New Wave of Products and Other Challenges to State Insurance Regulators: Reflections from ACI 14th Annual National Forum

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The 14th annual National Forum on Insurance Regulation, sponsored by American Conference Institute, convened in New York City on March 7-8, 2018. This yearly event is a great opportunity to learn about emerging issues and recent developments in state insurance regulation from leaders of the insurance industry. This year’s Forum brought together senior officials of the National Association of Insurance Commissioners (NAIC); state insurance commissioners; Chief Legal Officers of leading U.S. insurers, reinsurers and brokers; founders and CEOs from InsureTech startups; experts in the cyber insurance market to discuss cybersecurity regulation and product development; experts in insurance coverage, regulation and risk management of legalized marijuana; and experts in the challenges, and regulation, of the expanding use of big data and predictive analytics in insurance underwriting.

I attended the Forum and led a panel discussion on Brexit and its anticipated impact on international reinsurers and insurance regulation. Our session was well-attended, as was a separate panel session on the U.S.-EU Covered Agreement. In both instances there were a lot of audience questions and debate since both topics are very hot.

Both will also be open to much discussion at the upcoming NAIC Spring Meeting next weekend in Milwaukee, where the Reinsurance (E) Committee, following on the NAIC’s Public Hearing on the Covered Agreement, February 20, 2018 in New York City, which I attended, drew hundreds of participants nationwide.

The Covered Agreement is still unsettling and controversial among state insurance regulators and engenders conflict with the FIO. The main controversy spawned by the Covered Agreement, over FIO pre-emption of enacted, non-conforming state adaptations of the NAIC’s Model Act on Credit for Reinsurance  providing, in part, for scheduled reduction of collateral requirements for alien nonadmitted reinsurance, will last until either amendments in various noncompliant versions of the Model Act are conformed or, on the 5th anniversary of the Covered Agreement effective date, whichever is later (in 2022, hereafter the Fifth Anniversary).

The Covered Agreement, now in effect, “favors” member nations of the EU most of which still do not meet the Standard & Poors (or other acceptable) sovereign credit ratings for foreign nations and their reinsurers seeking to assume risks from U.S. ceding companies, but do not give equal treatment to reinsurers that are not within the EU but are nevertheless “certified” by the states under the Model Act.

At this time, only reinsurers domiciled in the UK (which is “Brexiting” in March 2019), the Republic of Ireland, France and Germany, of the 28 nation members of the EU, are currently eligible for elimination of collateral requirements (i.e., not required to fully collateralize obligations) because of the adoption of the Model Act in most states. Complete elimination of collateral requirements applicable to all EU nations and their domestic reinsurers (which are at present ineligible to be certified under the Model Act) will take effect under the Covered Agreement as of its Fifth Anniversary.

The NAIC, therefore, has a lot of work to do to 1) revise the Model Act (and adopt such amendments as an accreditation standard to conform all 50 states to the rules stated in the Covered Agreement, in a short period of time) or 2) take other actions with such non-certified EU nations, such as Norway, which is a member nation of the EEA (but not the EU) and non-EU nations including Japan, Switzerland and Bermuda, which are sovereign nations qualified under the Model Act, but not members of the EU, and other non-qualified European (e.g., Italy) and non-European (S. Korea) nations, which may qualify under current standards written into the Model Act.

One take away from the ACI Forum on Insurance Regulation is that 2018 will see new risks and products intended to meet those risks as well as the continuing rollout of nontraditional insurers melding coverage and online technology. The demand for new products will provide brokers opportunities to add value by exploring solutions to their customers’ coverage needs and will provide regulatory attorneys new and challenging opportunities for creative problem solving and client representation before state regulators and the NAIC.