NAIC Credit for Reinsurance – Certified Reinsurers

1. NAIC Credit for Reinsurance – Certified Reinsurers IASA Chicagoland Chapter Conference Chicago, IL April 17, 2014 Matthew Wulf, Reinsurance Association of America

2. Topics for Discussion • Reinsurance 101 • NAIC • Reinsurance Regulation • Credit for Reinsurance • Certified Reinsurers • Qualified Jurisdictions • Federal Regulation?

3. Definition of Reinsurance “Reinsurance is a contract of insurance whereby one insurer (called the reinsurer or assuming company) agrees, for a portion of the premium, to indemnify another insurer (called the reinsured or ceding company) for losses paid by the reinsured under insurance policies issued by the reinsured to its policyholders.”

4. Elements of Reinsurance • Reinsurance is a form of insurance • There are only two parties to the reinsurance contract - the Reinsurer and the Reinsured - both of whom are insurers, i.e. entities empowered to insure • The subject matter of a reinsurance contract is the insurance liability of the reinsured undertaken by it under insurance policies issued to its own policyholders • A reinsurance contract is an indemnity contract • The reinsurer “reimburses” the insurer for its portion of paid claims

5. Functions of Reinsurance • Financing • Stabilization • Capacity • Catastrophe Protection • Services

6. Functions of Reinsurance • The fundamental objective of insurance, to spread the risk so that no single entity finds itself saddled with a financial burden beyond its ability to pay, is enhanced by reinsurance • Insurers purchase reinsurance for essentially four reasons: (1) to limit liability on specific risks; (2) to stabilize loss experience; (3) to protect against catastrophes; and (4) to increase capacity 

7. Reinsurance is a Global Industry • In 2012 there were approximately 5,116 reinsurers from 110 jurisdictions • 3,252 of those companies assumed premiums from U.S. cedents • The top 40 reinsurers account for the vast majority (~80%) of reinsurance assumed and these companies are from 10 jurisdictions (U.K. Bermuda, Germany, Switzerland, France, Japan, Korea, Australia, India and Spain)

8. NAIC • The National Association of Insurance Commissioners (NAIC) is the U.S. standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories • Through the NAIC, state insurance regulators establish standards and best practices, conduct peer review, and coordinate their regulatory oversight • NAIC staff supports these efforts and represents the collective views of state regulators domestically and internationally

9. Reinsurance Regulation • Purpose • Regulate the solvency of reinsurers and ceding insurers • Ensure the collectability of reinsurance recoveries • Secure accurate reporting of financial information relied upon by regulators, insurers and investors

10. Reinsurance Regulation • Historically focused on solvency and collectability • Focused primarily on the reinsurance transaction • Consumers not involved in the transaction • No privity of contract • No regulation of rate or form (consumer protection)

11. Reinsurance Regulation - Evolution • New focus is still on solvency, collectability and… • Instead of just the transaction, it incorporates: • Ability and willingness of the reinsurer to pay • Quality of the non-US regulator

12. Reinsurance Regulation – Evolution • Regulation of the reinsurance transaction was historically necessary in light of: • the significant amount of reinsurance ceded abroad • the substantial variance among jurisdictions regarding the level of reinsurance regulation • the difficulty U.S. regulators faced in understanding the intricacies of financial statements from over 100 jurisdictions • BUT …

13. Reinsurance Regulation – Evolution • … • Regulatory reform efforts in the EU, the UK and Bermuda have raised the bar for international reinsurance regulation • Improved regulatory coordination and accounting convergence efforts have enhanced U.S. regulators’ ability to analyze and understand financial statements from other jurisdictions • U.S. Congress, FIO and the camel’s nose under the tent

14. Components of Reinsurance Regulation • NAIC Model Laws and Regulations • Credit for Reinsurance • Holding Company • Material Transactions • Reinsurance Intermediary • State Statutes and Regulations • Receivership • Required Contract Clauses • Accounting Rules for Financial Statements

15. Credit for Reinsurance • Cornerstone of Reinsurance Regulation • Credit for ceded reinsurance is permitted if the reinsurer is licensed or provides sufficient collateral • NAIC Model Law first adopted in 1984 with various improvements in subsequent years • Most recent Model Law adopted by NAIC in 2011 • Most recent Model Regulation adopted by NAIC in 2011 • Recent revisions to NAIC Model Law and Regulation are first step in regulatory modernization and international cooperation

16. Credit for Reinsurance • A domestic ceding insurer may take credit for reinsurance it cedes if the reinsurer is: • Licensed; • Accredited; • Domiciled in a “substantially similar” state; • 100% Collateralized; 0r • “New” – Certified (less than 100% collateral)

17. Credit for Reinsurance – Forms of Collateral • Multiple Beneficiary Trust Fund, e.g., Lloyd’s • Single Beneficiary Trust Fund • Letters of Credit • Funds Withheld • Cash, Securities or other Collateral Acceptable to the Commissioner

18. Credit for Reinsurance – Collateral Reduction and Certified Reinsurers • In November 2011, the National Association of Insurance Commissioners unanimously approved changes to its credit for reinsurance model law and regulation allowing the state insurance department discretion to reduce the amount of collateral required from reinsurers that meet certain criteria. • “Certified” reinsurers • To date, 19 states have passed credit for reinsurance reforms: • AL, CA, CT, DE, FL, GA, IN, IA, LA, ME, MD, MO, NH, NJ, NM, NY, PA, RI, and VA • Legislation pending in CO, DC, HI, IL, MA, OH and VT • Working on 2015 legislation in MI and TX

19. Credit for Reinsurance – Collateral Reduction and Certified Reinsurers • Heavily debated for 10+ years • Goal: Reduction in Collateral requirements for well capitalized, well run, well regulated non-U.S. reinsurers from qualifying jurisdictions

20. Certified Reinsurer Provisions – Key Aspects • Certified Reinsurer – Section E of NAIC Model Law • A non-U.S. reinsurer may be categorized as a Certified Reinsurer if: • Licensed as an insurer or reinsurer in a Qualified (after analysis) jurisdiction • Has minimum surplus of $250 million • Maintains ratings (on an entity basis) from at least two nationally recognized rating agencies • Submits to jurisdiction • Submits financial information for regulatory review • Satisfies other requirements established by the regulator

21. Certified Reinsurer Provisions – Key Aspects • Certified Reinsurer • In addition to capital and surplus, ratings, submission to jurisdiction and financial information requirements the regulator will consider: • Business practices • Reputation for prompt payment • Any regulatory actions against reinsurer • Receivership considerations • Participation in solvent schemes • Special provisions for Lloyd’s

22. Certified Reinsurer Provisions – Key Aspects • Determining collateral reduction • Commissioner shall assign rating to applicant reinsurer based on factors as well as rating chart in regulation • Commissioner shall publish list of all certified reinsurers and their ratings • Commissioner may defer to other NAIC accredited jurisdictions’ certification determinations

23. Certified Reinsurer Provisions – Key Aspects • “Slow Paying” Reinsurers • The commissioner shall, at a minimum, increase the security the certified reinsurer is required to post by one rating level if the commissioner finds that: • (a) more than 15% of the certified reinsurer’s ceding insurance clients have overdue reinsurance recoverables on paid losses of 90 days or more which are not in dispute and which exceed $100,000 for each cedent; or • (b) the aggregate amount of reinsurance recoverables on paid losses which are not in dispute that are overdue by 90 days or more exceeds $50,000,000

24. Credit for Reinsurance – Risk Concentration • Risk Concentration – “managing” and “diversifying” • A domestic ceding insurer shall notify the commissioner within thirty (30) days after reinsurance recoverables from any single assuming insurer, or group of affiliated assuming insurers, exceeds fifty percent (50%) of the domestic ceding insurer’s last reported surplus to policyholders • A domestic ceding insurer shall notify the commissioner within thirty (30) days after ceding to any single assuming insurer, or group of affiliated assuming insurers, more than twenty percent (20%) of the ceding insurer’s gross written premium in the prior calendar year

25. Credit for Reinsurance – Certified Reinsurers • The Reinsurance Task Force has outlined the process for reviewing existing states’ certification of reinsurers (as well as the individual reinsurers) • ReFAWG (Reinsurance Financial Analysis Working Group) • ReFAWG operates as a peer review team within the NAIC structure and its meetings are closed to interested parties • ReFAWG will look at all the reinsurers certified by the states and evaluate the appropriateness of each reinsurer‘s certification • The ReFAWG determination will be shared with the certifying state, although it is not mandatory for any individual state to follow the ReFAWG determination

26. Credit for Reinsurance – Certified Reinsurers • Similar "FAWG" groups operate at the NAIC in other areas and the peer pressure element should not be underestimated • The NAIC anticipates that after ReFAWG review, other states will use the ReFAWG determination as a basis to accept reinsurers from the NAIC list without additional review

27. Credit for Reinsurance – Qualified Jurisdictions • Qualified Jurisdiction • Evaluation of appropriateness and effectiveness of reinsurance supervisory system • Evaluation of similar treatment of U.S reinsurers • Adequate and prompt enforcement of U.S. judgments • Cooperation and information sharing • NAIC to publish list of qualified jurisdictions • If state approves jurisdiction not on NAIC list, must provide justification

28. Credit for Reinsurance – Qualified Jurisdictions • In August 2013, the NAIC adopted the Process for Developing and Maintaining the NAIC List of Qualified Jurisdictions for the purposes of reinsurer certification and collateral reduction • A reinsurer‘s domiciliary jurisdiction must be approved before reinsurers from that jurisdiction are eligible to apply for certification in the states • The NAIC will evaluate an applicant jurisdiction's regulatory regime, including the laws and regulations in place as well as regulatory resources • The evaluation will be conducted on the basis of publicly available information and will be subject to information sharing agreements

29. Credit for Reinsurance – Qualified Jurisdictions • Expedited review of Bermuda, Germany, Switzerland and the United Kingdom • Completed 12/31/13 • Four jurisdictions were reviewed simultaneously to avoid competitive issues • “Conditional” status • Now in the process of full review • confidentiality and information sharing agreement (the NAIC has stated it has no plans to ask for, or accept, confidential, company specific information under this agreement

30. Federal Regulation? Dodd-Frank Wall Street Reform and Consumer Protection Act • July 21, 2010 signed into law • 2,319 pages - 16 titles • Requires regulators to create 243 rules (11 Federal agencies), conduct 67 studies, and issue 22 periodic reports • Stated purpose of the legislation: • To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end "too big to fail," to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes

31. Federal Regulation? NONADMITTED AND REINSURANCE REFORM ACT • Single regulator by home State for financial solvency purposes for reinsurers. • Credit for reinsurance decided by cedent’s domiciliary regulator. • No other state can deny this credit for reinsurance. • Host State’s Preemption of Extraterritorial Regulation • Interfering with contractually agreed to arbitration; • Requiring specific reinsurance contract terms; • Enforcing agreements on terms different than reflected in agreement; and • Otherwise applying laws to reinsurance agreements of insurers not domiciled in that State

32. Federal Regulation? FEDERAL INSURANCE OFFICE • In Treasury Department • Michael McRaith (former IL Ins. Dept. Director) is first Director of FIO • Excludes health, LTC and crop insurance • Authority • Monitor industry • Non-voting member of FSOC • Conduct studies • Role of global reinsurance market • Impact of Reinsurance Section of NRRA • How to modernize/improve regulation – due 1/21/12 • Recommend insurers as systemically important • Run TRIA Program • Coordinate/develop federal policy on international matters

33. Federal Regulation? FEDERAL INSURANCE OFFICE (Cont.) • Secretary w/USTR negotiates “covered agreement” • Written bi/multilateral recognition agreement that recognizes prudential measure for business of (re)insurance that achieves level of protection for (re)insurance consumers that is substantially equivalent to level of protection achieved under State regulation • Outcomes determinative test • Must consult with 4 Congressional Committees before, during and after negotiations. • Director can preempt State measures subject to covered agreement. • Savings Clause: Preemption cannot affect State capital or solvency requirement except where State measure = less favorable treatment of non-U.S. insurer • Before determination of inconsistency: notify and consult with State and USTR + comment period • After determination: notify State + 4 Congressional Committees • Determination subject to APA and de novo judicial review

34. Questions?

35. Reinsurance Association of America www.reinsurance.org Matthew Wulf wulf@reinsurance.org