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III. Insurance-Linked Securities
d. Alternative Approach to Funding
During 2015 several transactions were completed in which collateral notes were issued directly to insurers and held as admitted assets, thereby financing XXX/AXXX reserves directly on the balance sheet of such insurers. Given the regulatory attention to captives, this approach may become more common.
3. Regulatory Environment
a. NAIC
As discussed in more detail in Section VI.H.2 below, a very important development in the world of reserve financing transactions was the NAIC’s adoption in 2014 of the XXX/AXXX Reinsurance Framework (the “Framework”) and AG 48, which are parts of the NAIC action plan to develop further regulatory requirements with respect to XXX and AXXX transactions. Importantly, the Framework and AG 48 aim to set standards applicable to XXX and AXXX transactions, instead of restricting them outright. Although certain insurance regulators, such as the New York State Department of Financial Services (the “NYDFS”) and the California Department of Insurance (the “CA Department”), are not satisfied with this approach and have continued to call for a nationwide moratorium on these types of transactions, the NAIC’s actions are a significant development that provides guidelines on how these transactions should be structured.
The NAIC Reinsurance (E) Task Force (the “Task Force”) spent much of the latter half of 2015 discussing the proposed amendments to the Credit for Reinsurance Model Law (the “Model Law”) and the Credit for Reinsurance Model Regulation (the “Model Regulation”), which are designed to enact the substantive provisions of the Framework/AG 48.
The Task Force’s original goal was to finalize the amendments to both the Model Law and the Model Regulation in 2015. However, given the volume of comments received with respect to these items, this timeline proved to be unrealistic. The revisions to the Model Law were adopted by the NAIC on January 8, 2016, so state action enacting these revisions can commence at any time now. However, the revisions to the Model Regulation are now planned to be finalized at (or, perhaps, before) the NAIC Spring 2016 National Meeting. See Section VI.H.1 below for a more detailed discussion of these developments.
b. New York
As discussed in more detail in Section VI.H.1 below, the steps taken by the NAIC to address XXX transactions and AXXX transactions have by no means received uniform support from state regulators. Indeed, the regulators of several commercially important states—including California and New York—have voiced vehement opposition. Former Superintendent Benjamin Lawsky of the NYDFS in particular has criticized XXX/AXXX financing transactions, calling them a “shadow insurance” industry because of what he perceives to be a lack of regulatory oversight. In the wake of the NYDFS’s year-long investigation of XXX and AXXX captive transactions (which culminated in June 2013 with a report entitled “Shining a Light on Shadow Insurance – a Little-Known Loophole that Puts Insurance Policyholders and Taxpayers at Greater Risk”), the NYDFS had urged other state regulators to adopt a national moratorium with regard to future XXX and AXXX transactions. The CA Department has likewise urged the adoption of a nationwide moratorium on XXX transactions and AXXX transactions. However, the NAIC did not heed these calls for a nationwide moratorium and rather focused its attention on the Model Law and the Model Regulation.
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Developments and Trends in Insurance Transactions and Regulation 2015 Year in Review