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RULES AND REGULATIONS

Title 31—INSURANCE

INSURANCE DEPARTMENT

[ 31 PA. CODE CH. 161 ]

Requirements for Qualified and Certified Reinsurers

[43 Pa.B. 2816]
[Saturday, May 25, 2013]

 The Insurance Department (Department) amends Chapter 161 (relating to requirements for qualified and certified reinsurers) under the authority of sections 206, 506, 1501 and 1502 of The Administrative Code of 1929 (71 P. S. §§ 66, 186, 411 and 412), regarding the general rulemaking authority of the Department, and section 319.1 of The Insurance Company Law of 1921 (act) (40 P. S. § 442.1), regarding credits for reinsurance.

Purpose

 The purpose of this final-form rulemaking is to update Chapter 161 in accordance with amendments to section 319.1 of the act by the act of July 5, 2012 (P. L. 1111, No. 136) (Act 136), which grants the Insurance Commissioner (Commissioner) the authority to ''certify'' reinsurers so that ceding insurers may receive credit for reinsurance ceded to duly certified reinsurers. Chapter 161 sets forth requirements for a licensed ceding insurer to receive credit for reinsurance in its financial statements. These amendments were proposed in conjunction with amendments to Chapter 163 (relating to requirements for funds held as security for the payment of obligations of unlicensed, unqualified reinsurers).

 The amendments to Chapter 161 are based upon recent amendments to model law and regulation developed by the National Association of Insurance Commissioners (NAIC) entitled ''Credit for Reinsurance Model Law'' (No. 785) and ''Credit for Reinsurance Model Regulation'' (No. 786). This final-form rulemaking is part of the financial regulation standards the Department must meet to maintain its accreditation by the NAIC. Thus, if a jurisdiction opts to certify reinsurers, as the Commonwealth has done with the enactment of Act 136, the standards by which it does so must be substantially similar to NAIC requirements for the jurisdiction to maintain NAIC accreditation.

Comments and Response

 Notice of proposed rulemaking was published at 42 Pa.B. 5629 (September 1, 2012) with a 30-day comment period. Comments were received from the Insurance Federation of Pennsylvania, Ace Group and Lloyds, London expressing support for the proposed rulemaking. The Ace Group and Lloyds, London emphasized the necessity that the Department's regulation be substantially similar to the NAIC model law and regulation.

 A comment from American International Group (AIG) raised three concerns. AIG noted that the amendments to section 319.1 of the act by Act 136 did not address the frequency by which a Commissioner would certify a reinsurer and requested that the Commissioner implement a uniform annual date for certifications to be effective to minimize administrative burden for calculating collateral requirements for the year. The Department declined to make this change. The variance of effective dates of contracts is a contractual issue between a ceding insurer and reinsurer and is not related to the timing of the Commissioner's certification of a reinsurer. Further, taking a credit for reinsurance is entirely voluntary; if a ceding insurer would find that the benefit of a credit is outweighed by the administrative burden of calculating the credit, it may decline to do so until the reinsurers with whom it contracts are certified.

 AIG suggested that ''catastrophic event'' be defined as an event determined by an organization such as the Property Claims Service or equivalent organization recognized by the Commissioner. The Department amended § 161.3b(b)(4) (relating to calculation of credit for reinsurance regarding obligations secured with certified reinsurers) as explained as follows.

 AIG expressed its belief that the 1-year deferral in posting security should not apply to certified reinsurers that have been assigned a ''Secure 4,'' ''Secure 5'' or ''Vulnerable 6'' rating. The Department declined to make this change because it would be a significant deviation from the NAIC model. Additionally, the Department believes that policyholders are better protected if the solvency of reinsurers is not jeopardized by treating them disparately. It should be noted that it is the ceding insurer's prerogative to contract with a particular reinsurer and a ceding insurer is under no obligation to contract with an insurer who has been assigned a rating.

 On October 31, 2012, the Independent Regulatory Review Commission (IRRC) submitted a comment with regard to the rulemaking that: (1) requested that the Department either define ''catastrophic occurrence'' or provide an explanation as to its rationale for not doing so; and (2) noted several cross referencing errors.

 In response to IRRC's comment and the comment from AIG, the Department added clarifying language to § 161.3b(b)(4) to note that when deciding whether to recognize an event as a catastrophic occurrence, the Commissioner would do so in consultation with the NAIC and would consider both natural and human events as possible catastrophes.

 However, the Department declined to provide a specific definition of ''catastrophic occurrence'' to maintain consistency with the NAIC model, which intentionally leaves the term undefined so that the Commissioner can make a case-by-case determination. ''Catastrophe'' and ''catastrophic occurrence'' are not capable of objective definition. Specifically, it is not possible to prospectively create a definition that would encompass all cases and would appropriately consider the totality of the circumstances.

 With regard to the cross referencing errors referenced by IRRC, the Department corrected the cross referencing error in § 161.3b(e).

 IRRC also noted that the references in § 161.3a(c)(3) and (4) (relating to requirements for certified reinsurers) do not match the corresponding provisions of the NAIC model regulation. Although the Department does acknowledge that the references do not match the corresponding NAIC model provisions, the Department determined that the NAIC model references are in error and that the references are correct.

 Specifically, the Department determined that § 161.3a(c)(3) properly cross references subsection (a)(3)(ii), regarding the assigning of a new rating to a reinsurer that is certified in another jurisdiction. Con- versely, section B(7)(a) of the NAIC model and § 161.3a(a)(5)(i) relate to notification requirements for regulatory actions. The NAIC model regulation should have cross referenced section 8B(8)(a). The equivalent of section 8B(8)(a) is § 161.3a(a)(3)(iii)(A). Because this subsection refers back to subsection (a)(3)(ii), the Department believes the direct reference to subsection (a)(3)(ii) is more clear.

 Likewise, the Department determined that § 161.3a(c)(4)properly cross references § 161.6 (relating to revocation of reinsurer qualification or certification), which deals with revocation of reinsurer qualification or certification. Again, the NAIC model should have cross referenced section 8B(8)(a) instead of section 8B(7)(a). The equivalent of section 8B(8)(a) is § 161.3a(a)(3)(iii)(B). Because this subsection refers back to § 161.6, the Department believes the direct reference to § 161.6 is more clear.

Affected Parties

 This final-form rulemaking applies to insurance companies domesticated in this Commonwealth and the reinsurers with whom they do business.

Fiscal Impact

State government

 The final-form rulemaking will strengthen and clarify existing regulatory requirements. There will not be material increase in cost to the Department as a result of this final-form rulemaking.

General public

 While Chapter 161 does not have immediate fiscal impact on the general public, the general public will benefit to the extent that allowing reduced collateral for reinsurers that are financially solvent and licensed in well-regulated jurisdictions will reduce the cost of reinsurance to ceding insurers in this Commonwealth and reduce trade barriers allowing for more competition in the reinsurance marketplace.

Political subdivisions

 This final-form rulemaking will not impose additional costs on political subdivisions.

Private sector

 This final-form rulemaking will not impose significant costs on the transaction of business in this Commonwealth.

Effectiveness/Sunset Date

 This final-form rulemaking will become effective on June 24, 2013. The Department continues to monitor the effectiveness of regulations on a triennial basis; therefore, a sunset date has not been assigned.

Contact Person

 Questions regarding this final-form rulemaking may be addressed in writing to Peter J. Salvatore, Regula- tory Coordinator, Insurance Department, 1326 Strawberry Square, Harrisburg, PA 17120, fax (717) 705-3873, psalvatore@state.pa.us.

Regulatory Review

 Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), on August 22, 2012, the Department submitted a copy of the notice of proposed rulemaking, published at 42 Pa.B. 5629, to IRRC and the Chairpersons of the House Insurance Committee and the Senate Banking and Insurance Committee for review and comment.

 Under section 5(c) of the Regulatory Review Act, IRRC and the House and Senate Committees were provided with copies of the comments received during the public comment period, as well as other documents when requested. In preparing the final-form rulemaking, the Department has considered all comments from IRRC, the House and Senate Committees and the public.

 Under section 5.1(j.2) of the Regulatory Review Act (71 P. S. § 745.5a(j.2)), on April 17, 2013, the final-form rulemaking was deemed approved by the House and Senate Committees. Under section 5.1(e) of the Regulatory Review Act, IRRC met on April 18, 2013, and approved the final-form rulemaking.

Findings

 The Commissioner finds that:

 (1) Public notice of intention to adopt this final-form rulemaking was given under sections 201 and 202 of the act of July 31, 1968 (P. L. 769, No. 240) (45 P. S. §§ 1201 and 1202) and the regulations thereunder, 1 Pa. Code §§ 7.1 and 7.2.

 (2) The adoption of this final-form rulemaking in the manner provided in this order is necessary and appropriate for the administration and enforcement of the authorizing statutes.

Order

 The Commissioner, acting under the authorizing statutes, orders that:

 (a) The regulations of the Department, 31 Pa. Code Chapter 161, are amended by adding §§ 161.3a, 161.3c and 161.8a, deleting § 161.8 and amending §§ 161.1—161.3, 161.6, 161.7 and 161.9 to read as set forth at 42 Pa.B. 5629 and by adding § 161.3b to read as set forth in Annex A.

 (b) The Department shall submit this order, 42 Pa.B. 5629 and Annex A to the Office of General Counsel and Office of Attorney General for approval as to form and legality as required by law.

 (c) The Department shall certify this order, 42 Pa.B. 5629 and Annex A and deposit them with the Legislative Reference Bureau as required by law.

 (d) The final-form regulations adopted by this order shall take effect on June 24, 2013.

MICHAEL F. CONSEDINE, 
Insurance Commissioner

 (Editor's Note: See 43 Pa.B. 2819 (May 25, 2013) for a final-form rulemaking by the Department relating to this final-form rulemaking.)

 (Editor's Note: For the text of the order of the Independent Regulatory Review Commission relating to this document, see 43 Pa.B. 2530 (May 4, 2013).)

Fiscal Note: Fiscal Note 11-249 remains valid for the final adoption of the subject regulations.

Annex A

TITLE 31. INSURANCE

PART VIII. MISCELLANEOUS PROVISIONS

CHAPTER 161. REQUIREMENTS FOR QUALIFIED AND CERTIFIED REINSURERS

§ 161.3b. Calculation of credit for reinsurance regarding obligations secured with certified reinsurers.

 (a) For a domestic ceding insurer to qualify for full financial statement credit for reinsurance ceded to a certified reinsurer, the certified reinsurer shall maintain security in a form acceptable to the Commissioner and consistent with section 319.1(b) of the act (40 P. S. § 442.1(b)) or in a multibeneficiary trust in accordance with § 161.3(3)(vii)(B) (relating to credit for reinsurance) except that:

 (1) If a certified reinsurer maintains a trust to fully secure its obligations subject to § 161.3(3)(vii) and chooses to secure its obligations incurred as a certified reinsurer in the form of a multibeneficiary trust, the certified reinsurer shall maintain separate trust accounts for its obligations incurred under reinsurance agreements issued or renewed as a certified reinsurer with reduced security as permitted by this paragraph or comparable laws of other United States jurisdictions and for its obligations subject to § 161.3(3)(vii)(B). It shall be a condition to the grant of certification under this subsection that the certified reinsurer shall have bound itself, by the language of the trust and agreement with the chief regulatory official with principal regulatory oversight of each trust account, to fund, upon termination of a trust account, out of the remaining surplus of the trust any deficiency of another trust account.

 (2) The minimum trusteed surplus requirements provided in § 161.3(3)(vii) are not applicable with respect to a multibeneficiary trust maintained by a certified reinsurer for the purpose of securing obligations incurred under this paragraph, except that the trust must maintain a minimum trusteed surplus of $10 million.

 (b) The allowable credit allowed a ceding insurer must be based upon the security held by or on behalf of the ceding insurer and shall be calculated in accordance with the following requirements:

 (1) For full credit to be allowed, the amount of security must correspond with the rating assigned by the Commissioner to the certified reinsurer under § 161.3a(a)(3) (relating to requirements for certified reinsurers) as follows:

Rating Security required
Secure—1 0%
Secure—2 10%
Secure—3 20%
Secure—4 50%
Secure—5 75%
Vulnerable—6 100%

 (2) Affiliated reinsurance transactions will receive the same opportunity for reduced security requirements as other reinsurance transactions.

 (3) The Commissioner will require the certified reinsurer to post 100% for the benefit of the ceding insurer or its estate, security upon the entry of an order of rehabilitation, liquidation or conservation against the ceding insurer.

 (4) To facilitate the prompt payment of claims, a certified reinsurer will not be required to post security for catastrophe recoverables for 1 year from the date of the first instance of a liability reserve entry by the ceding company as a result of a loss from a catastrophic occurrence as recognized by the Commissioner. When determining what constitutes a catastrophic occurrence, the Commissioner will consult with the NAIC and consider both natural and human events. The 1-year deferral period is contingent upon the certified reinsurer continuing to pay claims in a timely manner in compliance with its contractual obligations in the reinsurance agreement under which the claims are ceded. Reinsurance recoverables for only the following lines of business as reported on the NAIC annual financial statement related specifically to the catastrophic occurrence will be included in the deferral:

Line 1: Fire
Line 2: Allied Lines
Line 3: Farmowners multiple peril
Line 4: Homeowners multiple peril
Line 5: Commercial multiple peril
Line 9: Inland Marine
Line 12: Earthquake
Line 21: Auto physical damage

 (c) With respect to obligations incurred by a certified reinsurer, if the security is insufficient, the Commissioner will reduce the allowable credit by an amount proportionate to the deficiency and has the discretion to impose further reductions in allowable credit upon finding that there is a material risk that the certified reinsurer's obligations will not be paid in full when due.

 (d) For purposes of calculating the allowable credit under this section, a certified reinsurer whose certification has been terminated for any reason shall be treated as a certified reinsurer required to secure 100% of its obligations.

 (1) As used in this subsection, ''terminated'' refers to revocation, suspension, voluntary surrender and inactive status.

 (2) If the Commissioner continues to assign a higher rating as permitted by this section, this requirement does not apply to a certified reinsurer in inactive status or to a reinsurer whose certification has been suspended.

 (e) Based on the analysis conducted under § 161.3a(a)(3)(ii)(B)(V) of a certified reinsurer's reputation for prompt payment of claims, the Commissioner may make appropriate adjustments in the security the certified reinsurer is required to post to protect its liabilities to United States ceding insurers, provided that the Commissioner will, at a minimum, increase the security the certified reinsurer is required to post by one rating level under § 161.3a(a)(3)(ii)(B)(I) if the Commissioner finds either of the following:

 (1) More than 15% of the certified reinsurer's ceding insurance clients have overdue reinsurance recoverables on paid losses of 90 days or more which are not in dispute and which exceed $100,000 for each cedent.

 (2) The aggregate amount of reinsurance recoverables on paid losses not in dispute that are overdue by 90 days or more exceeds $50 million.

 (f) This section does not prohibit the parties to a reinsurance agreement from agreeing to provisions establishing security requirements that exceed the minimum security requirements under this section or under § 161.8a (relating to reinsurance contracts).

[Pa.B. Doc. No. 13-950. Filed for public inspection May 24, 2013, 9:00 a.m.]



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