ORDER OF THE OFFICE OF THE COMMISSIONER OF INSURANCE RENUMBERING, AMENDING AND CREATING A RULE
Office of the Commissioner of Insurance
Rule No. Agency 145 – Ch. Ins 52 The Commissioner of Insurance proposes an order to renumber Ins 52.01 (1); to amend Ins 52.01 (intro.), 52.02 (intro.), (3) (intro.), (4m) (a) 3. g. and 5. d., (4m) (e), 52.05 (2) (k) (intro.), 52.07 (1) (intro.) and (2) to (5); and to create Ins 52 Subch. I (title), 52.005, 52.01 (1g), (4) and (5), 52.02 (4m) (a) 3. c. (Note) and 5. b. (Note), 52.02 (4r), 52 Subch. II, and 52 Appendices C to H, relating to credit for reinsurance accreditation amendments.
The statement of scope for this rule SS: 125-20 was approved by the Governor on September 2, 2020, published in Register No. 777A1, on September 8, 2020, and approved by the Commissioner on September 29, 2020. The proposed rule was approved by the Governor on January 13, 2022, to submit to the legislature, and submitted to the legislature on January 26, 2021. The rule passed through Senate and Assembly committees and the Joint Committee for Review of Administrative Rules on April 22, 2022 with no action taken.
ANALYSIS PREPARED BY THE OFFICE OF THE COMMISSIONER OF INSURANCE (OCI)
1. Statutes interpreted:
2. Statutory authority:
3. Explanation of OCI’s authority to promulgate the proposed rule under these statutes:
Wisconsin Statutes ss. 620.03, 620.21, 620.22, 623.02, 623.04, 623.32, generally regulate how insurers account for assets and liabilities. Wisconsin Statute s. 627.23, specifically authorized insurers to accept reinsurance and states “[s]ubject to rules promulgated by the commissioner for calculation of its reserves and its surplus, and subject to sub. (3), an authorized insurer may also cede reinsurance to an unauthorized insurer.” The proposed rule regulates how an insurer may take credit for reinsurance to an unauthorized insurer authorized by s. 627.23, Stats. The authority for the requirements for credit for reinsurance involving term and universal life reserve financing arises from ss. 623.15 and 623.21, Stats., that establish accounting and reserve requirement for all insurers authorized to do business in this state. Wisconsin Statutes ss. 601.42 (1g) and 623.04, authorize the commissioner to “promulgate rules specifying the liabilities required to be reported by insurers in the financial statements submitted under s. 601.42 (1g) (a), and the methods shall be consistent with s. 623.06.” 4. Related statutes or rules:
5. The plain language analysis and summary of the proposed rule:
The proposed rule would modernize Wisconsin’s credit for reinsurance provisions by aligning them with the federal Nonadmitted and Reinsurance Reform Act and by adopting the most recent amendments to the National Association of Insurance Commissioners (“NAIC”) model act and model regulation on which Wisconsin’s rules are based. These revisions are also an accreditation requirement by the NAIC.
The NAIC is a standard setting regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and U.S. territories. It develops model laws and regulations using a committee structure that includes both member of the committee and interested regulators. The NAIC also provides an accreditation process for state insurance departments. Accreditation of the Office of the Commissioner of Insurance (OCI) by the NAIC helps Wisconsin insurers by ensuring that OCI has full regulatory authority over its domestic insurers, it accomplishes this by subjecting domestic insurers to financial regulation only by their domestic commissioner if the state is accredited. Because Wisconsin is accredited, Wisconsin insurers are not subject to separate financial regulation in every state in which they do business.
On September 22, 2017, the United States and the European Union signed the Bilateral Agreement Between the United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance, (“covered agreement”) which has entered into force. On December 11, 2018, the United States and the United Kingdom signed the Bilateral Agreement between the United States of America and the United Kingdom on Prudential Measures Regarding Insurance and Reinsurance. The covered agreement was authorized by Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) which authorized the Secretary of the Treasury and the United States Trade Representative to jointly negotiate a covered agreement on behalf of the United States with one or more foreign governments, authorities, or regulatory entities. The covered agreement requires states to implement the reinsurance collateral provisions or face federal preemption by the Federal Insurance Office (“FIO”) under Dodd-Frank, which provides that a state insurance measure shall be preempted to the extent that the Director of FIO “determines” that the measure is inconsistent with the covered agreement and results in less favorable treatment of a non-U.S. insurer domiciled in a foreign jurisdiction that is subject to a “covered agreement” than a U.S. insurer domiciled, licensed, or otherwise admitted in that state. A “covered agreement” under Dodd-Frank is an agreement entered into between the U.S. and foreign government(s) on prudential measures with respect to the business of insurance or reinsurance that achieves a level of protection for consumers that is “substantially equivalent” to the level of protection under state law.
To prevent preemption under Dodd-Frank requires the state insurance measure to be “consistent” with the covered agreement which may be interpreted as a higher standard. States are recommended to adopt the 2019 revisions in as close to identical form to the models in order to best avoid the possibility of federal preemption. FIO considers the 2019 Model Law and Regulation to provide a basis for U.S. States to revise their credit for reinsurance measures for purposes of achieving consistency with the covered agreements and avoiding a potential preemption determination under the FIO Act. FIO recently provided a public statement on Preemption Analysis: https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/federal-insurance-office/covered-agreements/preemption-analysis. Specifically, “FIO considers the 2019 Model Law and Regulation to provide a basis for U.S. States to revise their credit for reinsurance measures for purposes of achieving consistency with the Covered Agreements and avoiding a potential preemption determination under the FIO Act… FIO will focus on differences from the text of the 2019 Model Law and Regulation in considering whether a U.S. State credit for reinsurance measure may be inconsistent with the Covered Agreements and therefore subject to potential preemption under the FIO Act.” The OCI has been regulating reinsurance credits to any reinsurance ceded under agreements entered into or renewed on or after August 1, 1993, as identified at s. Ins 52.07. As to the specific changes in chapter Ins 52, Wis. Adm. Code, in newly created Subchapter I, the modifications provide that non-U.S. jurisdictions that are subject to an in-force covered agreement with the United States, each within its legal authority, or in the case of a covered agreement between the United States and European Union, is a member state of the European Union, shall be recognized as a reciprocal jurisdiction. In addition, the commissioner could deem other non-U.S. jurisdictions that meet certain criteria as reciprocal jurisdictions. The proposed changes modernize Wisconsin’s credit for reinsurance provisions to align them with requirements of the covered agreement regarding insurance and reinsurance. The amendments proposed by this rule introduce the concept of reciprocal reinsurers consistent with the NAIC model law and regulation. Reinsurers from certain foreign jurisdictions could be recognized by the commissioner as reciprocal reinsurers if they meet stringent capitalization and solvency requirements. The revisions serve to reduce reinsurance collateral requirements for currently certified non-U.S. licensed reinsures that are licensed and domiciled in qualified jurisdictions. The collateral requirement for reinsurance ceded to reciprocal reinsurers by domestic insurers would be $0. The changes serve to provide regulators with an effective method of monitoring the reinsurance activities of U.S. companies. U.S. primary insurance companies may be given reinsurance credit on their statutory financial statements for insurance risk they transfer via reinsurance that meets the legal and accounting risk transfer requirements and other relevant laws. Both the 2011 revisions to the credit for reinsurance models, which served to reduce reinsurance collateral requirements for certified reinsurers domiciled in qualified jurisdictions, and the 2019 revisions with respect to reciprocal jurisdictions, address the reinsurance collateral requirements necessary for U.S. ceding companies to take credit for certain reinsurance transactions.
The proposed Subchapter II changes establish standards governing certain reserve financing arrangements pertaining to life insurance policies containing guaranteed nonlevel gross premiums, guaranteed nonlevel benefits, and universal life insurance policies with secondary guarantees. The proposed rule will bring Wisconsin’s requirements into alignment with other states and meet a NAIC accreditation requirement. No Wisconsin-domiciled insurers are currently engaged in the financing arrangements addressed by the rule. However, should that change, the rule would ensure that, with respect to each such financing arrangement, funds would be held by or on behalf of the ceding insurers in the forms and amounts prescribed in the rule. The requirements apply to reinsurance ceded to a captive insurer or special purpose vehicle, reinsurers that materially deviate from statutory accounting or risk-based capital rules. The revisions do not apply to licensed, accredited, or certified reinsurers or reinsurers that meet the reciprocal jurisdiction qualifications. The revisions also contain a professional reinsurer exemption for reinsurers that maintain at least $250,000,000 in capital and surplus as determined using the NAIC accounting practices and procedures manual, including all amendments adopted by the NAIC, excluding the impact of any permitted or prescribed practices; and is licensed in at least 26 states or licensed in at least 10 state and licensed or accredited in a total of at least 35 states.
Regulators need to be able to assess and monitor the risks posed with respect to captive reinsurance transactions, and the regulatory process is enhanced through uniform application by regulators when reviewing these transactions. This rule change would align Wisconsin’s regulation with the NAIC model and the regulations of other states.
In general, reinsurance ceded for reserve financing purposes has one or more of the following characteristics: some or all of the assets used to secure the reinsurance treaty or to capitalize the reinsurer (1) are issued by the ceding insurer or its affiliates; or (2) are not unconditionally available to satisfy the general account obligations of the ceding insurer; or (3) create a reimbursement, indemnification or other similar obligation on the part of the ceding insurer or any if its affiliates, other than a payment obligation under a derivative contract acquired in the normal course and used to support and hedge liabilities pertaining to the actual risks in the policies ceded pursuant to the reinsurance treaty. The proposed rule would require that in order to take credit for reinsurance ceded with respect to each such financing arrangement, security must be held by or on behalf of a ceding insurer. The rule prescribes the actuarial method to be used to determine the amount of primary security, and that other security, as defined in the rule, must be held equal to any portion of the statutory reserves as to which primary security is not held.
6. Summary of, and preliminary comparison with, any existing or proposed federal regulation that is intended to address the activities to be regulated by the proposed rule:
Public Law 111-203 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) that contains the Nonadmitted and Reinsurance Reform Act of 2010.
7. Comparison of similar rules in adjacent states as found by OCI:
Laws and Rules related to Requirements for Credit for Reinsurance:
Illinois: Public Act 102-0578 amended Ill. Admin. Code 215 §§ 5/35B-25, 5/131.1, 131.5,131.14b, 131.15, 131.22, 131.22a relating to the NAIC reinsurance model regulation and law effective 12/31/2022.
Iowa: Iowa Code §§ 521B.101A to 521B-105 (2021) and Iowa Admin Code r. 5.33 and 112.7 (1) “e” (2021) relating to the NAIC reinsurance model regulation and law.
Michigan: Mich. Comp. Laws §§ 500.1103 and 500.1106 relating to the NAIC reinsurance model regulation and law. Minnesota: MN HF 6, signed 6/26/2021, Minn. Statutes sections 60A.092 (10), 60A.093, 60A.096 and 60A.097 amended implementing the NAIC reinsurance model regulation and law.
Laws and Rules related to Term and Universal Life Reserve Financing:
Illinois: None.
Iowa: Iowa Code §§ 521B.102, 521B.103 (2017), and 521B-105 and Iowa Admin Code r. 191-112.1 to 112.9 (2017)
Michigan: None.
Minnesota: None
8. A summary of the factual data and analytical methodologies that OCI used in support of the proposed rule and how any related findings support the regulatory approach chosen for the proposed rule:
OCI based this rule on the model law and regulations that were adopted by NAIC and have been enacted or will likely be enacted by all accredited jurisdictions in the United States and Territories. Failure to adopt the NAIC model law and regulation may result in OCI being preempted to regulate certain transactions.
9. Any analysis and supporting documentation that OCI used in support of OCI’s determination of the rule’s effect on small businesses under s. 227.114: This rule will have little or no effect on small businesses. This rule will reduce the collateral requirements of certain reinsurers with at least $250,000,000 in capital so it would not affect small businesses. There may be some insurers that qualify as small businesses who cede risk to reinsurers but the rule is not expected to have any effect on their ability to take credit for reinsurance ceded and could make it easier to do business with a reinsurer.
10. A description of the Effect on Small Business:
This rule will reduce the collateral requirements of certain reinsurers with at least $250,000,000 in capital so it would not affect small businesses. There may be some insurers that qualify as small businesses who cede risk to reinsurers but the rule is not expected to have any effect on their ability to take credit for reinsurance ceded and could make it easier to do business with a reinsurer.
11. Agency contact person:
Phone: (608) 267-9586
