Report - 2021 01 14 A28148 D224291 Bill Report 5048 Sbr Bfst Ta 21

Summary

A Senate Bill Report on SB 5048, as of January 12, 2021, concerning reinsurance agreements, prepared by staff of the Senate Committee on Business, Financial Services & Trade. The bill is sponsored by Senator Mullet by request of the Insurance Commissioner. The background explains credit for reinsurance, the National Association of Insurance Commissioners, and the Covered Agreements between the European Union and the United States, noting possible federal preemption effective September 1, 2022. The report states the bill sets requirements for reinsurers located and licensed in reciprocal jurisdictions, requires the OIC to list reciprocal jurisdictions and qualifying reinsurers, and authorizes related rules, including conditions such as at least $250 million in capital and surplus. It also summarizes supporting public testimony.

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                            SENATE BILL REPORT
                                  SB 5048

                                      As of January 12, 2021

Title: An act relating to reinsurance agreements.

Brief Description: Concerning reinsurance agreements.

Sponsors: Senator Mullet; by request of Insurance Commissioner.

Brief History:
     Committee Activity: Business, Financial Services & Trade: 1/12/21.


                                     Brief Summary of Bill
           • Establishes certain requirements for qualifying reinsurers located and
             licensed in reciprocal jurisdictions.


SENATE COMMITTEE ON BUSINESS, FINANCIAL SERVICES & TRADE

     Staff: Kellee Gunn (786-7429)

     Background: Credit for Reinsurance. Reinsurance is an insurance product purchased by
     an insurance company to pass some of the risk assumed by the insurance company to the
     reinsurer. The insurer that transfers the risk to the reinsurer is the ceding company. The
     reinsurer, the assuming company, accepts the risk. The ceding insurance company's
     exposure to financial loss is thereby reduced. Credit for reinsurance is an accounting
     procedure that permits a ceding company to treat amounts due from reinsurers as assets or
     reductions from liability. This improves the reported financial condition of the ceding
     insurance company in its annual statement. Credit for reinsurance is allowed only when
     specified standards are met. In 2015, the Legislature passed the National Association for
     Insurance Commissioner's Credit for Reinsurance Model Law.

     National Association of Insurance Commissioners. The National Association of Insurance
     Commissioners (NAIC) is an association composed of elected and appointed insurance




     This analysis was prepared by non-partisan legislative staff for the use of legislative
     members in their deliberations. This analysis is not part of the legislation nor does it
     constitute a statement of legislative intent.

Senate Bill Report                              -1-                                             SB 5048
     regulators from the states and territories of the United States. The Office of the Insurance
     Commissioner (OIC) is a member of NAIC.

     Dodd-Frank Wall Street Reform and Consumer Protection Act, the Covered Agreements,
     and Federal Preemption. The Dodd-Frank Wall Street Reform and Consumer Protection
     Act of 2011 allowed for bilateral agreements between the European Union and the United
     States—the Covered Agreements—regarding qualifying reinsurers. The Covered
     Agreements ensure that no reinsurance collateral obligations be applied to qualifying
     reinsurers. Effective September 1, 2022, the federal government may preempt any
     inconsistent state law that treats a qualified non-United States reinsurer under the Covered
     Agreements less favorably than a United States insurer licensed in the state.

     In 2019, NAIC adopted amendments to their Credit for Reinsurance Model Law—the 2019
     Amendments to the Credit for Reinsurance Models—that reflect the Covered Agreements.
     States that do not adopt the 2019 Amendments to the Credit for Reinsurance Models will
     lose NAIC accreditation and have their state laws regarding reinsurance preempted by the
     federal government.

     Summary of Bill: This bill establishes certain requirements on assuming
     insurers—reinsurers—located and licensed in a reciprocal jurisdiction, as brought forward
     by NAIC as amendments to the Credit for Reinsurance Model Law.

     A reciprocal jurisdiction is one that is:
        • located outside the United States and is subject to an in-force agreement with the
           United States;
        • located within a United States jurisdiction that meets requirements for accreditation
           by NAIC's financial standards and accreditation program; or
        • from a qualified jurisdiction, as currently set forth in statute and determined by the
           OIC.

     In addition to being located and licensed in a reciprocal location, other requirements are
     established including, but not limited to, sharing certain financial information with the OIC
     pertinent to the reinsurance agreement.

     The OIC must create a list of reciprocal jurisdictions which includes those listed by NAIC.
     The OIC must also list reinsurers that have satisfied the required conditions and to which
     cessions shall be granted credit. A jurisdiction may be removed by the OIC if they no
     longer meet the necessary requirements. Upon removal, the credit for reinsurance ceded to
     a reinsurer shall be allowed if otherwise allowed in state law.

     Credit for reinsurance is allowed only for reinsurance agreements entered into, amended, or
     renewed on or after the effective date of this act, and only if the losses have occurred within
     a certain time period on or after the reinsurer met all their obligations. Losses must have
     been incurred, and reserves reported, when either the reinsurer met all eligibility


Senate Bill Report                              -2-                                         SB 5048
     requirements or the effective date of the new reinsurance agreement, whichever is later.

     The OIC may adopt rules applicable to reinsurance agreements relating to certain life and
     health insurance and annuity products where the NAIC adopts model regulatory
     requirements regarding credit for reinsurance. A rule may apply to life and universal life
     reinsurance policies contained in treaties issued on or after January 1, 2015. Rules
     regarding those same reinsurance agreements may not be applicable to cessions to a
     reinsurer under certain conditions. Those conditions include whether they are located and
     licensed in a reciprocal jurisdiction and the Covered Agreements apply, are otherwise
     allowed to be a reinsurer under state law, or whether the reinsurer:
         • maintains at least $250 million in capital and surplus in accordance with NAIC's
           accounting practices and procedures manual; and
         • is licensed in at least 26 states or licensed and accredited in a total of at least 35 states
           and maintains licensure in at least 10 states.

     Rules adopted by the OIC may require a ceding insurer, when calculating the amounts or
     forms of security required, to use the valuation model adopted by NAIC. The authority to
     adopt rules regarding reinsurers is not limited otherwise by the OIC's general authority to
     adopt rules.

     Appropriation: None.

     Fiscal Note: Not requested.

     Creates Committee/Commission/Task Force that includes Legislative members: No.

     Effective Date: Ninety days after adjournment of session in which bill is passed.

     Staff Summary of Public Testimony: PRO: This legislation aligns with federal bilateral
     agreements. This went through an extensive vetting process and is a model and standard for
     maintaining NAIC accreditation. NAIC accreditation is important as it provides a structure
     for mutual recognition of solvency. This is an important issue for insurers domiciled here
     that do business in other states. Without NAIC accreditation, domiciled insurers may be
     subject to investigation and examination by other state regulators. This would be an
     expensive and time-consuming process for domiciled insurers. Insurers must reflect
     reinsurance on their books and there is agreement by the U.S. and international regulators
     on accounting principles regarding solvency. This is a technical bill that gives the OIC the
     ability to penalize and assess certain reinsurers.

     Persons Testifying: PRO: Senator Mark Mullet, Prime Sponsor; Jon Noski, Office of the
     Insurance Commissioner; David Forte, Office of the Insurance Commissioner; Mel
     Sorensen, American Property Casualty Insurance Association, American Council of Life
     Insurers, America's Health Insurance Plans; Dennis Burke, Reinsurance Association of
     America.


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     Persons Signed In To Testify But Not Testifying: No one.




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