Assessment of public comments for the Third Amendment to 11 NYCRR 80-1 (Insurance Regulation 52)

The New York State Department of Financial Services ("Department") received comments from a trade association representing the life insurance industry in New York ("life trade organization") and from a national property/casualty insurance trade organization ("property/casualty trade organization") in response to its publication of the proposed rule in the New York State Register.

Summaries of the comments on the proposal and the Department's responses thereto are as follows.

The property/casualty trade organization commented that it supports the proposal in so far as it reflects changes contained in the National Association of Insurance Commissioners' ("NAIC's") Model Insurance Holding Company System Regulatory Act (the "Model Act"). The organization also urged the Department to consider adopting certain provisions in the Model Act that are not present in this proposal, including provisions pertaining to enterprise risk and supervisory colleges. However, some of these provisions would need to be adopted through legislation rather than through promulgation of a regulation.

The life trade organization requested certain technical changes to a proposed amendment pertaining to corporate governance and a proposed amendment pertaining to divestiture of a controlling interest in a domestic insurer, and the Department made certain non-substantive amendments to address those concerns. The life trade organization also requested that reinsurance agreements involving life insurers be treated the same as reinsurance agreements involving property/casualty insurers. However, the Department did not make this change to the proposed amendment because property/casualty insurers typically enter into large numbers of reinsurance agreements, many of which are for relatively small and ascertainable exposures, while reinsurance agreements entered into by life insurers generally are complex, and a person generally would not know in advance whether a life reinsurance agreement would meet a certain threshold, because of the nature of life insurance.

In addition, the life trade organization urged the Department to add the Model Act language that provides a threshold for notice of guarantees when made by a domestic insurer. The Department did not make any changes to the proposed amendment because the language in the Model Act appears to be inconsistent and the Department believes that it needs to see all the guarantees anyway.

Comments on specific parts of the proposed rule are discussed below.

Proposed Item 9 of 11 NYCRR 80-1.2(d) ("Corporate Governance")

Comment

The life trade organization suggested making slight modifications to the language set forth in new item 9 because it believes the modifications more accurately reflect the customary roles of the board of directors and members of senior management in matters of corporate governance and internal controls.

Department's Response

After further discussion with the life trade organization, the Department made non-substantive changes to the proposed item to address the concern.

Proposed Amendment to 11 NYCRR 80-1.5(b)(4) ("Reinsurance Contracts")

Comment

The proposed amendment would require a domestic property/casualty insurer to file with the Superintendent of Financial Services ("Superintendent") only reinsurance treaties or agreements that meet a certain threshold, unless otherwise requested by the Superintendent. The life trade organization commented that the Model Act contains a similar threshold for reinsurance treaties or agreements that is not limited to only certain types of insurance, and that it does not see any rationale for why the proposed amendment needs to be different from the Model Act, since a de minimis reinsurance transaction between a domestic controlled life insurer and its holding company parent should not be viewed any differently than a transaction between a domestic property/casualty insurer and its parent.

Department's Response

The proposed amendment makes a distinction between different kinds of insurers because property/casualty insurers typically enter into large numbers of reinsurance treaties and agreements, but many of them are for relatively small and ascertainable exposures. The threshold should ensure that the Superintendent will review the material transactions that have the potential for negatively impacting domestic property/casualty insurers.

However, reinsurance treaties and agreements entered into by life insurers generally are complex, often involving off-shore affiliates, captives, and securitizations, and it generally would not be known in advance whether a reinsurance treaty or agreement involving a life insurer would meet a certain threshold because of the nature of life insurance. With regard to accident and health insurers, the volume of reinsurance treaties and agreements is not as great as those entered into by property/casualty insurers. In addition, holding company arrangements involving many accident and health insurers affect entities dually regulated by the Department of Financial Services and Department of Health, so it is necessary for the Superintendent to review reinsurance treaties and agreements to ensure compliance not only with the Insurance Law, but also the Public Health Law.

Therefore, the Department did not make any changes to this amendment.

Comment

The property/casualty trade organization commented that it would appear that the Department is attempting to introduce a threshold trigger for prior approval of related party reinsurance contracts as contained in the Model Act, and that the result is a set of circumstances in which the New York domiciled ceding insurer still must seek prior approval from the Department for all related party reinsurance transactions, but only must submit a copy of the reinsurance contract if the transaction size is above the threshold. The organization asserts that this result creates confusion.

Department Response

Insurance Law Section 1505(d) prohibits a domestic controlled insurer from entering into a reinsurance treaty or agreement with any person in its holding company system unless the insurer has notified the Superintendent in writing of its intention to enter into the treaty or agreement at least 30 days prior thereto and the Superintendent has not disapproved it within the 30 day period. Therefore, an insurer does not need the Superintendent's prior approval. Rather, the insurer only needs to notify the Superintendent and may proceed after 30 days if the Superintendent has not disapproved it. Thus, no changes to the proposal are necessary.

Proposed Amendment to 11 NYCRR 80-1.5(c)(3) ("Guarantees")

Comment

The Department has revised this section to expand the list of transactions between a domestic controlled insurer and any person in its holding company system that are deemed to be material to include any management agreements, service contracts, tax allocation agreements, guarantees, or cost-sharing arrangements. The life trade organization commented that, while it recognizes that the language mirrors language in the Model Act, it does not include the subsequent provision that provides a threshold for notice of guarantees when made by a domestic insurer and urged the Department to add this provision to the proposed amendment.

Department's Response

The Model Act requires a domestic insurer to notify the Superintendent of all management agreements, service contracts, tax allocation agreements, guarantees, and all cost-sharing arrangements. The Model Act then states that a domestic insurer must notify the Superintendent of guarantees when made by a domestic insurer if the guarantee meets a certain threshold. The language in the Model Act seems to be inconsistent, as the distinction between these two provisions is unclear. Nonetheless, the Department believes that it needs to see all the guarantees anyway and therefore did not make any changes to the proposed amendment.

Proposed Amendment to 11 NYCRR 80-1.8 ("Divestiture")

Comment

The life trade organization commented that customarily, an acquiring party does not submit an application for approval of acquisition until after a stock purchase agreement has been signed, and suggested that language to this effect be added to the proposed amendment.

Department's Response

It is the Department's understanding that the divestiture language set forth in the Model Act was added to address a situation that occurred in which a holding company divested its controlling interest in an insurer by giving away stock in the insurer to charities in small enough quantities that no one person had a controlling interest in the insurer. Since no one was acquiring control of the insurer, there likely was no stock purchase agreement and an application for approval of acquisition of control was never filed.

Under the Model Act, the obligation falls upon the holding company seeking to divest, not the insurer. However, absent legislative change, the Department could address the concern only by putting the obligation on the insurer. After discussing this issue further with the life trade organization, the Department added language to the proposed amendment to clarify that a domestic insurer must file with the Superintendent a notice of a proposed divestiture when the insurer anticipates that no person will have a controlling interest in the domestic insurer after the proposed divestiture. The Department believes that this is a non-substantive amendment that addresses only the unusual circumstance that the amendment to the Model Act addressed.

Enterprise Risk Filing

Comment

The property/casualty trade organization urged the Department to adopt the enterprise risk filing provision set forth in the Model Act and to work with the insurance departments of other states and the insurance industry to ensure a smooth, efficient implementation of this reporting requirement. The organization noted that the Model Act failed to include a uniform effective date and suggested that the Department adopt an effective date that is no sooner than January 1, 2014 so that states have lead time to coordinate with other states with regard to implementing the enterprise risk report.

Department's Response

The enterprise risk filing is not the subject of this amendment. However, the Department will take the comment into consideration when it promulgates a separate regulation or proposes legislation pertaining to enterprise risk.

Supervisory Colleges

Comment

The property/casualty trade organization commented that New York is the domiciliary state for a large number of insurers, and without including language that enables the Superintendent to participate in a supervisory college, the Department will lack the proper authority to effectively participate in the process, potentially leaving many supervisory colleges devoid of the Department's judgment and participation.

Departmentís Response

Supervisory colleges are not the subject of this amendment. Rather, the Department has proposed legislation that would adopt the Model's supervisory college language.

Confidentiality

Comment

The property/casualty trade organization commented that the confidentiality provisions of the Model Act ensure the confidentiality of all documents, materials, or other information obtained by or disclosed to an insurance regulator pursuant to the holding company system laws and regulations, with such information not subject to the relevant freedom of information laws, subpoena, or discovery, or admissible into evidence in any private civil action. The organization asserts that without inclusion of these provisions, the Department may lack the ability to share with or obtain from the NAIC or other supervisors certain information about domiciliary insurers.

Department's Response

Insurance Law Section 1504(c), which applies to holding companies, already requires the Superintendent to keep confidential the contents of each report made pursuant to Article 15, and any information obtained in connection therewith. Insurance Law Section 1709, which applies to subsidiaries of domestic life insurance companies and certain other entities, requires the Superintendent to keep confidential the contents of certain information reports and information pertaining thereto. In addition, Insurance Law Section 110 allows the Superintendent to share confidential documents with and receive confidential documents from the NAIC, the NAIC's affiliates or subsidiaries, or regulatory and law enforcement officials of other foreign or domestic jurisdictions. Any other confidentiality language would need to be added to the Insurance Law by legislation. Therefore, the Department did not make any changes to the proposed amendment.