Insurance and reinsurance in the United States: overview
A Q&A guide to insurance and reinsurance in the United States.
The Q&A gives a high level overview of the market trends and regulatory framework in the insurance and reinsurance market; the regulation of insurance and reinsurance contracts; the corporate structure of insurers and reinsurers; and the regulation of insurers and reinsurers, including regulation of the transfer of risk. It also covers: operating restrictions for insurance and reinsurance entities, including authorisation/licensing requirements; reinsurance monitoring and disclosure requirements; content requirements for policies and implied terms; insurance and reinsurance claims; insolvency of insurance and reinsurance providers; taxation; dispute resolution; and proposals for reform. Finally, it provides websites and brief details for the main insurance/reinsurance trade organisations in the United States.
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This Q&A is part of the global guide to insurance and reinsurance. For a full list of jurisdictional Q&As visit www.practicallaw.com/insurance-guide.
Market trends and regulatory framework
The US insurance market remains very competitive, with numerous multi-line and specialised insurers operating both nationally and regionally, targeting different risks through different distribution channels. Based on 2014 year-end data, there were about 1,779 US domestic property casualty insurers, with a combined policyholder surplus of approximately US$630 billion (A.M. Best Co. 2015 Aggregates & Averages − Property/Casualty: Insurance Company Groups, p. 613). Additionally, in 2014 there were about 479 US domestic life/health insurers operating in the US, with combined capital and surplus of approximately US$338 billion (A.M. Best Co. 2015 Aggregates & Averages - Life/Health: Insurance Company Groups, p. 271).
Competition exists for both commercial and personal lines, even though product regulation may limit pricing flexibility in certain lines of property/casualty insurance and it may take more than a year to complete filings necessary for the launch of a new life product. Certain markets present greater regulatory challenges for insurers due to volatility in loss experience and/or rate suppression and may be less competitive, for example:
Property coverage in certain catastrophe-exposed areas.
Casualty coverage for certain medical professions in certain states.
In those markets, state-run facilities and coverage plans may play a greater role, and licensed insurers may be restricted in their ability to exit.
Insurance is regulated primarily by the states, not the US federal government, although insurers that present systemic risk may also be designated for heightened supervision by the Federal Reserve, and insurance groups that own banks or savings and loans are also regulated as bank holding companies by the Federal Reserve. Insurers and reinsurers are regulated by state government officials in their state of incorporation (domiciliary state), and potentially in non-domiciliary states in which they transact business. The state system of regulation seeks to protect consumers through supervision of:
Insurance company licensing.
Market conduct rules.
Regulation of investments.
Financial reporting by insurers.
Capital requirements (including prescribed accounting rules).
Own Risk Solvency Assessment (ORSA), Enterprise Risk Management (ERM) and corporate governance standards and requirements.
Regulation of holding companies.
Consumer protection services.
An officer in the state's executive branch is designated in each state as the chief supervisory official for implementation and enforcement of the state insurance laws (called the insurance commissioner, insurance superintendent or insurance director). This official may be elected or appointed by the governor, depending on the state. The official presides over a regulatory agency, generally referred to as the insurance department, although the exact name of the agency varies from state to state.
The National Association of Insurance Commissioners (NAIC) is a voluntary association composed of state insurance regulators for all 50 states, the District of Columbia and five US territories. The NAIC provides a forum for the development and implementation of uniform policy. Its chief tools include:
Development of model laws and rules, which may or may not be enacted into law by each state or territory.
Development of standardised financial reporting and solvency ratios.
Co-ordination of examinations of insurers.
Life insurance products may be subject to regulation by the US Securities and Exchange Commission (SEC) if the products qualify as "securities" that are not exempt under the US federal securities laws. Life products also may be subject to regulation by the US Department of Labor, if they are offered in connection with employee benefit plans.
All insurance companies operating in the US are subject to US federal regulation that affects businesses generally, such as investor protection rules under federal securities laws, rules relating to the disclosure and security of non-public personal information of customers and consumers, anti-money laundering rules and anti-bribery and trade sanction rules.
Regulation of insurance and reinsurance contracts
Contract of insurance
In the US, a contract of insurance is typically an agreement where one party, the insurer, agrees to confer a benefit of monetary value on another party, the insured, on the happening of a specified event that is beyond the control of either party, in return for receiving premium payments from the insured. To procure insurance, the insured must have a material interest that would be adversely affected by the happening of the specified event, called an insurable interest. For instance, a person would only have an insurable interest in any property that he owns, or is in his possession or which serves as security for repayment of a loan by him. Annuity contracts are treated as a form of insurance even though some annuities are not always contingent upon a human life.
Contract of reinsurance
A contract of reinsurance is an agreement between a ceding insurer and an assuming insurer (the reinsurer), under which the reinsurer agrees to indemnify the ceding insurer for losses paid by the ceding insurer and expenses under policies written by the ceding insurer. Reinsurance is a form of insurance: it is simply insurance on insurance. Because reinsurance contracts generally are considered to be agreements between two parties of equal bargaining power, they generally are not regulated as to form and content.
Under the current regulatory system in most states, insurance contracts covering risks in a state must meet state law requirements as to content. Contract forms used by licensed insurers must be filed with the state insurance department for most lines of insurance and may be disapproved (some states require prior approval). Rates to be charged are subject to filing and disapproval or prior approval for some lines of insurance.
Large risk commercial lines can be non-regulated or deregulated, depending on the jurisdiction. Insurers for deregulated lines are not required to file policy or rate changes with the state, but generally must adhere to substantive state laws as to coverage, terms and conditions. Reinsurance contracts are generally exempted from state rate and form requirements.
Certain derivative contracts, such as swaps, may confer the same economic benefits as insurance but are not considered to be insurance due to the absence of a contractual requirement that the holder have an insurable interest in the event(s) that triggers payment under the contract. They are not regulated as insurance as a consequence. The purchase and sale of derivatives nonetheless may be regulated as such by the Commodities and Futures Commission (CFTC).
Insurance companies in the US operate under various forms of corporate or non-corporate organisation:
Stock insurance company. A stock insurance company is formed under state statutes, often in the same manner as a stock corporation but sometimes under statutes that are specific to insurance companies. Typically, the corporation is formed and issues shares, the shareholders elect directors, and the directors name the officers, just as with general purpose corporations under state law. A stock insurance company, like other stock corporations, is owned by its shareholders.
Mutual insurance company. A mutual insurance company typically takes a corporate form, but does not issue shares and is owned by its policyholders instead of shareholders. The policyholders of a mutual insurer elect the directors. Instead of paying dividends to shareholders, mutual insurers can pay policy dividends to policyholders who own participating policies. Some mutual companies have converted to a mutual holding company structure, in which:
the mutual insurance company becomes a stock insurance company subsidiary of a mutual holding company; and
policyholders of the insurance company become members of the mutual holding company.
Reciprocal insurers. A reciprocal insurance exchange (also known as an interinsurance exchange) is an unincorporated association of individuals or corporations that have agreed to exchange insurance contracts with each other. They do this by appointing an attorney-in-fact to exchange contracts on their behalf. Sometimes the attorney-in-fact is a for profit corporation that charges a fee for its services; other times the attorney-in-fact is a subsidiary of the reciprocal exchange.
Fraternals. Fraternal benefit societies (otherwise known as fraternals) are organised by groups of people with a common background (such as ethnic, national or religious) or a common occupation. Their members come together seeking mutual aid, including:
preservation of the values of their ethnic or religious group;
cultural assistance; and
The most common forms of insurance companies are stock and mutual companies.
Regulation of insurers and reinsurers
Insurance companies are regulated based on their licence status. To lawfully transact insurance in a state, an insurer must be licensed in that state by the state insurance department. Unlicensed insurers can insure people in the state through the state's excess or surplus lines law or other licensing exemptions. Licensed insurers are highly regulated in each state.
Reinsurers can reinsure risks in the US without being licensed, although they generally must be licensed in a jurisdiction in which they establish offices to conduct business. Unauthorised reinsurers must provide qualifying collateral to ceding insurers in order for ceding insurers to receive financial statement credit for the ceded reinsurance. These collateral requirements serve as a substitute for financial regulation of unauthorised reinsurers under the current rules.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (see Question 36), collateral requirements are determined exclusively by the ceding insurer's state of domicile. Unauthorised reinsurers must generally provide qualifying collateral in an amount equal to 100% of the reinsurer's gross liabilities to the ceding insurer for the ceding insurer to receive financial statement credit for the reinsurance. Exceptions exist for reinsurers that establish a trust in the US for the benefit and protection of their US cedants (a "multi-beneficiary trust") or reinsurers that have been designated "certified reinsurers". Reinsurers can be certified if they meet certain criteria as to financial strength and reliability as indicated by their credit ratings and are domiciled in countries that are found to have strong systems of domestic insurance regulation. The amount of collateral a certified reinsurer is required to provide is reduced and is tied to the reinsurer's ratings. Currently, about half of the states have adopted laws that allow for the designation of certified reinsurers. Every state must do so by 2019 in order to remain accredited by the NAIC.
It is important to draw a distinction between what a regulated insurance entity can do and what an affiliate of a regulated insurance entity can do. In general, insurers and reinsurers are only permitted to carry on only those lines of insurance for which they are licensed and activities that are reasonably incidental to their insurance business, whereas their non-insurer affiliates are permitted to carry on non-insurance business. The same insurer cannot conduct general insurance and life insurance, although separate companies conducting general insurance and life insurance may co-exist within the same affiliated group.
The amount of insurance an insurer can write is limited by the amount of its "surplus as to policyholders", which is the regulatory capital calculated under US statutory accounting principles. Generally, insurers may not expose themselves on any single risk, net of reinsurance, to more than 10% of their surplus.
In addition, regulators monitor the ratio of net written premiums to surplus. They will require insurers that write too much insurance relative to their surplus to reduce their premium writings.
Authorisation or licensing
Unless exempted, an insurer must be licensed in all states in which it transacts insurance. Each state insurance department establishes the required qualifications for licensing in its state.
A reinsurer is not required to be licensed in a state to provide reinsurance to an insurer in a state, although a reinsurer's status as licensed or unlicensed may affect the ceding insurer's ability to take financial statement credit for the ceded reinsurance. A licensed insurer can typically transact reinsurance covering the kinds of insurance that it is licensed to transact directly. (see Question 6).
Certain unauthorised insurers ("excess and surplus lines insurers") can transact insurance covering risks in a particular state if the insurance is placed through qualified "excess and surplus lines" producers, in accordance with specified procedures (see Question 6).
Insurance brokers and agents that serve as intermediaries between the customer and the insurer (collectively, "producers") must be licensed to sell insurance and must comply with various state laws and regulations governing their activities. State insurance departments oversee producer activities to protect insurance consumer interests in insurance transactions. The type of licence granted (agent, broker or producer) varies by state. An excess and surplus lines broker is a specialty broker empowered to place insurance with surplus line eligible insurers under the state's surplus lines law, and must obtain a surplus lines broker licence. In addition, reinsurance intermediaries are the agents and brokers of the reinsurance market and are also subject to licensing.
If business is conducted in the name of an entity, the entity must be licensed. Generally, individuals employed by the entity who are engaged in licensable activity must be individually licensed, although reinsurance intermediaries and third party administrators are notable exceptions.
Other providers of insurance/reinsurance-related activities
Other providers of insurance or reinsurance related activities are:
Managing general agents (organisations that handle most or all of the functions of an insurance company, except that they do not retain risk).
Insurance consultants (insurance professionals who specialise in assisting businesses and individuals in assessing their insurance needs and creating an insurance plan to meet those needs).
Claims adjusters (insurance professionals who specialise in investigating and negotiating insurance claims; a "public adjuster" represents the insured, and an "independent adjuster" represents the insurer).
Third party administrators (organisations that handle the claims processing and employee benefits plans for the insurer).
Some, but not all, states regulate providers of insurance-related activities and those states typically require such providers to be licensed.
Generally, insurers that are not authorised by a state are prohibited from transacting insurance in that state, subject to certain exceptions recognised by state law. "Transacting insurance" is broadly defined in most states. Typically, any of the following acts in the state, whether done in person or effected by mail or telephone from outside the state or otherwise, constitute transacting an insurance business:
Making, or proposing to make, any insurance contract.
Issuance or delivery of a policy or contract of insurance.
Solicitation of applications for any such policies or contracts.
Collecting any premium or other consideration for any policy or contract of insurance.
Doing anything else that is substantially equivalent to any of the above in a manner designed to evade the provisions of the state's insurance law.
The limited exceptions to the general prohibition against doing unauthorised insurance business include:
Lawful placements made under a state's surplus lines law.
Marine, aviation and transportation/railroad exemptions.
Large, sophisticated commercial buyers in some states can access unauthorised insurers directly under limited circumstances.
Insurance agents and brokers ("producers") are not exempt from licensing in any jurisdiction. Insurance agents and brokers placing insurance with licensed insurers must be licensed for the type of insurance being placed. Producers that place insurance with surplus lines insurers must be specially licensed as surplus lines producers.
In addition to prohibiting unauthorised insurers from transacting insurance business in the state, the states also prohibit any other person in the state from in any way assisting or "aiding and abetting" unauthorised insurers in transacting insurance business in the state. This includes:
Acting as agent for an unauthorised insurer in the transaction of insurance business.
In any manner advertising an unauthorised insurer.
In any other manner aiding an unauthorised insurer to transact insurance business in the state.
Other providers of insurance/reinsurance-related activities
There are no exemptions or exclusions for the licensing of providers of insurance/reinsurance related activities. However, some types of providers, such as third party administrators, are not regulated by every state (see Question 9).
Restrictions on ownership or control
US regulators review the owners of insurance companies and persons who control them to determine their fitness to control an insurer. The focus of the review is on the experience, competency and integrity of the owner or controlling person (and its management if a corporation). Regulators also review the finances of an owner or controlling person. As part of their review, regulators will conduct personal background checks and, in some states, require fingerprinting.
Several states' laws restrict ownership or control by any government entity, including ownership by US states, the US federal government and foreign governments.
In addition, federal law broadly prohibits felons from being involved in the insurance business. It provides that any individual who has been convicted of any criminal felony involving dishonesty or a breach of trust, or who has been convicted of other types of offences, cannot wilfully engage in the business of insurance without a special waiver.
Licensed insurance producers are reviewed for their fitness to serve as a licensee.
Any individual who has been convicted of any criminal felony involving dishonesty or a breach of trust, or who has been convicted of other types of offences, cannot wilfully engage in the business of insurance in any capacity without a special waiver.
Other providers of insurance/reinsurance-related activities
Any individual who has been convicted of any criminal felony involving dishonesty or a breach of trust, or who has been convicted of other types of offences, cannot wilfully engage in the business of insurance in any capacity without a special waiver.
Acquisition of an insurer is subject to the prior approval of the insurance department in the insurer's domicile state. No entity can acquire control over a domestic insurance company without receiving such approval. Control is defined as actual control, and is generally presumed to exist if any person acquires voting securities representing 10% or more of the voting power of an insurer or its parent company (a few states set the threshold at 5%). State insurance regulators have the power to evaluate the business plans and financing involved in the purchase.
All potential acquirers must file a disclosure statement with the state insurance department, typically referred to as a "Form A" application. The Form A discloses the:
Identity of the acquirer.
Financial information about the acquirer and its owners.
Source of financing for the acquisition.
Biographical information on the officers and directors of the acquirer.
The acquirer must also disclose the terms of the purchase and file a copy of the purchase agreement. The Form A and many of the exhibits (including the purchase agreement but not including personal financial information or business plans) is available to the public in most states under the state's freedom of information laws.
A person who has been approved to acquire control may be able to increase ownership without prior regulatory approval, depending on the circumstances.
Many states have adopted amendments to the NAIC Model Insurance Holding Company System Act that will require any controlling person of a domestic insurance company seeking to divest its controlling interest in the domestic insurance company to file a confidential notice of its proposed divestiture with the commissioner. This notice must be filed at least 30 days before the cessation of control. The commissioner will then determine whether the party seeking to divest or to acquire a controlling interest in the domestic insurance company will be required to file for and obtain approval of the transaction. This requirement generally does not apply if a Form A is filed in connection with the transaction.
Acquisition of an insurance agency does not require prior regulatory approval, except in Texas. Some states require a post-acquisition notification filing.
Other providers of insurance/reinsurance-related activities
Acquisition of a provider of insurance-related activities does not require prior regulatory approval except in Texas. Some states require a post-acquisition notification filing.
Ongoing requirements for the authorised or licensed entity
Licensed insurers must file annual and quarterly financial statements prepared in accordance with US statutory accounting principles (SAP) as determined by the NAIC, subject to variations prescribed or permitted under state law. The annual statements must be audited. Insurers must calculate and submit various ratios used by regulators for solvency regulation, including risk based capital (RBC) ratios.
Insurers are also required to undergo periodic financial examinations and market conduct examinations by the states in which they are licensed. During financial examinations, state financial examiners investigate a company's accounting methods, procedures and financial statement presentation. These examinations verify and validate what is presented in the company's annual statement to ascertain whether the company is in good financial standing. Market conduct examinations occur on a routine basis, but can also be triggered by complaints against an insurer. These examinations review:
Agent licensing issues.
Types of products sold by the company and agents.
Agent sales practices.
Other market-related aspects of an insurer's operation.
Insurers are restricted in the kinds of investments they can make.
Every insurer that is part of a holding company structure must:
File an annual registration statement (typically called a "Form B") with the insurance department of its state of domicile. The Form B describes all of the affiliated relationships between the insurer and its affiliated entities. Transactions between affiliates must be described, and information must be provided with respect to the ultimate controlling person.
Receive prior approval of any material transaction between the insurer and any affiliated entity, including purchases and sales of assets, reinsurance arrangements, management agreements and tax-sharing agreements (typically called a "Form D"). These transactions are reviewed by regulators to determine whether the terms are fair and reasonable and to ensure that any fees being paid by the insurer are commensurate with the value of the services being provided.
The ultimate controlling person of every registered insurer must file an annual enterprise risk report (Form F) with the lead state commissioner of the insurance holding company system. Form F must, to the best of the ultimate controlling person's knowledge and belief, identify the material risks within the insurance holding company system that could pose enterprise risk to the insurer.
In addition, any dividends declared by an insurer that exceed the state's threshold are deemed to be "extraordinary". Extraordinary dividends must be reviewed and approved by insurance regulators before being distributed, to ensure that the insurer has sufficient assets and liquidity following payment of the dividend.
US insurers that have annual direct written and unaffiliated assumed premium of more than US$500 million or are part of an insurance group that has annual direct written premium of more than US$1 billion must "maintain a risk management framework to assist the insurer with identifying, assessing, monitoring, managing and reporting on its material and relevant risks" and must perform an Own Risk Solvency Assessment (ORSA) at least annually and file a summary ORSA Report that documents the results of the ORSA with its domestic state insurance regulator or the lead state insurance regulator for its insurance group. Internal modelling and stress testing are intended to be parts of the risk management framework.
Insurance producers must make requalification filings and filings in connection with certain placements of insurance policies and must report changes in background information on an ongoing basis. Additionally, some states require brokers to hold money received from insureds in a separate trust according to specific guidelines.
Other providers of insurance/reinsurance-related activities
Providers of insurance-related activities are also required to make requalification filings in some states and to report changes in background information on an ongoing basis. Additionally, some states also require third party administrators to hold funds remitted to them in a separate trust according to specific guidelines, so that the funds are not co-mingled (mixed) with any other funds of the administrator or other clients of the administrator.
Penalties for non-compliance with legal and regulatory requirements
The sanctions that an insurer potentially faces for failing to comply with applicable legal and regulatory requirements include:
Imposition of civil fines and penalties.
Suspension or revocation of the insurer's licence.
Imposition of a cease and desist order.
In extreme situations, an insurance regulator may initiate proceedings to be appointed receiver of an insurance company and, as receiver, take possession of and control over the insurer's property and businesses.
Criminal penalties may apply for intentional conduct.
If an unlicensed insurer has transacted insurance with a policyholder in violation of applicable state law, the policyholder may have a right to void the policy and secure a refund of premiums. In some jurisdictions, the insurer can be barred from enforcing policy terms, conditions and exclusions under a policy issued by an unlicensed insurer in violation of state law, or that conflict with applicable state law. In some states, violations of specific legal requirements applicable to the sale and performance of insurance contracts are declared to be unfair trade practices, and can be enforced by consumers in civil suits for monetary damages.
Similar penalties exist for insurance producers. However, in addition, insurance producers who "aid and abet" an unauthorised insurer may be held personally liable for loss payments, premium tax payments or both, according to an order issued by a state insurance department.
Other providers of insurance/reinsurance-related activities
Penalties for providers of insurance-related activities are similar to the penalties imposed on insurers and reinsurers (see above, Insurance/reinsurance providers).
Restrictions on persons to whom services can be marketed or sold
All persons who purchase insurance must have an insurable interest in the coverage (see Question 3).
Additionally, specific classes of insureds, such as the elderly, are protected under certain state laws. These states have special protections that must be adhered to for the sale of insurance to insureds in those classes.
In many states there are broad prohibitions against advertising on behalf of, or even calling attention to the existence of, an unauthorised insurer, to any audience.
Reinsurance monitoring and disclosure requirements
The extent to which a reinsurance company can monitor claims, settlements and underwriting of the cedant company is typically set out in the reinsurance contract. In terms of underwriting, generally, the reinsurance company reviews the underwriting guidelines of a ceding company before committing to provide the reinsurance, and the cedant may covenant to adhere to those guidelines.
Reinsurance contracts also require ceding companies to provide reports to the reinsurer, generally on a quarterly or monthly basis, detailing information for claims and settlements reported or paid during that period. This information typically is statistical and does not provide the detailed information necessary to closely monitor the cedant's business. Reinsurance contracts typically have an access-to-records clause that provides reinsurers with the right to audit the books and records of the cedant.
Reinsurance contracts commonly use the "follow the fortunes" doctrine, which generally requires reinsurance companies to follow the underwriting fortunes of their cedant companies and, therefore, be bound by the claims-handling, settlement and allocation decisions of the cedant companies, as long as there is no evidence of fraud, collusion with the insured or bad faith.
The disclosure/notification obligations of the cedant depend on the terms of the reinsurance contract. Contracts generally require reports to the reinsurance company on a monthly or quarterly basis (see Question 16). A reinsurance contract also typically has a notice provision specifically addressing how and when the cedant must notify the reinsurer of claims.
Insurance and reinsurance policies
Content requirements and commonly found clauses
Form and content requirements
Many states have specific coverage requirements for specified lines of coverage. For example, many states have a standard fire policy that insurers providing coverage against loss of property due to fire must use. In addition, most states restrict non-renewal and cancellation, and require that the policy form complies with state law requirements.
Life insurance policies must comply with state law provisions on non-contestability and non-forfeiture. Other provisions may be necessary for life products to qualify for life insurance tax benefits under the US Internal Revenue Code.
Commonly found clauses
An insurance policy typically describes the:
Term of the policy.
Coverage under the policy.
Premium payable by the insured.
Amount of the deductible or loss retention.
The most common parts of a policy include the:
Policy declarations, which identify:
the insured person/entity;
the insured's address;
the insuring company;
what risks or property are covered;
the policy limits (amount of insurance);
any applicable deductibles;
the policy period; and
the premium amount.
Coverage section, which describes the covered perils or risks assumed, and describes the nature of the coverage.
Exclusions section, which limits coverage by describing property, perils, hazards or losses arising from specific causes which are not covered by the policy.
Conditions section, which describes the rules of conduct and duties and obligations required for coverage.
Facultative certificates of reinsurance typically have fewer terms and conditions, and will have a following form clause if the reinsurance is meant to follow the underlying contract. Ceding insurers purchase both facultative and treaty reinsurance, depending on the nature of the policies and insured parties.
Commonly found clauses
Reinsurance agreements are highly customisable and there is only limited standardisation. Contracts vary widely, based on the type of contract, the line of business, the ceding insurer, the reinsurer and if there is a reinsurance broker involved.
There are a number of customary clauses, although the precise wording may vary from contract to contract. Some of these clauses are required by state regulations or accounting rules governing credit for reinsurance on US statutory financial statements.
These regulations and rules do not allow a ceding insurer to take credit unless the agreement contains the following features:
An acceptable insolvency clause (under which the reinsurer's obligations survive in the event of the insolvency of the ceding entity without reduction because of the insolvency or ceding insurer's ability to pay the underlying loss).
Recoveries due to the ceding insurer must be available without delay in a manner consistent with the orderly payment of incurred policy obligations by the ceding insurer.
The agreement constitutes the entire contract between the parties, and must provide no guarantee of profit from the reinsurer to the ceding insurer or from the ceding insurer to the reinsurer.
The agreement must provide for reports of premiums and losses and settlement on at least a quarterly basis, unless there is no activity during the period.
Additional clauses may be required if the reinsurer is not licensed or accredited in the state and is providing collateral to secure its obligations.
Additional clauses that most reinsurance agreements contain as a matter of custom and practice include:
A dispute resolution clause (typically a form of an arbitration clause).
An access to records clause.
A business covered clause.
A commencement and termination clause.
An errors and omissions clause.
A governing law clause.
A loss settlements and notice of loss clause (which may include a follow the settlements or follow the fortunes clause).
Insurance policies have an implied duty of good faith, which requires insurers to generally engage in "fair dealing" with the policyholder. This includes:
Adjusting policyholders' claims (either paying or denying) within a reasonably prompt time.
Co-operating with policyholders regarding their claims by responding to letters and phone calls in a timely fashion.
Explaining in writing precisely why a claim is being denied.
Attempting to find a basis to pay the claim rather than finding reasons to deny it.
Many states have laws that provide that policies will be interpreted to conform to state law. Therefore if, for example, a policy is missing a required coverage, or the policy terms relating to cancellation or non-renewal conflict with state law, the policy will be enforced as if written to comply with the state requirements.
Most states have laws that protect consumers against unfair and deceptive trade practices. These laws apply to insurers in addition to laws that are specific to insurance.
Most, but not all, insurance policy forms are subject to regulation, so such contracts must include certain terms and conditions designed to protect consumers. In addition, there are certain statutory provisions that supplement these protections. For instance, many states regulate cancellation or non-renewal of an insurance policy, by:
Requiring that insureds receive timely notice of cancellation or non-renewal (to allow them sufficient time to obtain a new policy).
Prohibiting cancellation in the absence of certain triggering events (for example, non-payment of premium, fraud or misrepresentation in procurement of the policy, and material change in risk).
All states require clauses relating to non-forfeiture and non-contestability for life insurance.
Standard policies or terms
There is a standard form of fire insurance policy in many states. The Insurance Services Office (ISO) develops standard commercial property-casualty policies. Personal lines policies, such as for homeowners and private passenger automobile insurance, have common features but can vary in certain respects.
Insurance and reinsurance policy claims
Establishing an insurance claim
An insured can make a claim to the insurer if it incurs a loss within the policy limits which is not covered by an exclusion of the policy. Policies can be occurrence based, claims first made, or claims first made and reported. Insurance policies typically have detailed provisions on when a claim must be made and notice provided to the insurer.
Third party insurance claims
There are very limited circumstances in which a third party can make a claim under an insurance policy. Typically, the third party must be named as an additional insured under the policy or the terms of the contract must otherwise specifically allow such a party to make a claim. The other instance in which a third party could make a claim under the insurance policy is if that claim has been assigned or subrogated.
The time period an insured has to make a claim is governed by the policy. Insurance contracts can be claims first made and claims first made and reported contracts (where coverage is triggered by the date the insured became aware of the claim and the insurer must then be notified), or occurrence contracts (where liability centres on the event that triggers coverage). Typically, insurance and reinsurance contracts also include notice provisions governing when the insured must notify the reinsurer of a claim or a potential claim.
Many states allow claimants to submit late claims as long as the insurer has not been prejudiced. State law may also provide rules for when a claim is deemed to have been discovered for the purposes of these requirements, as well as applicable statutes of limitations.
Generally, an original policyholder or other third party has no privity with the reinsurer and cannot sue the reinsurer directly. The main exception is where a contract expressly contains a "cut-through" provision granting such a right to an original policyholder or other third party. Additionally, in the case of assumption reinsurance with a novation agreement, the original policyholder has privity with the reinsurer.
There are state guaranty associations in every state. These provide benefits when an insurer becomes insolvent, subject to a cap (see Question 29).
A breach of an insurance policy is considered a breach of contract. The remedy for any breach of contract is the right to sue (or arbitrate if required by the contract) to recover losses. If the breaching party has acted in bad faith, the claimant can obtain damages in tort, which potentially includes consequential damages and punitive damages (see Question 28).
Punitive damage claims
Slightly less than half of all US states limit insurance for punitive damages in some fashion. The courts in these states generally hold that it is a violation of a public policy to allow punitive damages to be covered by insurance because the punitive damages award would cease to have a deterrent and/or punitive effect.
While some US states do not allow insurance of punitive damages, they may allow reinsurers in their jurisdiction to reinsure insurers for this risk. This would apply where an insurer enters into a policy to provide insurance for punitive damages in another jurisdiction where it is allowed.
Insolvency of insurance and reinsurance providers
US insurance companies are not subject to bankruptcy under the US Federal bankruptcy code. Instead, they are subject to receivership proceedings under state law. These proceedings apply US bankruptcy law concepts in many respects. In addition, under federal legislation enacted in 2010 (see Question 36), an insurance company or insurance group that presents a "systemic risk" to the US financial system can be subject to supervision by the US Federal Reserve, including resolution authority (that is, the power to seize, conserve, sell and wind-up a distressed insurer).
All states have laws allowing the state insurance commissioner to take action if the solvency of a domestic insurer or reinsurer becomes a concern. The level of control that can be exerted differs, depending on the severity of the insurer's distress:
Supervision. An insurer is allowed to remain under its existing ownership and management while the commissioner actively instructs and works with the company to pursue a remediation plan. Supervision may not be available to insurers in all lines of business.
Conservation/rehabilitation. The commissioner can obtain a court order granting him control of an insurer. This is an intermediate step that is intended to help the insurer rehabilitate.
Liquidation. If there is no reasonable chance of rehabilitation, the commissioner can obtain a court order for its liquidation.
Ancillary proceedings. Each state authorises its commissioner to begin ancillary proceedings to preserve and marshal the assets of an insurer located in that state, if the commissioner of the insurer's state of domicile does not act in relation to solvency concerns, or if requested by the commissioner of another state. The commissioner acting in an ancillary proceeding acts for the benefit of all policyholders, wherever located, but only has authority in relation to assets located in that state. As a general matter, the exercise of ancillary jurisdiction by one state commissioner is co-ordinated with the actions taken by the commissioner of the state in which the insolvent or impaired insurer is domiciled.
Typically these insolvency laws only apply to insurers and reinsurers, and not to agencies, brokerages or other entities providing insurance related services. Those entities remain subject to bankruptcy under the US federal bankruptcy laws.
A distinguishing feature of insurance company insolvency proceedings is that policyholder claims have priority over the claims of general creditors, including cedants and reinsurers.
In addition, every state has a state guaranty association that provides coverage for policies issued by a licensed insurer for specified lines of insurance, up to a certain amount. Payments by the guaranty associations are funded by recoveries from the insolvent insurer (the guarantee association succeeds to the insured's rights to payment under the policy to the extent of its own payment) and by assessments on licensed insurers in the state.
Certain excess policies provide that they will drop down if the insurer that issued the underlying policy goes into insolvency. Generally, however, a contractual drop-down clause is not found in excess policies. Case law in the US is split as to whether an excess insurer must drop down in the case of the underlying insurer's insolvency if the policy is silent. In certain states and under certain circumstances, drop down is required, while in other states and other circumstances it is not. This depends on how the court views the intent of the parties based on the specific terms and conditions of the subject policy. Because of this uncertainty, some excess policies contain anti-drop down clauses.
Every state recognises the right to set-off mutual debts and credits to some extent. Set-off rights will be governed by the set-off clause included in the contract and by the law of the state of domicile of the insurer that is the subject of an insolvency proceeding. Most state insurance codes contain explicit recognition of the right of set-off, but may specify restrictions. Contractual set-off rights can limit, but cannot expand, set-off rights recognised by law.
Taxation of insurance and reinsurance providers
US insurers and reinsurers are subject to taxation at both the federal and state levels. Federal income tax is imposed at a rate of 35% for insurers that have taxable income in excess of US$10 million. Federal taxable income, which is the tax base, is calculated by including premiums plus investment income and gains, and other income, less expenses and loss reserves allowable under the tax law.
There are different federal tax law provisions for life insurance companies (which include accident and health insurance) and property/casualty insurance companies. Statutory loss reserves of property/casualty companies are discounted for tax purposes, whereas the tax loss reserves for life insurers are calculated by statutory formula (with reference to NAIC tables and valuation techniques).
States impose premiums and/or franchise taxes on insurers licensed in their state, which generally range from 1% to 4%, and are typically imposed on gross premiums less return premiums and amounts received for reinsurance. Reinsurance of US risks ceded or retroceded to reinsurers located outside the US may be subject to a federal insurance excise tax of 1% on reinsurance premiums. Direct insurance of US risks placed with insurers located outside the US may be subject to a federal insurance excise tax of 1% on insurance premiums for life or accident insurance, or 4% for property/casualty insurance. There is a separate state tax on excess/surplus lines insurance, typically imposed on the insured and collected by the excess/surplus lines broker.
Insurance and reinsurance dispute resolution
Generally, state insurance regulators handle complaints filed by consumers in their state under standard procedures. Otherwise, there are no special procedures or venues for insurance or reinsurance complaints or disputes, and such matters are brought in the appropriate court of law or before an arbitration panel if arbitration is provided by contract. Typically in the US, reinsurance arbitration is ad hoc rather than before a particular arbitral organisation.
Arbitration clauses in insurance and reinsurance agreements are generally, but not always, enforceable. Federal law makes arbitration agreements enforceable for contracts made in interstate or international commerce. Various state laws make arbitration agreements enforceable with exceptions, which sometimes encompass insurance contracts.
Choice of forum, venue and applicable law clauses in an insurance or reinsurance contract are generally recognised and enforced in the US, subject to exceptions including:
Parties to a contract cannot confer subject matter jurisdiction on the US Federal courts by contract.
Some courts can decline jurisdiction on grounds of an inconvenient forum, when neither the parties nor the contract has any nexus with the state.
Courts will not enforce a choice of law provision if the particular law to be enforced is against the public policy of the forum state.
Insurance continues to be primarily regulated by the various states, which are usually considering a number of insurance regulatory reforms. Sometimes, their activity is co-ordinated through the NAIC (see below, NAIC reforms). However, there are currently also significant federal reforms.
Four recent and potential federal legislative reforms are the:
Patient Protection and Affordable Care Act 2010 (ACA).
Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 (Dodd-Frank Act).
Reauthorisation of the Terrorism Risk Insurance Act (TRIA).
National Association of Registered Agents and Brokers Reform Bill (NARAB II).
ACA. The ACA essentially federalises health insurance throughout the US, by requiring that:
All Americans maintain health insurance.
Health insurance be made available to all Americans with certain minimum, "essential health benefits", at affordable, or "reasonable", prices.
To ensure the broad purposes of the ACA are fulfilled, that is, "quality, affordable health care" and "quality health insurance coverage for all Americans", the ACA combines the existing regulatory infrastructure of the various states with the authority of certain federal agencies. In practice, this means that it provides for the states and the US federal government to regulate the business of health insurance together.
Dodd-Frank Act. The Dodd-Frank Act provides for the Financial Stability Oversight Council (FSOC), which is charged with:
Monitoring systemic risk.
Determining which non-bank financial institutions to designate as systemically important financial institutions subject to heightened supervision by the Federal Reserve.
In April 2012, FSOC issued a final rule and interpretive guidance that details the analysis and process FSOC intends to use when determining which non-bank financial institutions should be subject to enhanced prudential standards and to supervision by the Federal Reserve.
As of May 2016, FSOC has designated three insurance groups for enhanced supervision (AIG,Prudential and MetLife), but one of those designations (MetLife) was reversed and vacated by an appellate court.
Dodd-Frank authorises the US Treasury Secretary and US Trade Representative (USTR) to negotiate "covered agreements" regarding the recognition of prudential measures with respect to the business of insurance and reinsurance with foreign governments that achieves a level of protection for insurance and reinsurance consumers that is substantially equivalent to the level of protection achieved under US state insurance or reinsurance regulation. These agreements can pre-empt inconsistent state law. In 2015, the Treasury Secretary notified Congress of his intent to initiate negotiations to enter into a covered agreement with the European Union (EU). The notice stated that the covered agreement negotiations with the EU will seek, among other things, to afford nationally uniform treatment of EU-based reinsurers operating in the United States, including with respect to collateral requirements.
TRIA. TRIA was initially enacted in 2002 to address the near complete withdrawal of private terrorism coverage following the 11 September 2001 terrorist attacks. Although TRIA expired at the end of 2014, the incoming 2015 Congress reauthorised it as one of its first items of business, and the federal terrorism backstop has now been extended to 2020. TRIA provides commercial property and casualty insurers access to a federal backstop for certain large terrorism events. Although TRIA was originally designed as a temporary programme to be in place for several years while a private terrorism coverage market developed, Congress has reauthorised it three times, in 2005, 2007 and 2015. TRIA requires that insurers of certain "covered lines" make coverage available for losses resulting from events certified as "acts of terrorism". Currently under TRIA, the federal programme is triggered if the total losses from an act of terrorism exceed US$100 million, and individual insurers are subject to a 20% deductible. Beginning on 1 January 2016, the programme trigger amount will increase from US$100 million to US$200 million, in US$20 million increments each year. Furthermore, the insurer co-pay, currently set at 15%, will rise by 1% each year until reaching 20% in 2020 and the mandatory recoupment threshold will increase by US$2 billion per year, from US$27.5 billion to US$37.5 billion. With the last extension, insurers subject to the programme will be required to make periodic reports to the Treasury Department of various items of information determined by the Treasury to be relevant to the programme.
NARAB II. As a response to the insurance industry's desire for nationwide uniformity in state licensing of insurance producers, the 2015 Congress also enacted NARAB II, a bill that creates a private, not-for-profit corporation to serve as an interstate clearing house for non-resident producer licensure. The corporation will be governed by a panel dominated by current and former state insurance regulators who will establish standards for membership. An approved NARAB member will be able to use the clearing house for non-resident licences in any other state. States retain their regulatory jurisdiction over consumer protection, market conduct and unfair trade practices. States also retain the right to license resident producers and to supervise, discipline, and set licensing fees for insurance producers.
The NAIC has amended its model law and regulation on credit for reinsurance to allow cedants to take financial statement credit for reinsurance ceded to non-admitted reinsurers with reduced or no collateral (see Question 6, Reinsurers).
In 2005, state regulators, acting collectively through the NAIC, began working on the development of a new approach for determining life insurance reserves. Life insurance reserves are currently determined under formulas, the use of which is prescribed by law. Generally, the NAIC considers replacing these formulas with a system that relies on the judgement of each company's actuaries to assess the unique risks presented by each company's business. The NAIC has adopted a new model Act containing the broad authority needed to allow company actuaries to use a principles based approach to setting reserves.
The Valuation Manual containing a life insurances principles based reserving (PBR) methodology was adopted by the NAIC at the end of 2012. PBR will not take effect until it is adopted by 42 states and state adoption reflects 75% of the total life insurance premium written in the US. In April 2016, the NAIC tentatively announced that this threshold was met, making 1 January 2017 the effective date if the NAIC confirms that all of the individual state laws adopted in the various states conform to the Model Act. This would trigger a three year phase-in period.
The NAIC also recently adopted a model law and corresponding regulation that will require licensed insurers to file an annual report describing their corporate governance practices on 1 June each year, beginning in 2016. The model law and regulation provide that such report, submitted by an insurer, or the insurance group of which the insurer is a member, must contain:
A description of the insurer's corporate governance framework.
A description of the insurer's board of directors and committee policies and practices.
A description of management policies and practices.
A description of management and oversight of critical risk areas.
The insurer is specifically permitted to provide information regarding corporate governance at the ultimate controlling parent level, at intermediate holding company level or the individual legal entity level, depending upon how the insurer or insurance group has structured its system of corporate governance. Finally, the model regulation states that in recognition of the fact that an insurer's corporate governance framework and practices may not vary significantly from year to year, and to facilitate regulatory review of the annual filings, insurers are encouraged to file a redline version of the filing each year to track those items that have changed from the previous year.
Main insurance/reinsurance trade organisations
There are many different insurance and reinsurance trade organisations that represent various market participants in the US. Set out below are the most well-known trade organisations which represent life insurers, property/casualty insurers, reinsurers, surplus lines insurers and insurance producers, respectively.
American Council of Life Insurers (ACLI)
Main activities. ACLI represents over 300 legal reserve life insurer and fraternal benefit society member companies before federal and state legislators, regulators and courts, on issues from financial and retirement security to international trade to regulatory reform. It works to educate the industry and the public at large on annuities, life, disability income, and long-term care insurance, as well as pensions and 401(k)-type plans.
American Insurance Association (AIA)
Main activities. The AIA is a property-casualty insurance trade organisation, representing about 300 insurers that write more than US$117 billion in premiums each year. AIA member companies offer all types of property/casualty insurance, including personal and commercial auto insurance, commercial property and liability coverage for small businesses, workers' compensation, homeowners' insurance, medical malpractice coverage, and product liability insurance.
Property Casualty Insurers Association of America (PCI)
Main activities. PCI members are diverse, including publicly held national companies as well as single-state and specialty writers. PCI's goal is to foster a competitive insurance marketplace to benefit both insurers and consumers.
National Association of Mutual Insurance Companies (NAMIC)
Main activities. NAMIC is a national trade association serving the property/casualty insurance industry, with 1,400 member companies that underwrite 43% of the automobile insurance market, 54% of the homeowners market, and 32% of the business insurance market. NAMIC members are small farm mutual companies, state and regional insurance companies, risk retention groups, national writers, reinsurance companies, and international insurance giants.
Reinsurance Association of America (RAA)
Main activities. The RAA is a national trade association established to influence and guide federal and state lawmakers, and international bodies, as they formulate and consider legislation that regulates the business environment in which the property and casualty reinsurance industry operates.
Independent Insurance Agents & Brokers of America (IIABA)
Main activities. IIABA is a national alliance of over 250,000 business owners and their employees, who offer all types of insurance and financial services products. Members include both independent insurance agents and insurance brokers. IIABA is a voluntary federation of state associations and local boards, with affiliates in every state and the District of Columbia.
Council of Insurance Agents and Brokers (CIAB)
Main activities. The CIAB is an association for commercial insurance and employee benefits intermediaries in the US and abroad. CIAB represents leading commercial insurance agencies and brokerage firms, which annually place 85% of US commercial property/casualty insurance premiums. It is devoted to protecting business, industry, government and the public at-large, and it administers billions of dollars in employee benefits.
John S Pruitt
Sutherland Asbill & Brennan LLP
Professional qualifications. New York, 1988; New Jersey, 1998; J.D Cornell Law School, 1987.
Areas of practice. Insurance regulatory; reinsurance, insurance M&A; corporate.
Non-professional qualifications. B.A. Hamilton College, magna cum laude, 1984
Counsel to insurers and other participants in the insurance sector on a wide range of regulatory and transactional matters, including:
- Advising property and casualty and life insurance clients on regulatory compliance, acquisitions, dispositions and restructurings.
- Assisting clients with governance, licensing, financial and market conduct examination and Insurance Holding Company Act matters.
- Advising clients involved in internal investigations and regulatory enforcement actions in a variety of matters, including broker compensation practices, finite risk reinsurance, rating practices and insurance sales and marketing practices.
Mr Pruitt regularly attends meetings of the National Association of Insurance Commissioners and various insurance industry trade associations and actively monitors emerging issues in US domestic and international regulation of insurance. He is also a member of the New York City Bar's Insurance Committee and Law360's 2013 Insurance editorial advisory board.
Co-author, "Crunching the Numbers in NYDFS' Cybersecurity Report" Law360, March 2015.
Co-author, "New Rules for the New Year" Best's Review, January 2014.
Co-author, "Spotlight on Captive Insurance Companies: How Captives are Relevant to Commercial Property & Casualty Insurers - NAIC Considers Insurers' Use of Captives" New York Insurance Association's Your NY Connection Magazine, Winter 2013.
Co-editor and Contributor, "2013 Outlook for Insurance Regulation", January, 2013.
Editor and Contributor, "NAIC Report: 2012 Fall National Meeting", December, 2012.
Co-author, "State Insurance Department Responses to Superstorm Sandy", Sutherland Legal Alert, November, 2012.
Co-author, "The House Financial Services Committee Reviews the Future of TRIA", Sutherland Legal Alert, September, 2012.
Editor and Contributor, "NAIC Report: 2012 Summer National Meeting", August, 2012.
Co-editor and Contributor, "Noteworthy Now: Sutherland Insurance Regulatory Mid-Year Review", July, 2012.
Co-author, "Multiple Representations: The SEC v D&O Insurers", Bloomberg Law Reports, January, 2012.
Co-editor and Contributor, PLI Insurance Regulation Answer Book, 2012.