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Proposed Amendment to NY Insurance Regulations Continues Trend to Reduce or Eliminate Posting of Collateral

January 23, 2013

The New York Department of Financial Services (Department) has proposed the Eleventh Amendment to New York Insurance Regulations 17, 20 and 20-A (New York Reinsurance Regulation) governing the circumstances under which a ceding insurer can take credit on its balance sheet for claims ceded to unauthorized insurers. This amendment will bring the New York regulation closer to the National Association of Insurance Commissioners’ Credit for Reinsurance Model Regulation (NAIC Model) by adjusting the credit that the ceding insurer may take on its balance sheet based on the financial strength of an assuming insurer that has been certified by the Department.

One of the most important modifications to the New York Reinsurance Regulation involves the institution of the reinsurer certification process. This new process allows an unauthorized assuming insurer to apply to the Department to become a certified reinsurer, be assigned a financial-strength rating and post collateral according to that rating. A ceding insurer that cedes its risk to a certified reinsurer is allowed to take full credit for the reinsurance and to accept the amount of collateral that is assigned by the regulation on the basis of the certified reinsurer’s financial rating.

Certification
To qualify for certification, an unauthorized reinsurer must:

  • Be domiciled and licensed to transact insurance or reinsurance in a “qualified jurisdiction”
  • Maintain certain capital and surplus requirements
  • Maintain financial-strength ratings from two or more acceptable rating agencies
  • Agree to post 100 percent security upon entry of an order of rehabilitation, liquidation or conservation against the ceding insurer
  • Comply with any other conditions required by the regulator relative to creditworthiness of the reinsurer.

Financial Rating
If the unauthorized reinsurer is certified, the Department will then assign such reinsurer a rating of Secure-1, Secure-2, Secure-3, Secure-4, Secure-5 or Vulnerable-6. The percentage of collateral that must be posted is based on the rating assigned to the certified reinsurer on a graduated basis, with Secure-1 at 0 percent, Secure-2 at 10 percent, Secure-3 at 20 percent, Secure-4 at 50 percent, Secure-5 at 75 percent and Vulnerable-6 at 100 percent.

The rating that is granted to a certified reinsurer is based on a number of factors, including, but not limited to, the:

  • Reinsurer’s financial-strength rating from an acceptable rating agency
  • Business practices of the reinsurer, including compliance with reinsurance contract terms
  • Reputation of the reinsurer for prompt payment of claims
  • Regulatory actions against the reinsurer.

The regulation also addresses circumstances where the reinsurer’s rating can be upgraded or downgraded and where certification of the reinsurer has been suspended or revoked.

Qualified Jurisdictions
Another significant change to the New York Reinsurance Regulation is the concept of “qualified jurisdictions,” which is found in the NAIC Model. U.S. jurisdictions that are NAIC accredited will be deemed to be qualified jurisdictions. The regulation enumerates a number of issues that must be considered in evaluating whether a particular alien reinsurer is domiciled in a “qualified jurisdiction.” These issues include, but are not limited to, the:

  • Reinsurance supervisory system in place in a non-U.S. jurisdiction
  • Regulatory framework, including structure and authority of domiciliary regulator regarding solvency
  • Form and substance of required financial reporting and financial and operational standards
  • Presence of enforcement issues concerning U.S. judgments
  • Relevant international standards or guidance.

Contractual Provisions
The New York Reinsurance Regulation also mandates that certain contractual provisions be included in any reinsurance treaty. Such provisions include an insolvency clause pursuant to New York Insurance Law section 1308; a funding clause to cure any financial statement penalty brought against the ceding insurer; a clause subjecting the reinsurer to the jurisdiction of the United States courts; and a clause stating that New York law will apply to any dispute brought under the reinsurance contract.

Wilson Elser will continue to monitor the status of this latest amendment to the New York Reinsurance Regulation as it progresses through the administrative process.

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