Regulators Tackle Special Purpose Reinsurance Vehicle Model Act

Regulators came close to advancing the Special Purpose Reinsurance Vehicle Model Act along the road to a vote by the general membership of the National Association of Insurance Commissioners, but in the end could not make that leap.

Additionally, a representative of the American Council of Life Insurers indicated that the life insurance industry was considering how it could use SPRVs.

Virginia Insurance Commissioner Alfred W. Gross, who chairs NAIC’s Financial Condition (E) Committee, indicated at the NAIC summer meeting here that the committee has combed the provisions of the model act to clear up inconsistencies and fine-tune the statutory language.

The committees Insurance Securitization Working Group voted to approve the SPRV Model Act when it met last March in Nashville.

Section 4C of the Model Act emerged as problematic in the committee’s review of the statutory language, reported committee member Arnold Dutcher, an Illinois regulator.

In the version submitted by the working group, the section says a state insurance regulator could not approve an application or issue a limited certificate of authority for an SPRV before finding that the proposed plan of operation would provide “a reasonable expectation of a successful operation.”

Dutcher–who described an SPRV as a device that transforms an insurance risk into a security–submitted a proposed amendment that additionally requires a state regulator to find “that the terms of the SPRV contract and related transactions comply with this act and are not hazardous to policyholders.”

The amendment goes on to state that, if the regulator refuses to approve such an application or to issue a certificate of authority, the regulator “shall grant the prospective SPRV organizer a hearing on request.” This amended language takes into account issues that were brought up by various regulators and industry representatives in Nashville.

In New Orleans, groups representing primary insurers–such as the National Association of Independent Insurers and the Alliance of American Insurers–commended the committee and the working group for considering the use of SPRVs on U.S. shores. The groups urged the committee to endorse the model act and pass it on to the NAIC’s Executive Committee for approval.

Stephen Broadie, vice president-financial legislation and regulation for the Des Plaines, Ill.-based NAII, said one reason his group supports the model act is because it would allow multiple cedants to use an SPRV. This in turn would give medium- and small-sized insurers access to the securitization markets, he said. Broadie said most SPRVs now operate offshore, and only large, well-funded institutions can take advantage of them.

The National Association of Mutual Insurance Companies, Indianapolis, and the American Council of Life Insurers, Washington, also expressed support for the SPRV Model Act, but with some caveats.

William D. Boyd, financial regulation manager for NAMIC, said his group would like to see “more tax certainty” for SPRVs; currently, the model act takes no position on the tax treatment of SPRVs.

Paul S. Graham III, managing actuary for ACLI, observed that SPRVs traditionally have been thought of for securitizing catastrophic risk. But he urged the committee to keep a place open in the model act for other insurance risks.

“Because were so late in the game, we dont have complete thoughts laid out on how the life insurance community would use SPRVs,” Graham admitted.

Graham was alluding to the fact that the life insurance industry is about two years behind the property-casualty insurance industry in considering both the use of domestic SPRVs and the SPRV Model Act.

“Much work remains to be done” to determine other uses that could be made of SPRVs, Graham added.

However, the reinsurance industry continues to see U.S.-based SPRVs as a threat. Joseph Sieverling, a vice president at the Reinsurance Association of America, Washington, outlined several reasons for RAAs opposition to the model act:

The SPRV Model Act would create “a tax regulatory-advantaged reinsurer.”

Sieverling reasoned that there would have to be “the same or better benefits” to ceding companies under the federal tax code to make domestic SPRVs more attractive to investors than offshore counterparts. He said RAA does not believe it is good public policy to create “a tax loophole for a special class of reinsurer to the detriment of the existing U.S. reinsurance market.”

Domestic SPRVs would enjoy other regulatory advantages over U.S. reinsurers.

Under the current version of the model, there would be no limits on the type of business that could be written or on the number of cedants that could use an SPRV, Sieverling noted.

The current version requires that SPRVs have a minimum of just $5,000 in capital.

In contrast, reinsurers “maintain a substantial amount of capital” even though a transaction may not be fully funded, Sieverling said.

Preferential tax treatment for U.S.-based SPRVs might lead investors to pour more capital into “an already overcapitalized market.”

Preferential tax treatment could also lead to other unintended consequences, Sieverling said.

RAA also foresees further consolidation in the reinsurance industry, he stated, predicting that “only the strongest players will survive in a marketplace tilted in favor of” competing entities that enjoy special tax and regulatory benefits.

He also suggested that U.S. reinsurers are more loyal to their customers during bad market cycles than domestic SPRVs, with their “transient capital,” would be.

RAAs fallback position is that, if the NAIC did adopt the model, “at minimum it should be limited to property-catastrophe risks,” he said.

The regulators and industry representatives engaged in extended discussion on the merits of onshore SPRVs and on whether to limit the uses to which they could be put.

Some committee members also expressed concerns about the model’s 30-day “deemer” provision. That provision–Section 4 of the model act–currently provides that 30 days after an insurance regulator has received a complete filing by a prospective SPRV organizer, “the application shall be deemed approved and a limited certificate of authority shall be issued” unless the domiciliary state of each ceding insurer notifies the regulator in writing that the domiciliary state disapproves of the transaction.

The committee postponed a vote on the SPRV Model Act until the last session in New Orleans on June 12.

NAMIC’s Boyd informed National Underwriter that at the June 12 meeting, the committee again postponed a vote on whether to approve the model. Instead, the committee decided that it needed to develop language that provides an approach other than that set forth in the 30-day deemer provision, and that limits application of the model act to catastrophic events, Boyd reported.

However, he said the amended language would be aimed at the drafting notes, or suggestions to state lawmakers on how to apply the model to their jurisdictions, rather than directly at the statutory provisions. In Boyd’s view, requiring drafting note changes was the committee’s attempt at a compromise with members who have expressed reservations about various aspects of the model act.

The committee indicated that it will be ready to vote on the model act at the NAIC fall meeting, in September, after members discuss the amended language, Boyd said.

E.E. Mazier is a staff writer for NU’s Property & Casualty/Risk & Benefits Management edition.


Reproduced from National Underwriter Life & Health/Financial Services Edition, June 29, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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