What the New Proposed Credit for Reinsurance Regulations Mean for Reinsurance Disputes

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You remember the Covered Agreements entered into between the US and the UK and the US and the EU to deal with Brexit and Solvency II and international financial standards, right? Well, the New York Department of Financial Services has noticed a proposed regulation implementing the new credit for reinsurance rules required under the Covered Agreements. The new regulation, the 12th amendment to regulations 17, 20 and 20A, does what was expected by allowing for reciprocal relief from credit for reinsurance requirements, but adds a few new interesting items relevant to reinsurance disputes.

The proposed regulation essentially ends the need for many non-US reinsurers to post collateral to allow US domestic ceding companies to obtain credit for reinsurance on their financial statements. Credit for reinsurance requirements for non-US reinsurers often led to requests for pre-hearing security in reinsurance arbitrations. While largely financial, the proposed regulation adds some new requirements to reinsurance contracts and could affect some reinsurance disputes.

A domestic ceding company may take credit for reinsurance on its annual statement from a reciprocal jurisdiction assuming insurer (a reinsurers) where the assuming insurer, among many other requirements:

. . . consents in writing to the jurisdiction of the courts of this State and to the appointment of the superintendent as agent for service of process; provided that:
(1) the superintendent may require that the assuming insurer provide and include such consent in
each reinsurance agreement under the superintendent’s jurisdiction
; and
(2) nothing in this subparagraph shall limit or in any way alter the capacity of parties to a
reinsurance agreement to agree to alternative dispute resolution mechanisms
, except to the extent such
agreements are unenforceable under applicable insolvency or delinquency laws;
(c) the assuming insurer consents in writing to pay all final judgments, wherever enforcement is
sought, obtained by a ceding insurer, that have been declared enforceable in the jurisdiction where the
judgment was obtained;
(d) each reinsurance agreement shall include a provision requiring the assuming insurer to provide
security in an amount equal to 100% of the assuming insurer’s liabilities
attributable to reinsurance
ceded pursuant to that agreement if the assuming insurer resists enforcement of a final judgment that is enforceable under the law of the jurisdiction in which it was obtained or a properly enforceable
arbitration award, whether obtained by the ceding insurer or by its legal successor on behalf of its
estate, if applicable . . . .

Note that the reinsurer must consent to jurisdiction and the appointment of the Superintendent as the agent for service of process (not unusual) and that nothing in the regulation precludes the parties from agreeing to alternative dispute resolution, which includes arbitration, in the reinsurance contract.

The interesting provision is the contractual requirement for 100% security for the reinsurer’s liabilities under the reinsurance contract if the reinsurer “resists enforcement of a final judgment.” How this will work in practical terms is unclear. Unless a court or arbitration panel requires pre-hearing security, a contractual requirement that security be posted only if the reinsurer resists enforcement of a judgment may not be helpful with a non-US reinsurer who refuses to pay. It also requires that any arbitration award be confirmed and reduced to a judgment. If the reinsurer does not pay, the cedent will have to go back to court or arbitration to enforce this provision of the reinsurance contract, which likely will lead to a default award and a second judgment that will have to be enforced outside the US. Enforcement, however, may be available under the U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

The purpose of the proposed regulation and the Covered Agreements is to level the playing field in international reinsurance so that financially sound companies are not required to post collateral solely because of the jurisdiction where they are domiciled. The regulation may have an effect on pre-hearing security requests in US reinsurance arbitrations. It clearly will have a contractual effect on reinsurers who resist enforcement of judgments obtained following reinsurance arbitration awards.

The proposed regulation was published on December 9, 2020 and will not become effective until sometime after February 2021, when the public comment period ends.