Magazine article Risk Management

Update on NAIC's Proposed Fronting Model Act

Magazine article Risk Management

Update on NAIC's Proposed Fronting Model Act

Article excerpt

The latest draft of the Limitations on Reinsurance Activities of Insurers Model Act was released at the National Association of Insurance Commissioner's June meeting in Indianapolis. Although progress has been made, substantial improvement is still needed before the model will be acceptable to industry, brokers and consumers. The revised draft, presented by the NAIC's Fronting Working Group, would permit an admitted insurer to cede business to an unlicensed reinsurer if the amount of written premiums ceded to a single, unlicensed reinsurer does not exceed 1 percent of the licensed insurer's policyholder surplus in the previous year and if all such reserve liabilities do not exceed 5 percent of the insurer's policyholder surplus. RIMS and other members of the Industry Advisory Committee complained that this provision was unacceptable because it would still sweep in too many transactions. Another new provision added to the proposed model would require the unlicensed assuming reinsurer to provide acceptable security equal to 125 percent of the liabilities ceded under the reinsurance agreement. RIMS originally proposed that the assuming reinsurer provide security equal to 115 percent of the liabilities ceded under the reinsurance agreement as a means of gaining an exemption from the prior approval requirement of the model. RIMS objected to the inclusion of the security requirement as a mandatory precondition for fronting programs, rather than a device for opting out of the prohibitory wrath of the model. The new draft would still permit fronting programs reinsured by a policyholder's captive as long as the policyholder maintained net worth of at least $50 million and agreed to indemnify the fronting insurer for losses the captive is unable to cover. RIMS opposes the $50 million net worth requirement because that amount is too high and would render this option useless except to a very small number of policyholders. At the meeting, RIMS suggested that a $5 million to $10 million net worth standard would be more appropriate. RIMS also challenged the rationale of the NAIC for wanting further regulation of policyholder-driven insurance programs. The NAIC's stated purpose for regulating fronting activities is to insure solvency. …

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