The Liability Risk Retention Act contains a single-state regulatory framework that enables risk retention groups to become licensed and regulated under the laws of a domiciliary state, preempting most laws and regulations of nondomiciliary states in which they operate.
The National Association of Insurance Commissioners has never much liked the single-state regulatory scheme, which removes nondomiciliary state control–that is, until the threat of federal regulation prompted a 180-degree turn on the part of some regulators.
Indeed, NAIC's proposal for a single-state regulatory scheme for reinsurers and its call for implementation through congressional action is viewed as a "paradigm shift for the NAIC" by Larry Mirel, the former commissioner at the District of Columbia Department of Insurance, Securities and Banking.
Mr. Mirel, who now practices law with the Washington, D.C.-based firm of Wiley Rein, predicts that NAIC actions "could have major implications for the future of state insurance regulation."
The NAIC proposal–adopted by the Joint Executive Committee/Plenary at the NAIC meeting in Grapevine, Texas, in December 2008–contains the single state or "home state" regulatory scheme, known as the Reinsurance Regulatory Modernization Framework.
The proposal calls for two new classes of reinsurers in the United States–national reinsurers (which are domiciled in U.S. jurisdictions) and port-of-entry reinsurers (which are not domiciled in U.S. jurisdictions).
Under the framework, a new entity would be created within the NAIC known as the Reinsurance Supervisory Review Department. The RSRD would consist of state insurance regulators and would have broad powers.
Unlike the LRRA–which provides that any state can serve as the domicile for a risk retention group–the RSRD would have the authority to "develop the criteria for a state to qualify as a home state or POE [point-of-entry] supervisor."
The RSRD would also have authority to develop accreditation standards through the NAIC's Financial Regulation Standards and Accreditation Program, or financial solvency requirements substantially similar to the requirements necessary for NAIC accreditation.
Under the proposed framework, nonregulatory states would be prohibited from applying different collateral requirements for credit for reinsurance than those set by the reinsurer's home state or POE supervisor.
Not all states voted for the proposal at the NAIC Plenary session. States voting against it were Indiana, Kentucky, Ohio, Utah and Wisconsin. Both U.S.-licensed reinsurers and non-U.S. insurers that do not choose to become a national reinsurer would have the option to continue to operate under the current regulatory framework.
The proposed reinsurance regulatory modernization initiative, including changes to collateral requirements, would apply only to reinsurance contracts entered into or renewed on or after the effective date of the proposal.
STATEMENT OF PRINCIPLES
Adopted along with the reinsurance initiative was a statement of principles requiring that the RSRD "be created as a transparent, publicly accountable entity, contemplated to be part of the NAIC, with a governing board composed of state or district insurance commissioners."
The statement of principles also requires that the "RSRD criteria relating to ceded premium volume will not unfairly discriminate against otherwise qualified small jurisdictions in attaining approval as a home state of POE supervisor."
The reinsurance initiative also establishes a dispute resolution process through a "consultative process" within the RSRD supervisory board to facilitate the resolution of disputes among insurance regulators.
After consultation, the decision by the home state or POE supervisor with respect to the financial solvency of the reinsurer would be final.
In order for the single-state regulatory scheme embodied in the Reinsurance Regulatory Modernization Framework to be implemented, Congress would have to enact a law, similar to the LRRA, which preempts state regulation. To this end, the NAIC "recommends federal enabling legislation (providing) appropriate authority to the RSRD."
Mr. Mirel, who himself had developed a reform proposal dealing with similar issues during his tenure as D.C. insurance commissioner, observed: "I am unaware of any other vote ever taken by the NAIC that calls for federal legislation to empower the NAIC to act in a way that would potentially preempt the regulatory authority of a state."
He views the reinsurance initiative "as a sea change in the direction of the NAIC and a portent of what is to come."
"The states that voted against the proposal presumably did so because they realized the implications for their sovereignty," he said. "Some who voted for it undoubtedly were also aware of the implications, but supported the idea, probably because they see it as a way to fend off the creation of a federal insurance regulator."
"I suspect that most of the commissioners who voted for the proposal had no idea of the implications for their future authority," he added.
How will this all turn out, given the uncertainty of how Congress will proceed on financial services regulatory reform? Stay tuned!
Karen Cutts is editor and publisher of the Risk Retention Reporter in Pasadena, Calif. Visit www.rrr.com for information on risk retention groups and purchasing groups.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.