Regulatory Impact Statement for the Eleventh Amendment to 11 NYCRR 125 (Insurance Regulations 17, 20, and 20-A)
1. Statutory authority: Financial Services Law sections 202 and 302 and Insurance Law sections 301, 307(a), 308, 332, 1301(a)(9), 1301(c), and 1308.
The above-cited Financial Services Law and Insurance Law sections establish the Superintendent's authority to promulgate regulations governing when an authorized ceding insurer (i.e., an insurer authorized or licensed to do business in New York) may take credit on its balance sheet for reinsurance recoverable from an assuming insurer not authorized in this state.
Financial Services Law section 202 establishes the office of the Superintendent. Financial Services Law section 302 and Insurance Law section 301 authorize the Superintendent to effectuate any power accorded to him by the Insurance Law and prescribe regulations interpreting the Insurance Law.
Insurance Law section 307(a) requires an insurer doing business in this state to file an annual statement, in a form and containing such matters as shall be prescribed by the Superintendent, with the office of the Superintendent.
Insurance Law section 308 vests the Superintendent with the authority to require an authorized insurer to file reports relating to the insurer’s transactions, financial condition or any matter connected therewith.
Insurance Law sections 1301(a)(9) and (c) and 1308 authorize the Superintendent to prescribe by regulation the conditions under which an authorized ceding insurer may be allowed credit as an asset or a deduction from loss and unearned premium reserves, for reinsurance recoverable from an assuming insurer not authorized to do an insurance business in this state.
2. Legislative objectives: Article 13 of the Insurance Law establishes minimum standards for the assets of insurers, including when an authorized ceding insurer may take credit on its balance sheet for reinsurance recoverable from an assuming insurer not authorized to do an insurance business in this state.
3. Needs and benefits: Reinsurance is insurance for an insurer. It is a means of redistributing risk throughout the global insurance industry. Often, an insurer will transfer (or “cede”) part or all of its risk to another party (the “assuming insurer”). The assuming insurer is ultimately responsible for paying its part of those ceded claims. The ceding insurer is given credit on its balance sheet for the business ceded to an assuming insurer recognized by New York. This allows the ceding insurer to reduce its reserves and increase the number of policies it can write. Prior to the promulgation of the Tenth Amendment to Regulations 17, 20, and 20-A (the “Tenth Amendment”), the ability to take credit for ceded claims was very limited where the assuming insurer, irrespective of its financial strength, was not authorized to do business in New York. Generally, a ceding insurer could not take credit for reinsurance from an unauthorized insurer unless the unauthorized assuming insurer posted collateral equal to 100% of its obligations to the ceding insurer. The promulgation of the Tenth Amendment provided an alternative regime that allowed highly capitalized unauthorized assuming insurers to dispense with all or part of the collateral posting requirement, depending upon the strength of their credit rating. This Eleventh Amendment continues the regime with slight refinements intended to align the regulation more closely with the NAIC’s recently adopted Credit for Reinsurance Model Law and Model Regulation.
Adoption of this amended rule will maintain and improve upon the Tenth Amendment’s reduction of reinsurance transactional costs and increase in reinsurance capacity. It also will keep New York aligned with the global insurance markets and worldwide accounting standards governing reinsurance contracts. Most jurisdictions outside the U.S. do not require non-domestic assuming insurers to post collateral in order for authorized ceding insurers to take credit. Under the Eleventh Amendment, the most financially healthy assuming insurers need not post collateral, or at least not 100% collateral. The Eleventh Amendment will continue to level the playing field among assuming insurers by predicating credit for reinsurance principally on financial strength, not geography. Assuming insurers with strong credit ratings will post less collateral than those with weak ratings.
On November 6, 2011, the National Association of Insurance Commissioners (“NAIC”) adopted a revised Credit for Reinsurance Model Law and a revised Credit for Reinsurance Model Regulation (the “Model Law and Model Regulation”) as developed by the NAIC’s Reinsurance Task Force. The Department actively participated in the NAIC Reinsurance Task Force’s efforts. The Eleventh Amendment is consistent with the Model Law and Regulation to the extent that they are consistent with the needs of the New York insurance market.
The proposed rule also reflects the purpose of the Dodd-Frank Wall Street Reform and Consumer Protection Act [Public Law 111-203; 7/21/10] (hereinafter, the “Dodd-Frank Act”) which preempts certain state laws relating to reinsurance ceded by authorized non-domestic insurers.
4. Costs: The proposed rule does not impose additional costs upon assuming insurers. The rule also does not impose additional costs upon the Department of Financial Services or other state government agencies or local governments. Nor is it expected that either the Department of Financial Services or regulated entities will directly incur additional costs.
5. Local government mandates: This rule does not impose any program, service, duty or responsibility upon a city, town or village, or school or fire district.
6. Paperwork: Assuming insurers seeking to be designated as “certified reinsurers” by the Superintendent, which status will allow ceding insurers to take credit for reinsurance without the assuming reinsurer having to post 100% collateral, must file certain documents annually with the Superintendent. However, these documents should be readily available, since they serve purposes relating to regulation of the unauthorized assuming insurers by other entities.
7. Duplication: This amendment will not duplicate any existing state or federal rule. The Eleventh Amendment is aimed at making New York’s rules consistent with the NAIC’s recently adopted Model Law and Model Regulation, to the extent that they are consistent with the needs of the New York insurance market.
8. Alternatives: As a substantive matter, the Eleventh Amendment essentially consists of only minor adjustments to the rule as amended by the Tenth Amendment. These adjustments were aimed at more closely conforming the rule to the NAIC Model Law and Model Regulation. Accordingly, there were no possible alternatives for the Department to consider.
9. Federal standards: There are no minimum federal standards for the same or similar subject areas. The regulation is consistent with the Dodd-Frank Act inasmuch as that legislation preempts the state from denying credit for reinsurance of a ceding insurer whose state of domicile is an NAIC-accredited state, or has financial solvency requirements substantially similar to the requirements necessary for NAIC accreditation, and recognizes credit for reinsurance for the insurer’s ceded risk. See Pub. Law 111-203, § 532.
10. Compliance schedule: Once the amended regulation is adopted, regulated parties will be able to comply immediately. Any reinsurer currently complying with the provisions of 11 NYCRR § 125.4(h) as promulgated by the Tenth Amendment will be deemed to be in compliance with the requirements of the Eleventh Amendment, provided that such reinsurer successfully applies to the Superintendent for status as a certified reinsurer prior to July 1, 2013. Accordingly, this proposal will apply to new or renewed reinsurance contracts effective on or after July 1, 2011.
Statement Setting Forth the Basis for the Finding that the Eleventh Amendment to 11 NYCRR 125 (Insurance Regulations 17, 20, and 20-A) Will Not Impose Adverse Economic Impact or Compliance Requirements On Small Businesses or Local Governments
The Department of Financial Services (the “Department”) finds that this rule would not impose reporting, recordkeeping or other requirements on small businesses. This rule applies to ceding insurers authorized to do business in New York State, as well as unauthorized assuming insurers. The rule establishes certain requirements for ceding insurers domiciled in New York and for foreign authorized ceding insurers that are domiciled in a state that is neither NAIC-accredited nor has financial solvency requirements substantially similar to the requirements necessary for NAIC accreditation, and does not recognize credit for reinsurance for the insurer’s ceded risk. The rule also establishes standards for assuming insurers, in order to enable ceding insurers to take credit on their balance sheets for risks ceded to assuming insurers.
The Department has reviewed the filed Reports on Examination and Annual Statements of authorized insurers and the trusteed surpluses of alien insurers subject to this amendment, and believes that none of them comes within the definition of “small business” set forth in section 102(8) of the State Administrative Procedure Act, because there are none which are both independently owned and have under 100 employees.
This rule also is not expected to have any adverse economic impact on local governments, and does not impose reporting, recordkeeping or other compliance requirements on local governments. The basis for this finding is that this rule is directed at ceding insurers and assuming insurers, none of which is a local government.
Rural Area Flexibility Analysis for the Eleventh Amendment to 11 NYCRR 125 (Insurance Regulations 17, 20, and 20-A)
1. Types and estimated numbers of rural areas: This amendment applies to domestic ceding insurers and reinsurers that are not authorized to do business in New York State (“assuming insurers”) and addresses whether a ceding insurer may take credit on its balance sheet, as an asset or deduction from reserves, for reinsurance recoverable from an assuming reinsurer. The amendment establishes certain requirements for assuming insurers that wish to obtain status as a certified reinsurer from the Superintendent. The ceding insurers do business in every county in this state, including rural areas as defined under State Administrative Procedure Act, Section 102(13).
2. Reporting, recordkeeping and other compliance requirements, and professional services: An assuming insurer applying for status as a certified reinsurer from the Superintendent, which status will allow a ceding insurer to take credit for reinsurance without the assuming insurer having to post 100% collateral, must file certain documents annually with the Superintendent. However, these documents should be readily available, since they serve purposes relating to regulation of the assuming insurers by other entities.There are no other additional paperwork requirements specific to ceding insurers that are based in rural areas.
3. Costs: This rule imposes no additional costs for ceding insurers, including those based in rural areas.
4. Minimizing adverse impact: This rule applies uniformly to regulated parties that do business in both rural and nonrural areas of New York State. This rule provides certain minor refinements intended to further level the playing field for all reinsurers, continuing the Department’s efforts to keep New York competitive while bringing the state into the 21st century of financial services regulation.
5. Rural area participation: In developing this rule, which makes only minor substantive changes to the existing regulation, the Department conducted limited outreach by contacting insurers, reinsurers, trade groups, other regulators, and other interested parties, including those located or domiciled in rural areas.
Job Impact Exemption for the Eleventh Amendment to 11 NYCRR 125 (Insurance Regulations 17, 20, and 20-A)
The proposed amendment should have no negative impact on jobs or economic opportunities in New York State. The amendment applies to reinsurance contracts, and modifies slightly the framework by which a ceding insurer may take credit on its balance sheet, as an asset or deduction from reserves, for reinsurance recoverable from any unauthorized assuming insurer that maintains a sufficiently high interactive financial strength rating from at least two rating agencies. In addition, the Superintendent must evaluate the unauthorized assuming insurer and determine the proper amount of collateral to be maintained by the assuming insurer for the ceding insurer to take credit on its balance sheet.
While ceding insurers may change their choice of assuming insurers to ensure that they receive credit as an asset or deduction from reserves for such reinsurance, the amendment will not change the fact that authorized insurers need to obtain such reinsurance.
The proposal requires an unauthorized assuming insurer applying to the Superintendent for status as a certified reinsurer, which status will allow a ceding insurer to take credit for reinsurance without the assuming reinsurer having to post 100% collateral, to file certain documents annually with the Superintendent.
Thus, there should be no negative impact on jobs or economic opportunities in New York State.