, “equal treatment” of Under the IMD, Article 1, “Scope”, paragraph 3, “equal treatment” of reinsurance intermediaries is “guaranteed.” In the Reinsurance reinsurance intermediaries is “guaranteed.” In the Reinsurance Directive, or RID, the “pledging of assets” by third-country reinsurers Directive, or RID, the “pledging of assets” by third-country reinsurers can be requested by an EU Member State. This is arguably not likely to can be requested by an EU Member State. This is arguably not likely to occur given the EU’s attempts at global harmonization of the occur given the EU’s attempts at global harmonization of the reinsurance business. Under the RID, EU Member States cannot offer reinsurance business. Under the RID, EU Member States cannot offer terms to third-country reinsurers on terms more favorable than those terms to third-country reinsurers on terms more favorable than those offered to Community members. That refers to reinsurance offered to Community members. That refers to reinsurance companies, not intermediaries. Thus, under the IMD, equal treatment companies, not intermediaries. Thus, under the IMD, equal treatment to intermediaries is guaranteed, with no mention of treatment of to intermediaries is guaranteed, with no mention of treatment of companies. Under the RID, equal treatment of companies is not companies. Under the RID, equal treatment of companies is not guaranteed. Any attempts by the EU to require pledging of assets by guaranteed. Any attempts by the EU to require pledging of assets by third countries could be met with claims of discrimination. If the third countries could be met with claims of discrimination. If the complainer is a U.S. reinsurance company, such complaints would be complainer is a U.S. reinsurance company, such complaints would be met with no sympathy – see the discussion of the collateral debate, met with no sympathy – see the discussion of the collateral debate, infra.infra.

[1] [1] Available atAvailable at www.eur-lex.europa.cu/LexUriServ/LexUriServe.do? www.eur-lex.europa.cu/LexUriServ/LexUriServe.do?uri=CELEX:32002L0092:EN:NOT.uri=CELEX:32002L0092:EN:NOT.

5050

RID HighlightsRID Highlights

The Reinsurance Directive The Reinsurance Directive gives reinsurers not based in gives reinsurers not based in an EU Member state the an EU Member state the opportunity to conduct opportunity to conduct business in the EU without the business in the EU without the need to establish a branch.need to establish a branch.

Art. 26: “Cooperation Art. 26: “Cooperation agreements…information agreements…information exchange”exchange”

--”guarantee of secrecy”--”guarantee of secrecy”

Art. 49: “…no more Art. 49: “…no more favourable than that accorded favourable than that accorded to reinsurance undertakings to reinsurance undertakings having their headhaving their head

office in that Member State.” office in that Member State.”

Compared with U.S. regime, Compared with U.S. regime, infra.infra.

5151

RID Highlights (Cont’d)RID Highlights (Cont’d)

Art. 50: “…negotiation of Art. 50: “…negotiation of agreements with…third agreements with…third countries regarding means countries regarding means of supervision over” “(a) of supervision over” “(a) reinsurance undertakings reinsurance undertakings which have their head which have their head offices situated in a third offices situated in a third country, and conduct country, and conduct reinsurance business reinsurance business within the Community within the Community

IMD – EU can require IMD – EU can require collateral (“pledging of collateral (“pledging of assets”) of third countries assets”) of third countries such as the U.S.such as the U.S.

Compared with U.S. regime, Compared with U.S. regime, infra.infra.

5252

Sources of Foreign Reinsurance Supervision



2005/68/ECAdopted Law for Implementation

Into National Law


USNational Association

of Insurance CommissionersCredit for Reinsurance Model Law (CFRML)


(Regulation by 51 Jurisdictions)

ImplementationInto National Law

UK

5353


UK

Financial Servicesand Markets Act

2000

The RID came into force Dec. 10, 2005 and was originally to be implemented by Dec. 10, 2007 (extended to October 2008). The UK

Financial Services Authority (“FSA”) states that most of the provisions of the RID had already been implemented by the UK prior to the planned

effective date. The next slides will discuss what was done for full implementation.

5454

Financial Servicesand Markets Act 2000

2006 Implementations (cont’d)

On 31 December 2006 the FSA introduced prudential changes for insurers which included the introduction of a principles-based approach to asset admissibility, the reduction of certain reinsurance solvency requirements and the authorization and supervision of insurance special purpose vehicles.

Source: Implementation of the Reinsurance Directive in the UK, Clyde & CO LLP Newsletter,

January 2008, available at http://www.runoffmarket.com/docs/a014/Run-off-Jan-2008.pdf.

5555

Financial Servicesand Markets Act 2000

2006 Implementations (cont’d)

The FSA’s proposed new measurers are discussed in its publication entitled Consultant Paper, Implementing the Reinsurance Directive, June 2006. The FSA implemented these new measures on December 31, 2006:

•Removed restrictions on the assets held by reinsurers;

The pre-existing prescriptive rules on admissible assets and quantitative limits were removed for pure reinsurers and replaced by high level "prudent person" investment principles covering liquidity, security, quality, profitability and matching of assets.

5656

FSA’s 2006 Measures (Cont’d)

•Removing restrictions on the assets held by reinsurers;

•Changed the life reinsurance rules on capital requirements and technical provisions;

Pure reinsurers and mixed insurers carrying on life reinsurance protection business and permanent health insurance can now determine their minimum capital requirement using the non-life solvency tests. Furthermore, pure reinsurers can now calculate their technical provisions on a basis which has less of a margin of prudence built in than was required. The FSA estimates that the combined effect of these is a significant increase in excess capital of UK pure reinsurers. A certain proportion of that capital is needed to meet the individual capital adequacy standards that the FSA imposes on each firm. But even taking that into account the FSA estimates the changes resulted in the potential freeing up of capital of approximately £730 million.

5757

FSA’s 2006 Measures (cont’d)

Removing restrictions on the assets held by reinsurers;

•Changing the life reinsurance rules on capital requirements and technical provisions;

•Relaxed restrictions on reinsurers' activities;

Previously reinsurers could only carry on reinsurance business and activities directly arising from that business. The FSA relaxed that restriction for pure reinsurers so as to permit them to carry on related operations such as providing actuarial advice or claims management services for their clients.

5858

FSA’s 2007 Measures

Dec. 31, 2007

•Financial Services and Markets Act 2000 (Reinsurance Directive) Regulation 2007 No 3255:

This provides that a proposed transfer by a reinsurance undertaking must be publicized and notified to policyholders. That requirement can be waived by the court in certain circumstances.

5959


Dec. 31, 2007

•Financial Services and Markets Act 2000 (Reinsurance Directive) Regulation 2007 No 3255:

•Services and Markets Act 2000 (Reinsurance Directive) Order 2007 No. 3254

This makes clear that the term "a relevant reinsurer" (as used in Statutory Instrument No. 2001/544) includes reinsurers that fall within the RID as well as other foreign reinsurers. The instrument also deals with Gibraltar-based firms, extending to Gibraltar-based firms carrying on reinsurance within the meaning of the RID the right to establish branches in the UK, which Gibraltar-based firms carrying on direct insurance business already had.

6060


Dec. 31, 2007

•Financial Services and Markets Act 2000 (Reinsurance Directive) Regulation 2007 No 3255;•Services and Markets Act 2000 (Reinsurance Directive) Order 2007 No. 3254;•The Reinsurance Directive Regulations 2007 No. 3253 A new procedure for reinsurance transfers. It was already possible, prior to the RID, to transfer reinsurance portfolios under Part VII of FSMA, but changes were required to the UK procedure to comply with the RID and in particular the need for home state authorization of transfers by UK branches of pure reinsurers. Also, the Treasury chose to simplify the Part VII process as it applies to reinsurance transfers, so that where the consent of all the policyholders has been obtained, an application to court will not be necessary, although a solvency certificate (which is a minimum requirement under the RID) will have to be obtained. There is also provision to clarify the application of the requirements for certificates as to solvency and consent of certain regulators to transfers by non-EEA insurers with a branch in the UK, and to transfers to branches of non-EEA insurers elsewhere in the EEA.

6161

Sources of Foreign Reinsurance Supervisory Rules



2005/68/ECActual Law



of Insurance CommissionersCredit for Reinsurance Model Law-NAIC)



6262

HighlightsHighlightsEU/RID NAIC/CRMAEU/RID NAIC/CRMA

The RID gives reinsurers not The RID gives reinsurers not based in an EU Member state based in an EU Member state the opportunity to conduct the opportunity to conduct business in the EU without the business in the EU without the need to establish a branch.need to establish a branch.

Art. 26: “Cooperation Art. 26: “Cooperation agreements…information agreements…information exchange”exchange”

--”guarantee of secrecy”--”guarantee of secrecy”

Art. 49: “…no more Art. 49: “…no more favourable than that accorded favourable than that accorded to reinsurance undertakings to reinsurance undertakings having their headhaving their head

office in that Member State.” office in that Member State.”

Same. But, unlike EU, which Same. But, unlike EU, which can assess collateral but can assess collateral but doesn’t, the U.S. does require doesn’t, the U.S. does require collateral as a proxy to a collateral as a proxy to a branch, financial strength branch, financial strength rating, equalization reserves, rating, equalization reserves, etc.etc.

No counterpart. Likely inNo counterpart. Likely in future State regulations future State regulations

(information sharing part of (information sharing part of NYS proposal).NYS proposal).

With some exceptions With some exceptions disclosed in legislative disclosed in legislative history to CFRML, history to CFRML, nonadmitted reinsurers are nonadmitted reinsurers are not treated more favorably not treated more favorably than admitted/licensed than admitted/licensed reinsurers or domestic, reinsurers or domestic, unlicensed reinsurers who unlicensed reinsurers who must post collateral.must post collateral.

6363

Highlights (Cont’d)Highlights (Cont’d) EU/RID NAIC/CRMA EU/RID NAIC/CRMA

Art. 50: “…negotiation of Art. 50: “…negotiation of agreements with…third agreements with…third countries regarding means countries regarding means of supervision over…of supervision over…

“ “(a) reinsurance (a) reinsurance undertakings which have undertakings which have their head offices situated their head offices situated in a third country, and in a third country, and conduct reinsurance conduct reinsurance business within the business within the Community” Community”

EU insurers can require EU insurers can require pledging of assets by third-pledging of assets by third-country reinsurers.country reinsurers.

No counterpart in CFRML. No counterpart in CFRML. But, such negotiations are But, such negotiations are quite likely in the future, quite likely in the future, by both the NAIC and by both the NAIC and individual States.individual States.

States must require States must require collateral of non-U.S. collateral of non-U.S. reinsurers not licensed in reinsurers not licensed in the U.S.the U.S.

6464

Sources of Reinsurance Supervision



2005/68/ECAdopted Law for Implementation

Into National Law



of Insurance CommissionersCredit for Reinsurance Model Law (CFRML))




UK

Adoption into State LawNew York State

6565

New York StateNew York StateRegulation 20 (11 NYCRR 125)Regulation 20 (11 NYCRR 125)

(c) (1) In the case of an alien assuming insurer, not otherwise entered as a (c) (1) In the case of an alien assuming insurer, not otherwise entered as a United States branch in another state, such assuming insurer meets the United States branch in another state, such assuming insurer meets the standards of solvency required of licensed insurers of like character, such standards of solvency required of licensed insurers of like character, such terms and conditions as prescribed by the superintendent, and otherwise terms and conditions as prescribed by the superintendent, and otherwise complies substantially with related requirements, and such assuming complies substantially with related requirements, and such assuming insurer has deposited and continues to maintain in one or more New York insurer has deposited and continues to maintain in one or more New York state banks and/or members of the Federal Reserve System located in New state banks and/or members of the Federal Reserve System located in New York state, a trust fund or trust funds, constituting a trusteed surplus, in York state, a trust fund or trust funds, constituting a trusteed surplus, in cash, readily marketable securities, or letters of credit, in an amount of not cash, readily marketable securities, or letters of credit, in an amount of not less than $20,000,000 for the protection of the United States insurers, and less than $20,000,000 for the protection of the United States insurers, and United States beneficiaries under reinsurance policies (contracts) issued by United States beneficiaries under reinsurance policies (contracts) issued by such alien assuming insurers. Such trusteed amount shall be in addition to such alien assuming insurers. Such trusteed amount shall be in addition to any other trust fund required by this department, including, but not limited any other trust fund required by this department, including, but not limited to, a trusteed amount at least equal to the liabilities attributable to United to, a trusteed amount at least equal to the liabilities attributable to United States insurers and United States beneficiaries under reinsurance policies States insurers and United States beneficiaries under reinsurance policies (contracts) issued by such alien assuming insurers. As used in this (contracts) issued by such alien assuming insurers. As used in this subdivision, surplus means the balance remaining after subtracting the subdivision, surplus means the balance remaining after subtracting the liabilities, attributable to reinsurance policies (contracts) issued in the liabilities, attributable to reinsurance policies (contracts) issued in the name of such alien assuming insurer from the total assets deposited in the name of such alien assuming insurer from the total assets deposited in the trust fund or trust funds trust fund or trust funds

6666

New York StateNew York StateRegulation 20 (11 NYCRR 125)Regulation 20 (11 NYCRR 125)

Lloyd’s Lloyd’s

Finally, in the case of “a group located outside the United States whoseFinally, in the case of “a group located outside the United States whosemembers consist of individual incorporated assuming insurers who are notmembers consist of individual incorporated assuming insurers who are notengaged in any business other than underwriting as a member of the group engaged in any business other than underwriting as a member of the group and individual unincorporated assuming insurers” (referring to Lloyd’s-styleand individual unincorporated assuming insurers” (referring to Lloyd’s-stylereinsurers without mentioning any company or market names), there is anreinsurers without mentioning any company or market names), there is anadditional requirement of trusteed surplus funds in the amount ofadditional requirement of trusteed surplus funds in the amount of$100 million. [1] (Lloyd’s has always been an insurance market, not an $100 million. [1] (Lloyd’s has always been an insurance market, not an

insurance company or insurance corporation).insurance company or insurance corporation).

Thus, Lloyd’s is required to post collateral (a) equal to liabilities underThus, Lloyd’s is required to post collateral (a) equal to liabilities underreinsurance contracts, plus (b) trusteed surplus funds in the amount ofreinsurance contracts, plus (b) trusteed surplus funds in the amount of$20 million, and (c) trusteed surplus funds in the amount of $100 million.$20 million, and (c) trusteed surplus funds in the amount of $100 million.Therefore, as discussed later in this section, it is not surprising that Lloyd’s isTherefore, as discussed later in this section, it is not surprising that Lloyd’s isthe most vocal opponent of the U.S. reinsurance collateral requirements, andthe most vocal opponent of the U.S. reinsurance collateral requirements, andthe leader of the Pan-European effort to abolish such requirements.the leader of the Pan-European effort to abolish such requirements.

[1] §125.4 ( c) (5) (d) (1) (iv) (a) Regulation No. 20, [1] §125.4 ( c) (5) (d) (1) (iv) (a) Regulation No. 20, available atavailable athttp://www.ins.state.ny.us/r_finala/2003/pdf/fr20a9tx.pdf.http://www.ins.state.ny.us/r_finala/2003/pdf/fr20a9tx.pdf.

6767

New York StateNew York StateProposed Regulation for 2008Proposed Regulation for 2008

The Superintendent of Insurance for the NYSID has announced The Superintendent of Insurance for the NYSID has announced proposed new reinsurance collateral rules. Alien and proposed new reinsurance collateral rules. Alien and domestic unauthorized reinsurance companies with the domestic unauthorized reinsurance companies with the highest credit ratings will be treated the same as authorized highest credit ratings will be treated the same as authorized companies. Weaker reinsurance companies will be required to companies. Weaker reinsurance companies will be required to post collateral on a sliding scale from 10 to 100 percent. post collateral on a sliding scale from 10 to 100 percent. Unauthorized reinsurers with a triple A credit rating from two Unauthorized reinsurers with a triple A credit rating from two rating agencies would not have to post collateral. rating agencies would not have to post collateral. Unauthorized reinsurers with a double A or equivalent rating Unauthorized reinsurers with a double A or equivalent rating would have to post collateral equal to 10 percent of claims, would have to post collateral equal to 10 percent of claims, single A 20 percent, and triple B 50 percent. Unauthorized single A 20 percent, and triple B 50 percent. Unauthorized reinsurers having a credit rating below triple B would still be reinsurers having a credit rating below triple B would still be required to post 100 percent collateral.required to post 100 percent collateral.

6868

New York StateNew York StateProposed Regulation for 2008 (cont’d)Proposed Regulation for 2008 (cont’d)

Other requirements would be as follows:Other requirements would be as follows: An unauthorized reinsurer must:An unauthorized reinsurer must: Meet the standards of solvency, including standards for capital adequacy, established by Meet the standards of solvency, including standards for capital adequacy, established by

its domestic regulator;its domestic regulator; Be authorized in its domiciliary jurisdiction to assume the specific kind of reinsurance it Be authorized in its domiciliary jurisdiction to assume the specific kind of reinsurance it

is offering;is offering; Maintain a policyholder's surplus or equivalent in excess of $250 million;Maintain a policyholder's surplus or equivalent in excess of $250 million; Accept required contract terms, including Accept required contract terms, including consent to the jurisdiction of U.S. courts for consent to the jurisdiction of U.S. courts for

disputes;disputes; Have a primary regulator that has a Have a primary regulator that has a memorandum of understandingmemorandum of understanding with the NYSID that with the NYSID that

addresses addresses information sharinginformation sharing and considers such matters as and considers such matters as regulatory equivalencyregulatory equivalency and and enforceability of judgmentsenforceability of judgments;;

Be domiciled in a country that allows U.S. reinsurers access to its market on similar Be domiciled in a country that allows U.S. reinsurers access to its market on similar terms; andterms; andPost 100 percent collateral upon the entry of an order of rehabilitation, liquidation or Post 100 percent collateral upon the entry of an order of rehabilitation, liquidation or conservation against the ceding insurance company.conservation against the ceding insurance company.

Collateral requirements will not change for authorized reinsurers; they will still not be Collateral requirements will not change for authorized reinsurers; they will still not be required to post any collateral. However, new safeguards will be put in place to help required to post any collateral. However, new safeguards will be put in place to help ensure the ability of these reinsurers to cover claims and thus protect consumers.ensure the ability of these reinsurers to cover claims and thus protect consumers.

Insurance companies ceding risk to reinsurers have Insurance companies ceding risk to reinsurers have responsibility for vetting thoseresponsibility for vetting those reinsurersreinsurers and developing risk management plans for their reinsurance placements. and developing risk management plans for their reinsurance placements.

The Superintendent of Insurance will retain final authority over any particular The Superintendent of Insurance will retain final authority over any particular transaction.transaction.

SourceSource: NYSID: NYSID

6969

Red herring and elephant graphics compliments of Google Images.

Questions?Questions?

Gregory S. Arnold, LL.MGregory S. Arnold, [email protected]@gmail.com(508) 688-4119(508) 688-4119

Economy & Finance

Greg Arnold Collateral Gats 03 23 09