February 2012

Contents Page

UK – proposed changes to the taxation of insurance groups 1

Europe – Solvency II timing update 2

Europe – European Commission letter to EIOPA regarding third

country equivalence 2

Europe – EIOPA publishes action plan for colleges of supervisors 3

Europe – European Commission White paper on pensions 4

UK – FSA publishes insurance newsletters 4

China – New draft rules on the administration of representative

offices of foreign insurance related institutions 5

China – Renaissance of Insurance Asset Management Companies 5

US – Update – States Continue to Consider Enacting the

Amendments to the NAIC Insurance Holding Company System

Model Act and Regulation 6

US – Update – NAIC Continues Consideration of AG 38 9

US – Update – Additional states introduce credit for

reinsurance reform legislation; New Jersey proposes new credit

for reinsurance regulations 10

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UK – proposed changes to the taxation of insurance groups

TAXATION OF CONTROLLED FOREIGN COMPANIES

HM Treasury has recently closed a consultation on the tax regime for controlled

foreign companies (“CFCs”). CFSs are non-UK tax resident companies controlled by

UK companies. Under the existing rules, a UK company can be assessed to UK tax

on profits realised by the CFCs in its group where those CFCs pay less than 75% of the

tax on their income that they would have paid had they been resident in the UK, and

the departure of several UK-headquartered insurance groups has been attributed to

this rule. HM Treasury is believed to be aiming to reverse this trend with its changes

to the CFC tax regime.

HM Treasury is yet to digest all the comments received on the consultation paper, so the

final form of the new rules to be introduced to Parliament as part of the Finance Bill 2012

is yet to be established. Probable features of the new rules can, however, be discerned

from the draft rules published on 31 January 2012, including the following provisions:

• Under the new regime, it is anticipated that an exemption from the regime for

CFCs based in certain countries (typically those that are not considered tax

havens) will continue to apply, although it is worth noting that the exemption for

CFCs based in Luxembourg will not apply to insurers.

• There may be an exemption when only a small proportion of the relevant CFC’s

trading income is derived from the UK.

• It is expected that the determination of whether a country is a CFC will include

consideration of where the significant people functions relevant to asset

ownership and risk management are located – if these are in the UK, the CFC

rules will apply. This definition will catch overseas insurers using UK persons to

insure non-UK risk.

• There are also expected to be changes to the types of income which fall to be

assessed to UK tax under the CFC regime; for example, it is anticipated that

property income will be excluded, as will reinsurance income unless there are

no commercial reasons for the reinsurance or the CFC is outside the European

Economic Area.

TAXATION OF LIFE ASSURANCE BUSINESS

Changes to taxation of life assurance business are required in order to address issues

arising from the advent of Solvency II, as the current tax system for life assurance

businesses relies on regulatory returns which will not provide the necessary

information once Solvency II comes into force.

The proposed changes in this area include the following:

• All life assurance business will be taxed on the basis of accounts, rather than

regulatory returns. (Currently, only permanent health insurance is taxed on an

accounts basis.)

• The allocation of profits between businesses will no longer be prescribed by

statue, instead it will become a commercial allocation.

• The tax regime for life assurance companies will be more aligned to the regime

for other companies, for example with regard to the taxation of debt.

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Europe – Solvency II timing update

February has seen continued speculation about when (and even whether!) Solvency II

will be implemented. Although there is nothing concrete to report, market opinion

certainly seems to be that the previously anticipated implementation date for

Solvency II will be pushed back.

In particular, EIOPA has written a letter to the European Commission emphasising

the challenges it faces with regard to consulting on Solvency II while there are still so

many uncertainties, and stressing the importance of the next legislative steps

occurring in a timely manner. The letter also stated that “it is difficult in light of the

global crisis to defend any further delay in its implementation” and that further

delays might encourage individual countries to pursue their own solutions.

Concern has also been expressed by the new head of the German supervisory

authority that the anticipated timetable cannot now be met in light of the delay to the

vote in the Economic and Monetary Affairs Committee which was announced in

January.

In addition, the European Actuarial Consultative Group said in its February report

that the rumours of delay were consistent with reports of continuing controversy in

the European Parliament on topics including “discount rates and the reflection of

asset illiquidity”.

We will be monitoring this area closely.

Europe – European Commission letter to EIOPA regarding third country equivalence

On 2 February 2012, the European Commission (the “Commission”) wrote a letter

to the European Insurance and Occupational Pensions Authority (“EIOPA”)

regarding third country equivalence assessments under Solvency II.

Whilst not prejudging the outcome of the ongoing negotiations in the Council of

Ministers and the European Parliament in relation to Omnibus II, the Commission

understands that these bodies are supportive of a transitional regime for third

country equivalence, and are, therefore, moving forward in this regard.

The Commission has been engaging in dialogue about a potential transitional regime

for third country equivalence under Solvency II with the supervisory authorities of a

number of third countries. As a result of this, the Commission has asked EIOPA to

carry out a technical analysis (as opposed to a full equivalence assessment) of the

following in relation to a number of countries:

1. whether persons working for, or on behalf of, the supervisory authorities are

bound by obligations of professional secrecy equivalent to those under Solvency I;

and

2. the areas where the third country’s supervisory regime does not currently meet the

equivalence criteria (“Gap Analysis”).

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The countries involved, and the status of the Commission’s discussions with them, is

as follows:

A. Australia, Chile, Hong Kong, Israel, Mexico, Singapore and South Africa have

expressed an interest in being part of a transitional regime. Discussions with

these countries are ongoing and decisions about their potential inclusion in a

transitional regime will not be taken by the Commission until 2013.

B. Initial discussions have been had with Brazil, China and Turkey. Whilst

discussions are at an early stage, these countries are also, in principle, interested

in inclusion in a transitional regime.

C. The Commission and EIOPA recently met with representatives from the Federal

Insurance Office and state insurance regulators from the United States. As the

prudential regulation of insurance undertakings is a state competence under US

law, a different approach for equivalence in relation to the US will be required.

D. The Japanese Financial Services Agency (the “JFSA”) has indicated its interest

in being included in a transitional regime in relation to group solvency and group

supervision. Therefore, the Commission has asked EIOPA to initiate further

discussions with the JFSA in order to carry out a Gap Analysis in these areas.

Europe – EIOPA publishes action plan for colleges of supervisors

EIOPA has published a 2012 action plan for colleges of supervisors, which is dated 16

January 2012 (the “Action Plan”).

The Action Plan details actions which colleges are required to implement during

2012, and sets deadlines for the completion of these actions. The action points are

split between action points for colleges which have not been constituted until now/

have not fulfilled the work plan for 2011, and action points for all colleges. Key

targets from the Action Plan include:

• Preparing for the implementation of Solvency II – the particular focus here is the

pre-application process for internal model approval (an ongoing task);

• Agreeing a work plan for when to take actions and decisions in 2012, in

particular in relation to Solvency II (to be completed by 30 June 2012);

• Enhancing of the regular exchange of information in colleges (to be complied

with from 30 June 2012 and ongoing); and

• (A task for the group supervisor) making a gap analysis (by the end of 2012).

Alongside the Action Plan, EIOPA also published a report (dated 2 February 2012) on

the functioning of colleges and the accomplishments of the 2011 action plan (the

“Report”). A key conclusion from the Report is that, despite the lack of a final legal

text, colleges are making great efforts to prepare for the Solvency II regime.

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Europe – European Commission White paper on pensions

The European Commission (the “Commission”) published a White Paper on 16

February 2012 entitled “An Agenda for Adequate, Safe and Sustainable Pensions” (the

“White Paper”). This follows the Commission’s Green Paper published in July 2010,

which reviewed the legal framework surrounding pension provision in Europe.

The White Paper puts forward measures to help create an environment where

employees can work for longer and save more for their retirement. The proposals aim

to balance the length of time people spend at work and in retirement. It also

encourages personal and occupational pension savings in addition to state benefits.

It addresses the possibility of introducing later retirement ages and proposes to make

pensions more portable for people who move countries. The proposals also aim to

ensure that occupational pension rights are sufficiently protected in employer

insolvency situations.

To take these proposals forward, the Commission has proposed some legislative

reforms, and it will also contemplate using codes of practice and conduct. In

particular, the Commission wants to revise Directive 2003/41/EC (the “IORP

Directive”), which deals with the supervision of institutions for occupational

retirement provision, before the end of 2012 The UK implemented the IORP

Directive through the Pensions Act 2004. The White Paper states that the aim of

this review would be to “maintain a level playing field with Solvency II”.

The suggestion that a Solvency II style regime could be imposed on pension schemes

has proved controversial, as many in the pensions industry are worried that the cost

of implementing such a regime would be substantial. The pensions systems used in

European member states vary substantially, particularly in the importance placed on

state, occupational and personal pensions savings. For that reason, it is not clear how

a review of the IORP Directive may impact UK pensions legislation. EIOPA has

promised an impact study which the industry hope will take into account the marked

difference in pension provision between member states.

UK – FSA publishes insurance newsletters

The FSA published the first General Insurance Newsletter and Life Insurance

Newsletter (together the “Newsletters”) for the year on 8 February 2012. The

Newsletters contain a summary of the FSA’s latest work in the insurance sector and

cover, amongst other things, a Solvency II policy and implementation update, an EU

Gender Directive update, and lists of other publications and speeches since the last

newsletter.

In relation to Solvency II, the FSA comments that “…we have no information to

suggest that the dates beyond 2014 will change. Firms should continue to work on

this basis and we will provide further updates as appropriate”.

The Newsletters also provide updates as to when the FSA expects to publish a

number of policy documents, including:

• a response to comments received on guidance for consultation on structured

products (due by the end of the first quarter of 2012);

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• a policy statement on insurance policies in packaged bank accounts (due in July

2012);

• a consultation on a ban of all marketing of traded life policy investments (due in

the second quarter of 2012);

• a policy statement on Solvency II and linked long-term insurance business (due

in the second quarter of 2012); and

• final guidance on payment protection products (due by the end of the first half of

2012).

China – New draft rules on the administration of representative offices of foreign insurance related institutions

On 22 March 2011, the Chinese Insurance Regulatory Commission (“CIRC”)

released new draft rules on the administration of representative offices of foreign

insurance related institutions (the “Draft Rules”). There was a public consultation

on the Draft Rules, which ended in April 2011. If finally approved, the Draft Rules

are intended to replace the rules on the administration of representative offices of

foreign insurance institutions, published on 1 September 2006, and the

interpretations of the CIRC on rules on the administration of representative offices of

foreign insurance institutions, published on 25 November 2008.

The main changes that would be made by the Draft Rules include:

1. the requirement that the total assets of the foreign insurance intermediary

institution intending to set up a representative office in China at the end of the

year immediately prior to application are at least US$2 billion would be reduced,

so that instead they would only need assets of at least US$200 million;

2. the requirements regarding the chief representative of the representative office

would be strengthened – in particular, such individuals would be required to

have 8 years’ insurance related working experience (with 2 years’ management

experience in insurance companies);

3. a “once a year face-to-face reporting” requirement would be imposed on the chief

representative; and

4. the amount of administrative penalties that could be given to any representative

office which breaches the laws would be significantly increased.

The Draft Rules are under further review by the CIRC, who will publish them once

ready. However, it is hard to estimate when this will happen as the timing may be

affected by various factors including, for example, if there are discrepancies on

certain provisions among relevant departments.

China – Renaissance of Insurance Asset Management Companies

For more than 4 years prior to the end of 2010 no new approvals for the establishment

of Insurance Asset Management Companies (“IAMCs”) had been issued by the

CIRC, and only 9 IAMCs existed in the China market. However, this condition was

changed as from December 2010 and a new round of establishment of IAMCs began.

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This was signaled by the approval for the establishment of Shengming Asset

Management Co., Ltd. in Shenzhen, which was issued on 16 December 2010.

In April 2011, in order to further control and manage potential risks in relation to

fund operations, and to improve the development of asset management businesses,

the CIRC issued Circular No. 19, which made several amendments to the 2004

‘Interim Administrative Regulations on Insurance Asset Management Companies’.

As a result of Circular No. 19, the requirement that the principal sponsor of an IAMC

has prior insurance business experience was lowered from 8 years’ prior experience to

5 years. However, other financial criteria for the establishment of an IAMC were

enhanced. For example, the minimum amount of total assets required of the IAMC’s

principal sponsor was increased by RMB5 billion to RMB10 billion, and the

minimum amount of the registered capital required of the IAMC was increased by

RMB70 million to RMB100 million.

Other significant amendments include the expansion of the business scope of an

IAMC (e.g. an IAMC will be able to operate funds from other consigners in addition

to funds from its own shareholders). In addition, an IAMC is to be allowed to set up

subsidiaries, although detailed implementation rules in relation to this area are to be

issued separately in the future.

Despite the rise in the threshold requirements for the establishment of an IAMC, the

market is still “hot”, and insurance companies are positive about setting up IAMCs.

Several approvals were issued by CIRC during 2011, including the approvals for

AnBang Asset Management Co., Ltd (in May 2011), Guangdayongming Asset

Management Co., Ltd. (in September 2011) and HeZhong Asset Management Co.,

Ltd. (in November 2011).

US – Update – States Continue to Consider Enacting the Amendments to the NAIC Insurance Holding Company System Model Act and Regulation

In 2011, Rhode Island, Texas and West Virginia became the first states to adopt

legislation to implement the December 2010 amendments to the National

Association of Insurance Commissioners (“NAIC”) Insurance Holding Company

System Regulatory Act (“Model Act”) and Insurance Holding Company System

Model Regulation with Reporting Forms and Instructions (“Model Regulation”).

Throughout 2011 and the first part of 2012, legislation was introduced in a number of

other states tracking the amendments to the Model Act. States that have considered

or are currently considering legislation incorporating aspects of the amended Model

Act include California, Florida, Illinois, Indiana, Kansas, Kentucky, Nebraska, New

York, Oklahoma and Pennsylvania. In addition, the New York Department of

Financial Services has released supplements to prior circular letters, discussing its

increased efforts to monitor holding company systems and announcing enterprise

risk management expectations. For more information on these New York regulatory

developments, please see our articles from the September 2011 Mayer Brown Global

Corporate Insurance & Regulatory Bulletin, New York Increases Efforts to Monitor

Holding Company Systems and New York Announces Enterprise Risk Management

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Expectations. While the proposed and recently enacted holding company legislation

is not uniform across the states, the legislation generally incorporates significant

changes brought about by the amendments to the NAIC models.

The Model Act and Model Regulation apply to insurance holding company systems,

which are defined as groups of two or more affiliated entities, at least one of which is

an insurer. The December 2010 revisions represent a shift in emphasis of the NAIC’s

approach to the regulation of insurance holding company systems. Historically, such

regulation has been designed to build “walls” around an insurer through regulation of

acquisitions, dividends and inter-affiliate transactions. The new approach adds a

new “windows” component to the traditional “walls” component giving insurance

regulators access to enhanced information about the activities and risk profile of an

insurer’s non-insurance affiliates.

One of the focal points of the Model Act amendments is the concept of “enterprise

risk” – defined as any activity, circumstance or event involving an insurer’s affiliate

that is likely to have a material adverse affect upon the financial condition of the

insurer or its insurance holding company system, including anything that would

cause the insurer’s risk-based capital to fall into the company action level, or would

cause the insurer to be in hazardous financial condition. The amended Model Act

requires an insurer’s ultimate controlling person to provide a confidential enterprise

risk management (“ERM”) report as part of the insurer’s “Form B” annual holding

company registration statement.

REVISIONS TO THE FORM “B” ANNUAL HOLDING COMPANY REGISTRATION STATEMENT

The Model Act revisions provide that the Form B must include a statement that the

insurer’s board of directors is responsible for any oversees corporate governance and

internal controls and that the insurer’s officers or senior management have approved,

implemented and continue to maintain and monitor corporate governance and

internal control procedures. The Form B must also include a confidential ERM

report provided by the insurer’s ultimate controlling person. An ERM report should

be designed to identify the material risks within the insurance holding company

system that could pose financial and/or reputational contagion to the insurer. The

ERM report should include material developments regarding strategy, internal audit

findings, compliance or risk management affecting the insurance holding company

system. Among other considerations, the ERM report should identify any material

activity or development of the insurance holding company system that, in the opinion

of senior management, could adversely affect the insurance holding company system.

REVISIONS TO THE “FORM A” ACQUISITION PROCESS

Among changes brought about under the revised Model Act and Model Regulation

regarding the “Form A” acquisition process, an acquiring person is required to

acknowledge that it and all subsidiaries within its control will provide information to

its home state commissioner upon request as necessary to evaluate the risk of

financial and/or reputational contagion to the insurer. An acquiring person must file

a “Form E” in the domestic state to address the competitive impact of the acquisition.

A control person that wishes to divest its controlling interest in a domestic insurer

must give the commissioner 30 days’ prior notice.

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REVISIONS TO THE “DISCLAIMER OF CONTROL” PROCESS

There is a rebuttable presumption of “control” when a person directly or indirectly

holds 10% or more of the voting securities of an insurer. Before the Model Act and

Regulation were modified, the presumption could be rebutted by filing a disclaimer of

control, which became effective immediately unless disallowed by the commissioner

after a hearing. Under the modified Model Act and Regulation, disclaimers are no

longer automatically effective upon filing. Disclaimers are only effective if not

disallowed within 30 days after filing. If disallowed, an applicant may request an

administrative hearing to seek reconsideration of the commissioner’s decision.

REVISIONS TO THE “FORM D” AFFILIATED TRANSACTION REVIEW PROCESS

The modified Model Act and Regulation provide for revisions to the “Form D” process

for review of transactions between insurers and their affiliates. Management service

and cost sharing agreements must include specific items enumerated in the Model

Act and Regulation. Amendments or modifications to previously filed agreements

must be filed with an explanation for the change and the financial impact on the

insurer. The domiciliary state commissioner must be notified within 30 days of

termination of a previously filed agreement. Among other requirements, a statement

must be made describing how each inter-affiliate transaction meets the “fair and

reasonable” standard.

ENHANCEMENTS TO THE COMMISSIONER’S EXAMINATION POWERS

Under the modified Model Act and Regulation, a commissioner can examine not only

the insurer but also its affiliates to ascertain the financial condition of the insurer,

including the risk of financial contagion to the insurer by the ultimate controlling

person, any affiliates or combination of affiliates, or the insurance holding company

system on a consolidated basis. A commissioner has the power to issue subpoenas

and examine persons under oath, and may seek a court order to enforce subpoenas,

under penalty of contempt. Sanctions for violating “Form A” approval requirements

include prohibiting all dividends or distributions from the insurer and placing the

insurer under regulatory supervision.

SUPERVISORY COLLEGES

In order to assess the business strategy, financial position, legal and regulatory

position, risk exposure, risk management and governance processes, and as part of

the examination of domestic insurers with international operations, a commissioner

may participate in a “supervisory college” with other regulators charged with

supervision of the insurer or its affiliates, including other state, federal and

international regulatory agencies.

EFFECTIVE DATES

The West Virginia amendments become effective on 1 July 2012, including the

requirement that the “Form B” include an annual ERM report.

The Rhode Island amendments became effective immediately upon passage on 27

May 2011, except for the requirement to file an ERM report, which takes effect on 1

July 2013.

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The Texas amendments became effective on 1 September 2011, but the ERM report

requirement is being rolled out in stages, based on the volume of an insurer’s total

direct or assumed annual premiums during the preceding 12-month period

(“Premium Volume”). An insurer’s annual “Form B” registration statement is

required to include an ERM report from its ultimate controlling person as part of its

first “Form B” filing due after (1) 1 July 2013, if its Premium Volume was $5 billion or

more, (2) 1 January 2014, if its Premium Volume was more than $1 billion but less

than $5 billion, (3) 1 January 2015, if its Premium Volume was more than $500

million but less than $1 billion and (4) 1 January 2016, if its Premium Volume was

$300 million or more but less than $500 million.

For additional information on the amendments to the Model Act and Regulation,

please see our article from the February 2011 Mayer Brown Global Corporate

Insurance & Regulatory Bulletin, NAIC Adopts Modified Insurance Holding

Company System Model Act and Regulation.

US – Update – NAIC Continues Consideration of AG 38

During a conference call on 21 February 2012, a joint working group of the National

Association of Insurance Commissioners’ (the “NAIC”) Life Insurance and Annuities

(A) Committee and Financial Condition (E) Committee (the “Joint Working

Group”), formed by the Executive (EX) Committee to study Actuarial Guideline 38

(“AG 38”), an NAIC model regulation which requires life insurers to establish

additional statutory reserves for certain universal life insurance policies with

secondary guarantees (“ULSG policies”)̧ took its first significant action by adopting

a bifurcated approach to AG 38 that establishes separate standards for ULSG policies

that are already in force and ULSG policies that are issued in the future.

For in force business, policies issued on or before a specified date would be treated as

closed blocks of business. Those closed blocks of in force business would be evaluated

by actuaries on a standalone basis. The evaluations would consist of asset adequacy

analyses incorporating moderately adverse scenarios. If it is determined that the

reserves are adequate on that basis, the company would not need to make an

adjustment to its in force reserves. If it is determined that the reserves are deficient

on that basis, the company would need to increase reserves to the level determined

pursuant to the asset adequacy analysis. All states would rely on the conclusions

reached pursuant to the actuarial evaluations. As such, the evaluations would lead to

a unified regulatory decision regarding the adequacy of each company’s in force

reserves and the manner and timing of any adjustments. For prospective business,

policies issued on and after a specified date, but prior to the effective date of

Principle-Based Reserving (“PBR”), would be reserved using a formulaic approach

consistent with the NAIC Life Actuarial (A) Task Force’s interpretation of AG 38 (as

modified or clarified to address any questions regarding its requirements). Policies

issued on and after the effective date of PBR would be reserved under PBR

methodology.

The Joint Working Group was created to address the issues surrounding AG 38 and

statutory reserve requirements for insurers offering certain ULSG and term

universal life products. In recent years, some regulators and industry participants

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have contended that some insurance companies may be improperly applying the

provisions of AG 38 in determining the reserves for universal life policies with

multiple secondary guarantees.

A number of issues regarding AG 38 remain outstanding and are still under

consideration by the Joint Working Group. The Joint Working Group’s draft proposal

will now be considered by the Life Insurance and Annuities (A) Committee, the

Financial Condition (E) Committee and ultimately the Executive (EX) Committee

and Plenary at the NAIC Spring Meeting on 4-6 March 2012.

The Joint Working Group is comprised of representatives from Alaska, California,

Florida, Iowa, New Jersey, New York, Tennessee, Texas and Virginia. The Joint

Working Group operates under the following charge: The joint working group shall

work expeditiously to determine whether it is prudent and necessary to develop

interim guidelines and/or tools to be utilized by regulators in evaluating reserves for

ULSG and Term UL products and, if so, to promptly develop such interim guidelines

and/or tools. As part of this effort, the working group shall make recommendations

regarding whether these interim guidelines and/or tools should be applied in force

and/or prospective ULSG and Term UL products until such time as the final

Valuation Manual is adopted. The working group shall use as guidance the work

completed by the Life Actuarial Task Force with respect to this issue. Finally, the

working group may engage resources as necessary to assist with analysis and

preparation of necessary guidelines and/or regulatory tools.

US – Update – Additional states introduce credit for reinsurance reform legislation; New Jersey proposes new credit for reinsurance regulations

Georgia and Virginia have become two of the latest states where bills have been

introduced to amend existing credit for reinsurance laws to adopt the reinsurance

risk-based collateral reforms embodied in the recently amended National

Association of Insurance Commissioners (“NAIC”) model law. Meanwhile, the New

Jersey Department of Banking and Insurance (“NJDOBI”) has released for comment

proposed new rules and amendments to existing rules to implement New Jersey’s

recently amended credit for reinsurance statute based on the NAIC model law. As we

have previously reported, the following states have already adopted reduced collateral

requirements:

• Florida (property and casualty only)

• Indiana (life, property and casualty)

• New Jersey (life, property and casualty)

• New York (life, property and casualty)

For more information on the NAIC reforms, please see our article from the October

2011 Mayer Brown Global Corporate Insurance & Regulatory Bulletin, NAIC Fall

2011 Meeting Notes. For background on the progression of reinsurance collateral

requirements reform in the US, please see our article, US reinsurance collateral

reform picks up pace, which can be found here.

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Both the recently introduced Virginia House Bill 1139 and Georgia Senate Bill 385

contain provisions that track the amended NAIC model law and would make a

significant change to the credit for reinsurance rules of those states by potentially

allowing full credit to insurers that cede risk to unauthorized reinsurers that post less

than 100% collateral. Under the newly proposed legislation in Virginia and Georgia,

credit will be allowed to a domestic insurer when risk is ceded to an assuming insurer

that has been “certified” as a reinsurer by the state insurance regulatory authority

and that secures its obligations in accordance with the requirements of the relevant

state’s insurance code. In order to be eligible for certification, an assuming insurer

must meet certain requirements, including being domiciled and licensed in a

“qualified jurisdiction” as determined by the relevant state under its statute,

maintaining financial strength ratings, maintaining minimum capital and surplus,

submitting to the jurisdiction of the relevant state, meeting filing requirements and

satisfying any other requirements of the relevant state. A rating will be assigned to

each certified reinsurer, giving consideration to the financial strength ratings of the

certified reinsurer. Most significantly, the proposed legislation provides that a

certified reinsurer must secure its obligations at a level consistent with its ratings, as

specified in rules to be adopted by the state insurance regulatory authorities, opening

the door for the possibility of risk-based collateral requirements under which a

certified reinsurer will be able to post less than 100% collateral, with the ceding

insurer still receiving credit for the ceded insurance.

The Virginia bill also contains provisions concerning the concentration of risk,

following amendments to the NAIC models that were added in the wake of similar

provisions added to New York’s Regulation 20, Credit for Reinsurance from

Unauthorized Insurers. Under the proposed Virginia legislation, a ceding insurer

would have to take steps to manage its reinsurance recoverable proportionate to its

own book of business. A domestic ceding insurer would have to notify the Virginia

State Corporation Commission (the “Commission”) within 30 days after reinsurance

recoverable from any single assuming insurer, or group of affiliated assuming

insurers, exceeds 50% of the domestic ceding insurer’s last reported surplus to

policyholders, or after it is determined that reinsurance recoverables are likely to

exceed this limit. The proposed legislation would also require a ceding insurer to

take steps to diversify its reinsurance program and notify the Commission within 30

days after ceding to any single insurer, or group of affiliated assuming insurers, more

than 20% of the ceding insurer’s gross written premium in the prior calendar year, or

after it is determined that the reinsurance ceded is likely to exceed this limit. In both

situations, the notification to the Commission is intended to demonstrate that the

exposure is being safely managed by the domestic ceding insurer.

Under the Virginia bill, the ability of reinsurers to reduce their collateral obligations

on in force business that is already reinsured and for which collateral has already

been posted will be limited by “effective date” language that tracks last minute

changes that were added to the NAIC models. The relevant language provides that

credit for reinsurance from certified reinsurers “shall apply only to reinsurance

contracts entered into or renewed on or after the effective date of the certification of the

assuming insurer. Any reinsurance contract entered into prior to the effective date of

the certification of the assuming insurer that is subsequently amended after the

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effective date of the certification of the assuming insurer, or a new reinsurance

contract, covering any risk for which collateral was provided previously, shall only

be subject to [this section] with respect to losses incurred and reserves reported from

and after the effective date of the amendment or new contract”.

Interestingly, the proposed Georgia bill does not contain the risk concentration

provision or the effective date limitation. Whether those last minute additions to the

amended NAIC models will ultimately find their way into the Georgia bill in the

legislative process remains to be seen.

On 21 February 2012, NJDOBI issued proposed new rules and amendments to

existing rules to implement the amendments to its credit for reinsurance statute that

were enacted last year. The proposed new rules are based on the recent amendments

to the NAIC model law and regulation, and NJDOBI is proposing amendments to the

existing rules to more closely track the NAIC model law and regulation. Highlights

of the proposed rules include procedures by which an insurer may become a certified

reinsurer, the basis by which a certified insurer would be rated, standards for

determining whether a jurisdiction is a qualified jurisdiction, the creation of a sliding

scale based on ratings to determine the amount of collateral required and the

addition of a provision addressing concentration risk, similar to the provision in the

recently introduced Virginia bill and discussed above. The NJDOBI proposal is

currently in the comment stage, with comments due on 21 April 2012.

We expect a number of other states to consider similar legislation this year to amend

their laws and regulations to bring them into line with the amendments to the NAIC

Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model

Regulation (#786) that were adopted at the NAIC’s 2011 Fall Meeting. Although

NAIC model laws and regulations do not become effective in any given state unless

and until they are enacted by the legislature or promulgated by the insurance

regulatory authority of that state, the NAIC model law and regulation generally have

an influence on state laws and regulations to the extent that certain aspects of the

amended models become accreditation standards of the NAIC. States strive to

maintain their NAIC accreditation so that other states will defer to them as the

primary regulatory authority for insurers domiciled in their states. Inclusion of the

amended versions of the Credit for Reinsurance Model Law and Credit for

Reinsurance Model Regulation in the NAIC accreditation standards will create a

strong incentive for states to adopt them.

In Illinois, legislation has already been introduced to amend the existing credit for

reinsurance laws to conform with the revised NAIC models. For more information

on the legislation introduced in Illinois, please see our article from the January 2012

Mayer Brown Global Corporate Insurance & Regulatory Bulletin, Illinois continues

to pursue credit for reinsurance reform.

During 2012, the NAIC will continue its consideration of credit for reinsurance

reform through the Reinsurance (E) Task Force, which will be conducting discussions

to determine which aspects of the amendments to the models will become

accreditation standards. The task force will also be establishing a new process to

evaluate reinsurance supervision in non-U.S. jurisdictions and will be forming a

subgroup to review applications to become a certified reinsurer.

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© 2012. The Mayer Brown Practices. All rights reserved.

0331 insFebruary 2012

If you have any query in connection with anything in this Bulletin, please do not

hesitate to get in touch with your usual Mayer Brown contact or one of the contacts

referred to below.

Co-Editor Co-Editor

Martin Mankabady David Alberts

Partner Partner

+44 20 3130 3830 +1 212 506 2611

mmankabady@mayerbrown.com dalberts@mayerbrown.com

Co-Editor Deputy Editor

Lawrence Hamilton Annemarie Payne

Partner Associate

+1 312 701 7055 +44 20 3130 3285

lhamilton@mayerbrown.com apayne@mayerbrown.com

Learn more about our Insurance Industry Group.