Assessment of Public Comments for the Eleventh Amendment to 11 NYCRR 125 (Insurance Regulations 17, 20, and 20-A)
Prior to the promulgation of the Tenth Amendment (the "Tenth Amendment") to 11 NYCRR 125 (Insurance Regulations 17, 20, and 20-A), credit for ceded claims was allowed in limited circumstances when the assuming insurer was not authorized to do business in New York, irrespective of its financial strength. Generally, an authorized ceding insurer was not allowed credit for reinsurance from an unauthorized insurer unless the unauthorized insurer posted collateral equal to 100% of the reserves ceded. Promulgation of the Tenth Amendment provided an alternative regime that allowed a highly-capitalized unauthorized assuming insurer to dispense with all or part of the collateral posting requirement, depending upon the strength of its credit rating. The purpose of the present amendment is to align Part 125 more closely with the Credit for Reinsurance Model Regulation (the "NAIC Model") recently adopted by the National Association of Insurance Commissioners ("NAIC").
The Department received comments on the proposed rule from three large insurers ("Insurer I", "Insurer II", and "Insurer III"). Another insurer sent a letter stating its unqualified support for the proposed amendment. A life insurer association informed the Department that it did not have any comments or recommended changes.
Comments from Insurer I
Insurer I is a global insurance and reinsurance company that, through its subsidiaries, provides property, casualty and specialty products to industrial, commercial and professional firms, insurance companies and other enterprises worldwide. Insurer I commented that while the proposed amendment provides for the downgrade of a certified reinsurer's rating by the Department upon the occurrence of certain events, the amendment does not expressly indicate when the downgrade would be effective or the time by which a certified reinsurer would have to provide its ceding insurers with the increased collateral. Insurer I posited that any downgrade would be effective immediately upon issuance of the notice of downgrade to the certified reinsurer and would be applicable to all losses incurred and reserves reported (including IBNR) as of that date. Insurer I further posited that the ceding insurer could immediately pursue the downgraded certified reinsurer for the corresponding increase in collateral, pursuant to the terms of their reinsurance agreements. This comment accurately interprets the proposed provision. Insurer I did not suggest revised language in connection with this comment.
Insurer I also asked whether the Department would publicize in advance any intended reduction of a certified insurerís rating, stating that "[i]t would be advantageous to have some knowledge of an impending downgrade, as a collective rush by the various ceding insurers for increased collateral from the reinsurer may make obtaining such collateral difficult." The impetus for the proposed amendment was to conform the rule to the NAIC Model as closely as permissible under New York law. Because the NAIC Model does not require public notice of a contemplated downgrade, the proposed amendment also does not require it. In addition, the Department considers a public notice requirement to be unnecessary, because § 125.4(h)(7)(viii)(c) affords domestic cedents a three-month period during which credit for reinsurance may continue to be taken in the event of a rating downgrade or a suspension, revocation, or termination of the reinsurer's certification.
Finally, Insurer I commented that the term "ceding reinsurer," as used in § 125.4(h)(10) of the proposed amendment, should be changed to "ceding insurer." By not accepting this change, the provision would be limited in its application: it would apply to retrocession contracts but not to reinsurance contracts. The Department agrees with this comment and has clarified the amendment accordingly.
Comments from Insurer II
Insurer II is a leading international insurance organization with operations worldwide. Insurer II commented that the proposed amendment does not require the Superintendent to provide a "thoroughly documented justification with respect to the criteria" relied upon to approve a jurisdiction that is not included in the list of qualified jurisdictions published by the NAIC. As the insurer acknowledged in its comment, the regulatory authority to recognize a qualified jurisdiction resides solely within the purview of the Superintendent, and as such, the Department does not believe the suggested change to be necessary.
Insurer II also commented that the proposed amendment should require the Superintendent to "comply with all reporting and notification requirements that may be established by the NAIC with respect to certified reinsurers and qualified jurisdictions." The Department considers such a provision to constitute an impermissible abdication of the Superintendent's regulatory authority, as well as an improper incorporation by reference, contrary to state law.
Insurer II further commented that the proposed amendment does not expressly grant the Superintendent the authority to revoke a certified reinsurer's certification. While the Department believes that such authority is inherent in the proposed amendment, it nevertheless concurs that inclusion of a more explicit expression of this authority would be helpful and consistent with the NAIC Model. A non-substantive change is made to the amendment in accordance with this comment.
Insurer II's final comment relates to the proposed rule's requirement that a reinsurance contract include language that compels a certified reinsurer to consent to any effort by the ceding insurer to enforce a U.S. court judgment in the certified reinsurer's home jurisdiction. Insurer II contends that the required term is not needed in a reinsurance agreement with a certified reinsurer due to other protections afforded under the certification procedures and elsewhere in the regulation. The Department disagrees with this comment. In drafting the proposed amendment, the Department specifically retained this protection for New York's ceding insurers. Moreover, the proposed amendment already liberalizes the current regulatory regime by no longer mandating the inclusion of specifically-worded contract terms.
Comments from Insurer III
Insurer III is among the largest personal lines property/casualty insurers in the United States, and is a major ceding insurer and purchaser of catastrophic reinsurance coverage. Insurer III suggested three editorial changes to § 125.4(h)(4). Its first suggested revision would expressly limit the deferral period for posting security for catastrophe recoverables ("deferral") to a maximum of one year. Insurer III's second revision is meant to clarify the meaning of "catastrophe" as used in § 125.4(h)(4), by allowing the deferral to be triggered only if there is significant insured loss stemming from the catastrophe. Its third suggested revision would describe the term "timely manner" as the payment of reinsured claims "in compliance with its contractual obligations as set forth in the reinsurance agreement under which the claims are ceded."
The Department believes that the first two suggested changes are non-substantive in nature and serve to provide greater clarity, consistent with the NAIC Model (i.e., (1) that the deferral period is not a fixed one-year period but is instead a period not to exceed one year in duration, and (2) that the deferral may be allowed only with respect to catastrophic events that result in significant insured property losses). The proposed amendment has thus been revised to include the suggested changes. However, the Department finds Insurer III's third suggested change to be superfluous: it is axiomatic that conformance with a contract of insurance (or reinsurance) necessitates timely payment of claims.
Insurer III also seeks to amend § 125.4(h)(5), ostensibly to prevent the retroactive impact of the proposed amendment, and suggested two alternative changes to that subdivision. Each of the alternatives represents a departure from the language of the NAIC Model, and appears to extend by an additional six months the length of time before the proposed amendment, once promulgated, would become effective. The Department will not adopt those changes because they are inconsistent with the NAIC Model.
This amendment is based on the NAIC Model, which has effected a significant modernization in the area of reinsurance collateral requirements. It is being adopted virtually as proposed, with the inclusion of a few clarifying and non-substantive changes, as indicated above.