Questions Arise at NAIC On Forms of Securities Acceptable As Credit for Reinsurance
Jun 11, 2014
During recent discussions within the National Association of Insurance Commissioners’ (“NAIC”) about acceptable forms of security for the purposes reinsurance collateral, an issue with certain language in the NAIC’s Credit for Reinsurance Model Law and Regulation that references “Securities listed by the Securities Valuation Office” was brought to the attention of Reinsurance Task Force Chairman John Huff.
Specifically, Section 3.B. of the Credit for Reinsurance Model Law (#785) provides that, for the purpose of collateralizing reinsurance obligations, security may be in the form of:
“Securities listed by the Securities Valuation Office of the National Association of Insurance Commissioners, including those deemed exempt from filing as defined by the Purposes and Procedures Manual of the Securities Valuation Office, and qualifying as admitted assets.“
Section 10.A.(2) of the Credit for Reinsurance Model Regulation (#786) includes a similar provision.
According to Chairman Huff, with respect to the original drafting and subsequent amendment of these Models, neither past NAIC proceedings nor corresponding legislative history includes any documented discussion that would provide further insight as to the intent of this provision, and specifically the phrase “Securities listed by the Securities Valuation Office.”
Inasmuch as there have been considerable developments within the Securities Valuation Office (“SVO”)-related processes during the time since this provision was included within these Models, he said, there are concerns that the provision may be subject to misinterpretation and/or misapplication, and that clarification might be necessary on 1) the original intent of this provision; and 2) which current SVO processes result in a security that is consistent with the intent of this phrase, as opposed to which current SVO processes do not.
Chairman Huff has therefore requested that the NAIC’s SVO staff research the intent of the language–specifically the phrase “Securities listed by the Securities Valuation Office”–and provide feedback to the Reinsurance Task Force to assist in determining whether any further action is necessary in order to address any concerns from a credit for reinsurance perspective. Any appropriate next steps will be coordinated with the NAIC’s Valuation of Securities Task Force.
Colodny Fass& Webb will continue to monitor the progress of this effort and provide updates as they become available.
The relevant provision from each Model is provided below.
Excerpt from the Credit for Reinsurance Model Law (#785) (relevant text is highlighted)
Section 3. Asset or Reduction from Liability for Reinsurance Ceded by a Domestic Insurer to an Assuming Insurer not Meeting the Requirements of Section 2
An asset or a reduction from liability for the reinsurance ceded by a domestic insurer to an assuming insurer not meeting the requirements of Section 2 shall be allowed in an amount not exceeding the liabilities carried by the ceding insurer. The reduction shall be in the amount of funds held by or on behalf of the ceding insurer, including funds held in trust for the ceding insurer, under a reinsurance contract with the assuming insurer as security for the payment of obligations thereunder, if the security is held in the United States subject to withdrawal solely by, and under the exclusive control of, the ceding insurer; or, in the case of a trust, held in a qualified U.S. financial institution, as defined in Section 4B. This security may be in the form of:
A. Cash;
B. Securities listed by the Securities Valuation Office of the National Association of Insurance Commissioners, including those deemed exempt from filing as defined by the Purposes and Procedures Manual of the Securities Valuation Office, and qualifying as admitted assets;
C. (1) Clean, irrevocable, unconditional letters of credit, issued or confirmed by a qualified U.S. financial institution, as defined in Section 4A, effective no later than December 31 of the year for which the filing is being made, and in the possession of, or in trust for, the ceding insurer on or before the filing date of its annual statement;
(2) Letters of credit meeting applicable standards of issuer acceptability as of the dates of their issuance (or confirmation) shall, notwithstanding the issuing (or confirming) institution’s subsequent failure to meet applicable standards of issuer acceptability, continue to be acceptable as security until their expiration, extension, renewal, modification or amendment, whichever first occurs; or
D. Any other form of security acceptable to the commissioner.
Excerpt from the Credit for Reinsurance Model Regulation (#786) (relevant text is highlighted)
Section 10. Asset or Reduction from Liability for Reinsurance Ceded to an Unauthorized Assuming Insurer not Meeting the Requirements of Sections 4 Through 9
A. Pursuant to Section [cite state law equivalent of Section 3 of the Credit for Reinsurance Model Law], the commissioner shall allow a reduction from liability for reinsurance ceded by a domestic insurer to an assuming insurer not meeting the requirements of Section [cite state law equivalent of Section 2 or other appropriate section of the Credit for Reinsurance Model Law] in an amount not exceeding the liabilities carried by the ceding insurer. The reduction shall be in the amount of funds held by or on behalf of the ceding insurer, including funds held in trust for the exclusive benefit of the ceding insurer, under a reinsurance contract with such assuming insurer as security for the payment of obligations under the reinsurance contract. The security shall be held in the United States subject to withdrawal solely by, and under the exclusive control of, the ceding insurer or, in the case of a trust, held in a qualified United States financial institution as defined in Section [cite state law equivalent of Section 4B of the Credit for Reinsurance Model Law]. This security may be in the form of any of the following:
(1) Cash;
(2) Securities listed by the Securities Valuation Office of the NAIC, including those deemed exempt from filing as defined by the Purposes and Procedures Manual of the Securities Valuation Office, and qualifying as admitted assets;
(3) Clean, irrevocable, unconditional and “evergreen” letters of credit issued or confirmed by a qualified United States institution, as defined in Section [cite state law equivalent of Section 4A of the Credit for Reinsurance Model Law], effective no later than December 31 of the year for which filing is being made, and in the possession of, or in trust for, the ceding insurer on or before the filing date of its annual statement. Letters of credit meeting applicable standards of issuer acceptability as of the dates of their issuance (or confirmation) shall, notwithstanding the issuing (or confirming) institution’s subsequent failure to meet applicable standards of issuer acceptability, continue to be acceptable as security until their expiration, extension, renewal, modification or amendment, whichever first occurs; or
(4) Any other form of security acceptable to the commissioner.
B. An admitted asset or a reduction from liability for reinsurance ceded to an unauthorized assuming insurer pursuant to this section shall be allowed only when the requirements of Section 14 and the applicable portions of Sections 11, 12 or 13 of this regulation have been satisfied.
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