Last week, the Reinsurance (E) Task Force (“Task Force”) of the National Association of Insurance Commissioners (“NAIC”) exposed for public comment the Final Evaluation Report of the Mutual Recognition of Jurisdictions (E) Working Group (“Working Group”) recommending that the NAIC recognize South Korea, officially known as the Republic of Korea, as a Qualified Jurisdiction and place it on the NAIC List of Qualified Jurisdictions. Comments on the Final Evaluation Report can be submitted until close of business on Tuesday, July 6, 2021. If approved by the Task Force and by the NAIC Executive (EX) Committee and Plenary, the designation of South Korea as a Qualified Jurisdiction would allow South Korean reinsurers to apply for Certified Reinsurer status, which would enable them to post reduced collateral for credit for reinsurance purposes.
In 2011, the NAIC amended its Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model Regulation (#786) (collectively, the “Credit for Reinsurance Models”) to reduce collateral requirements for certain unauthorized reinsurers. Prior to these changes, reinsurers that were not authorized or accredited in their cedents’ domiciliary jurisdictions were generally required to post 100 percent collateral in order for their cedents to be able to take credit for such reinsurance. The 2011 amendments to the Credit for Reinsurance Models created a new category of reinsurers called “Certified Reinsurers” that were permitted to post reduced collateral for credit for reinsurance purposes according to a sliding scale based on the financial strength and business practices of the reinsurers.
Only reinsurers licensed and domiciled in a “Qualified Jurisdiction” are eligible to become Certified Reinsurers. In 2012, the Working Group (originally known as the Qualified Jurisdiction (E) Working Group) was established to evaluate jurisdictions for listing on the NAIC List of Qualified Jurisdictions. So far, seven jurisdictions have been placed on the list—Bermuda, France, Germany, Ireland, Japan, Switzerland and the United Kingdom.
In 2017, the United States and the European Union entered into a Bilateral Agreement Between the United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance. In 2018, the United States and the United Kingdom entered into a substantially similar Bilateral Agreement Between the United States of America and the United Kingdom on Prudential Measures Regarding Insurance and Reinsurance. These two bilateral agreements are “Covered Agreements” under Title V of the Dodd-Frank Act, which authorizes the Office of the United States Trade Representative (“USTR”) and the Secretary of the Treasury to jointly negotiate a covered agreement on behalf of the United States with one or more foreign governments, authorities or regulatory entities. Under the US-EU and US-UK Covered Agreements, the signing jurisdictions are required to eliminate collateral requirements for credit for reinsurance purposes for reinsurers licensed and domiciled in these jurisdictions. To ensure that result, the Dodd-Frank Act provides a mechanism for a Covered Agreement to pre-empt inconsistent state laws and regulations five years after the Covered Agreement is entered into.
In 2019, the NAIC Executive (EX) Committee and Plenary adopted revisions to the Credit for Reinsurance Models to incorporate the collateral elimination requirements under the Covered Agreements. The revised Credit of Reinsurance Models created a new designation—“Reciprocal Jurisdictions”—to refer to jurisdictions subject to in-force Covered Agreements. However, the revised Credit for Reinsurance Models went a step further and also provided that Qualified Jurisdictions that recognize certain key NAIC solvency initiatives and meet other qualifying requirements would be recognized as Reciprocal Jurisdictions. Thus, yet another category of reinsurers was created, known as “Reciprocal Jurisdiction Reinsurers.” Reinsurers that have their head office or are domiciled in Reciprocal Jurisdictions are not required to post any reinsurance collateral for their cedents to take full credit for reinsurance if such reinsurers meet the other requirements of the Credit for Reinsurance Models.
In 2021, the Qualified Jurisdiction (E) Working Group was renamed the Mutual Recognition of Jurisdictions (E) Working Group to be more encompassing of the multiple categories of reinsurers. In addition to evaluating jurisdictions for listing as Qualified Jurisdictions on the NAIC List of Qualified Jurisdictions, the Working Group now also evaluates whether to designate a certain Qualified Jurisdiction as a Reciprocal Jurisdiction. To date, three jurisdictions—Bermuda, Japan and Switzerland—have been designated as Reciprocal Jurisdictions in addition to the European Union and United Kingdom, which qualify for Reciprocal Jurisdiction status based on the Covered Agreements.
South Korea’s Application for Qualified Jurisdiction Status
On September 28, 2020, the lead insurance supervisors for South Korea—the Financial Services Commission (“FSC”) and the Financial Supervisory Service (“FSS”)—submitted an application to the NAIC requesting that South Korea be designated as a Qualified Jurisdiction. After review of the application by the Working Group and submission of additional supplementary information, notice of South Korea’s application was sent to the Federal Insurance Office and the USTR. On May 27, 2021, the Working Group voted to recommend South Korea for approval as a Qualified Jurisdiction. Further, the Working Group recommended that California be designated as the Lead State for purposes of regulatory cooperation and information sharing with the FSC and FSS.
On June 4, 2021, the Reinsurance (E) Task Force exposed the Working Group’s Final Evaluation Report for a 30-day public comment period. Comments can be submitted electronically until close of business on Tuesday, July 6, 2021. Following the public comment period, the Final Evaluation Report has to be approved by the Task Force before being sent for final approval to the NAIC Executive (EX) Committee and Plenary.
Once South Korea is designated as a Qualified Jurisdiction, it will be able to seek status as a Reciprocal Jurisdiction. However, the Process for Evaluating Qualified and Reciprocal Jurisdictions, which was adopted by the NAIC on August 27, 2013, with current revisions effective December 10, 2019, states that after the Working Group’s initial approval of a new Qualified Jurisdiction, it may defer consideration of such jurisdiction as a possible Reciprocal Jurisdiction until there has been sufficient experience in the United States with that jurisdiction and its reinsurers. Therefore, it is unclear how quickly South Korea’s designation as a Qualified Jurisdiction, if granted, will progress to a designation as a Reciprocal Jurisdiction.
In the meantime, if South Korea is designated as a Qualified Jurisdiction, reinsurers licensed and domiciled in South Korea will be able to apply for Certified Reinsurer status, which will allow such reinsurers to post reduced collateral to meet the credit for reinsurance requirements of the revised Credit for Reinsurance Models.
As a reminder, the changes discussed in this Legal Update would impact only the reinsurance collateral requirements for cedents to take credit for reinsurance obtained from South Korean reinsurers. They would not prohibit parties to a reinsurance transaction from agreeing as a commercial matter to levels of reinsurance collateral that are higher than what is legally required for credit for reinsurance purposes.