on the Insurance Industry
A quarterly publication of the Foley & Lardner LLP Insurance Industry Team
The Financial Accounting Standards Board
In this issue… Proposes Bifurcation of Insurance Contracts
By Wm. Carlisle Herbert
The Financial Standards Accounting Board (FASB) recently invited
Page 1 The Financial Accounting Standards
public comments on a proposal to bifurcate many insurance and
Board Proposes Bifurcation of
reinsurance contracts for financial reporting purposes.i Under the
Insurance Contracts FASB proposal, certain insurance and reinsurance contracts would
Page 2 Regulators Consider New Rating be divided into an “insurance” component and a financing
component called a “deposit.”
Approach to Reinsurance Collateral
Requirements While the FASB says it has not reached even a tentative conclusion on
this proposal, it has solicited comments because some have suggested
Page 3 Foley Sponsors Conference on Business that bifurcation would provide users of financial statements with better
Method Patents for the Financial information about the economic substance of insurance arrangements.
Services Industry Under current accounting practice, a contract is treated as a whole either as insurance or
as a deposit depending on whether the contract transfers a significant insurance risk. Under
Page 4 NAIC Amends Reinsurance Intermediary
the bifurcation proposal, a contract would be bifurcated where the contract may be divided
Model Act to Require Compliance With into a component reflecting claims payments that are likely to occur and a component reflecting
Discovery Orders claims payments that are possible but not likely to occur. The former component would be
treated as a deposit made to fund the expected claims payments, and the latter would be
Page 5 Florida Creates Joint Underwriting
treated as insurance.
Association for Commercial Property
Insurance Under the FASB proposal, several kinds of contracts would be excluded from bifurcation. These
would include contracts such as loans that do not meet a specific definition of “insurance
Page 6 Proposed Federal Regulation: A Bird’s contract.” Generally Accepted Accounting Principles (GAAP) currently do not define an insurance
Eye View of the Battle contract, and part of the current FASB project is to collect comments on a proper definition.
A second kind of excluded contract would be the “unequivocal insurance contract,” one that has
Page 8 Announcements
“negligible noninsurance features.” A typical contract of this kind would be a single-risk contract
(e.g., single life, single asset or single event), where the premium is appropriately low, the
contract has no risk-limiting features and the contract is not likely to produce in any claims during
Foley has expanded the Insurance Practice Group to its term. This type of contract would be treated entirely as insurance.
create our cross-departmental Insurance Industry A third kind of excluded contract would be the contract that does not transfer “significant
insurance risk.” A contract that did not transfer significant risk would be treated entirely as a
Team, chaired by Kevin G. Fitzgerald. The team deposit. For identifying such a contract, the FASB proposes to incorporate the guidance provided
counsels clients in the following areas: mergers by GAAP (Statement 113) to determine whether a reinsurance contract transfers significant
insurance risk. The FASB has invited comments specifically on whether it would be appropriate to
and acquisitions/transactional, regulatory, insurance apply the Statement 113 guidance to insurance contracts as well as reinsurance contracts.
taxation, financial products, reinsurance The FASB has suggested that bifurcation might be limited to those kinds of insurance contracts
that have been described as “finite risk arrangements.” Under this approach, a fourth exclusion
transactions and dispute resolution, insurance
would preserve for bifurcation only contracts that meet tests designed to identify these specific
dispute resolution, insolvency/guaranty fund, arrangements. The tests would look for risk-limiting terms or features in a contract, such as a
matching of anticipated income and disbursements or provisions for profit or loss sharing
distribution, captives, and public affairs. between insurer and insured, that produce “a significant financing component or an insignificant
To subscribe to Focus, please send an e-mail to
Alternatively, the FASB has suggested that bifurcation might be employed for all contracts
Foley&LardnerInsuranceIndustryGroup@foley.com remaining after the first three exclusions have been applied. This approach would be designed
to provide “consistent accounting across all remaining insurance and reinsurance contracts
or visit us on the Web at Foley.com/insurance.
regardless of the form, products, or features included in the contract.”
The FASB has described three possible methods for bifurcating contracts. One, called the
“expected payout method,” would identify a level of likely claims payments for a contract and
FOCUS on the Insurance Industry Fall 2006 2
would treat a portion of the premiums paid under the contract as a Regulators Consider
financing of these expected payments. This approach has also
been described as a “dollar-trading method” of identifying the New Rating
deposit component of insurance and reinsurance contracts. Approach
A second method, the “proportional method,” would determine
what portion of the entire risk addressed by a contract has been
retained by the policyholder. The ratio of the retained risk to the Collateral
entire risk would then be applied to the contract’s cash flows to
determine the deposit component of the contract.
A third method, the “cash flow yield method,” would undertake to By Brian S. Kass
identify a portion of an insurance contract’s cash flows that
After years of discussion, the National Association of Insurance
provides a return equivalent to the interest rate on a loan. This
Commissioners (NAIC) has moved one step closer to a substantial
portion would be treated as financing, while cash flows in excess
revision of collateral requirements for reinsurers. In a move that
of the interest rate would be treated as insurance. The FASB has
caught many by surprise, regulators at the NAIC Summer Meeting
specifically noted that more research is necessary to determine
took measures to advance a new, rating-based proposal designed to
the feasibility of this approach.
ease collateral requirements for non-U.S. reinsurers. Unlike existing
The FASB has acknowledged that there is a wide divergence of collateral rules, the NAIC proposal calls for collateral obligations to
opinion on many aspects of the bifurcation proposal. While be tied to a reinsurer’s financial strength and would apply to all
advocates of bifurcation believe that the user of a financial reinsurers, regardless of their licensing or accreditation status.
statement “would be able to determine better the risk that a
Current Collateral Requirements
company bears and its strategy to limit that risk,” some opponents
believe that insurance contracts are “essentially indivisible,” and Current reinsurer collateral requirements are imposed under
some believe that bifurcation would not permit readers of financial state credit for reinsurance regulations. Generally speaking, these
statements to evaluate “what the bifurcated components imply regulations require U.S. insurers to obtain acceptable forms of
about future cash flows.” collateral from non-licensed or non-accredited reinsurers in order
to take financial statement credit for reinsurance ceded to these
The FASB proposal leaves many questions unanswered. For
reinsurers. In these situations, credit for reinsurance is permitted
example, the proposal suggests that group contracts, such as
only in an amount equal to collateral posted by the reinsurer.
group health or life insurance, would be bifurcated because a
Conversely, ceding companies that cede risks to reinsurers that
portion of the premium for such contracts compensates the
are licensed or accredited in the ceding company’s state of
insurer for the likely payment of expected claim losses. A portfolio
domicile are permitted to take full financial statement credit
of “unequivocal insurance contracts,” on the other hand, would be
without obtaining any collateral from the reinsurer. In other words,
treated entirely as insurance even though a portion of the premium
existing regulations focus exclusively on a reinsurer’s licensing or
received on the portfolio as a whole similarly compensates the
accreditation status with no consideration given to the reinsurer’s
insurer for the payment of expected claim losses. For the purpose
financial strength or stability.
of evaluating the financial condition of the insurer as a whole, it is
not clear why a group contract and a portfolio of individual Proposed Collateral Requirements
contracts should produce such disparate accounting results. The collateral requirements contemplated under the NAIC
The FASB has noted that the International Accounting Standards proposal take the opposite approach and focus on the
Board (IASB) is planning in the near future to solicit comments financial strength of a reinsurer rather than its licensing or
on a paper containing its own tentative decisions on the accreditation status. These requirements would apply to
accounting treatment of insurance contracts. The FASB has domestic and non-domestic reinsurers alike.
stated that it will decide whether to join the IASB in a project to Under the proposal, procedures would be established for
develop a comprehensive standard for such accounting after evaluating the credit risk of reinsurers through a rating-based
receiving comments from its own constituents on the IASB system. Reinsurers placed into the highest rating category would
paper. The IASB has reported that its paper will likely be be exempt from posting any collateral whereas reinsurers falling
published near the end of 2006. into the lowest rating category would be required to secure 75%
of their liabilities. Reinsurers that do not receive a rating would be
Financial Accounting Standards Board, Invitation to Comment, Bifurcation of Insurance and
required to secure their obligations in order for U.S. ceding
Reinsurance Contracts for Financial Reporting, Financial Accounting Series No. 1325-100 (May companies to take financial statement credit.
26, 2006) (the FASB requested that comments be submitted by August 24, 2006). The proposal calls for the NAIC Reinsurance Task Force (or its
successor) to have primary jurisdiction to implement the rating
FOCUS on the Insurance Industry Fall 2006 3
process. The Task Force would also be responsible for two Foley Sponsors
important semi-annual assessments that would serve in part to
determine a reinsurer’s rating. First, the Task Force would be Conference on
responsible for publishing a list of those countries and states that
they view as adequately regulating domestic reinsurers. Reinsurers
domiciled in those jurisdictions identified as adequately regulating Patents for the
reinsurers could potentially receive a higher rating than a similarly Financial Services
situated reinsurer domiciled in a jurisdiction that does not make the
list. Second, the Task Force would publish a list of those reinsurers Industry
who, in its judgment, fail to engage in the prompt settlement of
undisputed reinsurance claims. Reinsurers appearing on this By David G. Luettgen
“slow-pay” list would automatically drop one rating category. For the third year in a row, Foley was the leading sponsor of the
A reinsurer’s rating would be determined based on its Standard & annual conference on Patenting Business Methods in the Financial
Poor’s rating or an equivalent rating from another nationally Services Industry, which was held July 25-27 in New York City.
recognized rating organization. This rating would then be subject The conference this year explored what leading companies in the
to adjustment depending on whether a reinsurer appears on the financial services industry are doing to build their defensive patent
“slow-pay” list or is domiciled in a recognized regulatory jurisdiction. portfolios, protect their business method processes, gain freedom
The proposal calls for the new collateral requirements to be to operate and, ultimately, develop a competitive edge. It also
imposed on a prospective basis (i.e., only to reinsurance contracts explored the steps a few innovative companies have taken to
that incept after the rules become effective). The proposal also monetize and leverage their IP assets. The conference featured
addresses the consequences of a change in or revocation of a speakers from insurance companies, including Swiss Re and
reinsurer’s rating after a reinsurance agreement goes into effect. Nationwide Mutual Insurance Company, as well as speakers from
other financial services companies such as American Express,
Industry Reaction to Collateral Proposal Citigroup Global Investment Bank, Goldman Sachs & Co., Fannie
The collateral proposal has received strong, mixed reactions within Mae and Lehman Brothers.
the insurance industry. Proponents of the proposed collateral
Insurance Companies have been increasingly active in building
requirements assert that the new rules will eliminate unnecessary
their intellectual property portfolios. Currently, there are about 270
costs and disincentives for non-domestic reinsurers to write U.S.
issued patents which the U.S. Patent Office classifies as insurance
business by eliminating collateral requirements where they are not
patents. This number is up dramatically from ten years ago, when
reasonably required. They also claim that the new rules are
there were fewer than 50 such patents. All signs are that this trend
necessary to ensure that U.S. credit-for-reinsurance requirements
is likely to continue. There are currently about 735 published patent
are consistent with developments in international reinsurance
applications relating to insurance, and an unknown additional number
standards. Not surprisingly, most non-U.S. reinsurers favor the
of unpublished patent applications. Because publication is optional,
proposed ratings approach, which they view as leveling the playing
the total number of pending patent applications related to insurance
field with their U.S. competitors.
is unknown. It is estimated, however, that the number of pending
Most insurers and reinsurers based in the U.S., on the other hand, insurance-related patent applications is between 3,000 and 5,000.
have opposed the proposed rules. Some claim the collateral It can take several years or more for a patent application to wend its
proposal would undermine the financial security of U.S. ceding way through the process at the Patent Office and issue as a patent.
companies and diminish the incentive of non-U.S. reinsurers to
As the number of insurance patents grows, so too does the amount
become licensed in the U.S. Others assert that the new collateral
of patent litigation over insurance patents. Earlier this month,
requirements would put U.S. reinsurers at a disadvantage because
Transamerica Life Insurance Company and Lincoln National Life
they would be required to comply with the collateral obligations at
Insurance Company became embroiled in patent litigation over U.S.
the same time they are subject to U.S. licensing requirements.
Pat. No. 7,089,201. The patent, which issued to Lincoln National on
Opponents favor maintaining the current collateral requirements or
August 8, relates to a method of administering an annuity product.
exploring different alternatives.
Insurance companies also need to be careful to avoid overstepping
At this time, the new collateral requirements remain in the proposal
other types of intellectual property. In 2002, Hartford Insurance
stage. The NAIC’s leadership, however, has requested that a formal
settled a trade secret claim with Bancorp Services for $118 million.
proposal be presented to the membership by the winter quarterly
meeting. Given the strong opinions voiced on both sides of this Foley’s intellectual property department has been a long-term player
issue, the collateral proposal is certain to be the subject of lively in advising companies on business method patents and other
discussion at the NAIC Fall Meeting. intellectual property issues that are of major concern to insurance
companies. Foley drafted the brief for the software industry in the
seminal State Street Bank case in 1998. The judicial stamp of
FOCUS on the Insurance Industry Fall 2006 4
approval given to business method patents in State Street Bank is document, or paper which may be deemed material as evidence
widely seen as triggering the current flood of business method in the case.”5 Courts are split on the meaning of this provision.
patent filings by insurance companies and others. Some hold that it authorizes arbitrators to order discovery from
third parties.6 Others have ruled that it affords no pre-hearing
discovery from third parties.7 A number of courts have staked out
interpretations between the two extremes.8
NAIC Amends If an intermediary refuses to cooperate and cannot be
Reinsurance compelled to participate in pre-hearing discovery, the result
can be a lack of proof to establish or rebut, among other
Intermediary elements, a misrepresentation at placement, an interpretation
Model Act to of a critical contract provision, or a definition of a key term.
Several solutions have been suggested to deal with the problem
Require of the non-compliant reinsurance intermediary. These include
Compliance With amending the FAA,9 seeking to compel intermediaries to
participate in discovery based upon an argument that they
Discovery Orders are third-party beneficiaries of the reinsurance contract,10 and
requiring intermediaries to sign on as a party to the contract.11
By Eric L. Maassen and These proposed solutions today remain largely untested.
Linda M. Annoye The NAIC recently implemented its own solution by adding the
The National Association of Insurance following provision to the Model Act:12
Commissioners (NAIC) in June Section 11: Compliance with Orders
adopted an amendment to the
A. A RB or RM shall comply with any order of a court of
Reinsurance Intermediary Model Act
competent jurisdiction or a duly constituted arbitration
(the Model Act) that would require
panel requiring the production of non-privileged documents
intermediaries to participate in pre-
by the RB or RM, or the testimony of an employee or other
hearing discovery if ordered to do so.1
individual otherwise under the control of the RB or RM with
If adopted in several key states, the
respect to any reinsurance transaction for which it acted as
amendment could serve as a tool for gaining access to crucial
a RB or RM.
evidence in reinsurance arbitrations.
B. Compliance shall be subject to the right of the RB or RM,
Intermediaries are instrumental participants in many reinsurance
and the parties to the reinsurance transaction, to object
transactions and relationships. A reinsurance broker (RB), among
to the court or arbitration panel concerning the nature or
other functions, typically sets up a reinsurance program and
scope of the documents or testimony or the time within
then solicits, negotiates, and places the reinsurance cessions or
which it must comply with the order. Failure to comply with
retrocessions.2 Reinsurance managers (RM), for their part, generally
the order shall be deemed to be a material non-compliance
have authority to bind and manage the reinsurer’s assumed
with this Act. However, in no event shall this section be
reinsurance business.3 Intermediaries also frequently serve premium
construed to require more than one appearance by the
and claims processing and reporting functions. Intermediaries thus
same witness in a single action or arbitration.
are often important witnesses in reinsurance dispute proceedings,
particularly in cases where a reinsurer seeks to rescind a contract Section 11 concededly is a mere model act; as such, it has no
of reinsurance based on some alleged misrepresentation by the independent force or effect. But most states have laws similar to
ceding company through its broker. Intermediaries also frequently the Model Act which govern the licensure and discipline of
maintain documentary evidence of pre-contractual representations intermediaries.13 Although no state has yet adopted the new
and understandings and contractual documentation. Section 11, insurance consultant, arbitrator and mediator Robert
Hall, who participated in the negotiations that led to Section 11,
Recent anecdotal evidence suggests that intermediaries are, with
notes in a recent report on the amendment of the Model Act,
increasing frequency, refusing to comply voluntarily with requests
“several prominent states have indicated an interest in adopting the
for documents and testimony in reinsurance disputes.4 The refusal
amendments …”14 If Section 11 becomes law in a few key states,
of intermediaries to participate voluntarily is chiefly a problem in
it could go a long way toward solving the current rash of problems
private arbitrations. Whereas courts have broad powers to require
caused by uncooperative intermediaries.
third parties to give evidence pursuant to subpoena, arbitration
panels have only limited subpoena powers. Under the Federal
Arbitration Act (FAA), “[t]he arbitrators … may summon in writing 1
Robert M. Hall, Discovery from Intermediaries: Interim Report on Developments in
any person to attend before them or any of them as a witness and Regulation and Case Law, ARIAS U.S., Second Quarter 2006, at 3;
in a proper case to bring with him or them any book, record, http://www.naic.org/committees_models.htm.
Reinsurance Intermediary Model Act § 790-1(2)(F) (NAIC 2004).
FOCUS on the Insurance Industry Fall 2006 5
Reinsurance Intermediary Model Act § 790-1(2)(G) (NAIC 2004). property risks.
Hall, supra note 1, at 2; Michele L. Jacobson, Robert Lewin, Royce F. Cohen & Andrew S.
Lewner, Commentary, Obtaining Discovery From Reinsurance Intermediaries and Other
For individual risks, the “initial” policy limits will be $1 million or
Non-Parties – Updated Case Law and Commentary, Mealey’s Litigation Report: less, with a 5% deductible. The Board of Governors may, subject
Reinsurance, Nov. 17, 2005, at 1. to the approval of the Office of Insurance Regulation (OIR), amend
9 U.S.C. § 7. its plan of operation to change the limits or deductibles.
See, e.g., In re Sec. Life Ins. Co. of Am., 228 F.3d 865, 870-71 (8th Cir. 2000) (holding
The rule creating the PCJUA does not elaborate on how
that arbitration panel had the power to order non-party to produce documents prior to the
hearing); Am. Fed’n of Television & Radio Artists, AFL-CIO v. WJBK-TV (New World
reinsurance might be structured. Early drafts of the rule allowed
Commc’ns of Detroit, Inc.), 164 F.3d 1004, 1009 (6th Cir. 1999) (stating that FAA’s
only for excess-of-loss reinsurance contracts. The more general
provision authorizing an arbitrator to compel production of documents from third parties language in the rule as adopted may indicate an intent to offer
for an arbitration hearing has been held to implicitly include the authority to compel other kinds of reinsurance, such as quota share arrangements.
production of documents prior to the hearing).
While there is express statutory authority for direct insurance, the
See, e.g., Hay Group, Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404, 406-11 (3d Cir.
statute authorizing creation of the PCJUA does not explicitly either
2004) (holding that the FAA does not authorize an arbitration panel to issue pre-hearing
discovery subpoena to a non-party).
authorize or prohibit the writing of reinsurance. The Reinsurance
See, e.g., COMSAT Corp. v. Nat’l Sci. Found., 190 F.3d 269, 275-76, 278 (4th Cir. 1999)
Association of America has stated that, in its view, the PCJUA has
(holding that the FAA does not authorize an arbitrator to subpoena third parties during pre- no statutory authority to write reinsurance and that it would also
hearing discovery, absent a showing of special need or hardship); Integrity Ins. Co., in have no authority to provide excess coverage on an individual
Liquidation, v. Am. Centennial Ins. Co., 885 F. Supp. 69, 73 (S.D.N.Y. 1995) (allowing pre- basis if the excess coverage is provided in a manner that
hearing document production but not depositions). constitutes a form of reinsurance.4
Robert M. Hall, Intermediaries and Discovery in Reinsurance Arbitrations, Mealey’s
Litigation Report: Reinsurance, Dec. 2, 2002; Jacobson et al., supra note 4, at 12.
Jacobson et al., supra note 4, at 10-11. A risk is eligible for PCJUA coverage only if the applicant has been
unable to obtain an adequate level of coverage after a diligent
Id. at 12-13; Hall, supra note 9.
Reinsurance Intermediary Model Act § 790 (NAIC, Draft Dec. 3, 2005); Hall, supra note 1,
search, including good faith applications to at least three admitted
insurers and one surplus lines insurer and a search through the
Hall, supra note 1, at 2.
Florida Market Assistance Plan. An applicant will not be disqualified
Id. at 3.
for PCJUA coverage, however, by any offer of coverage for a
premium cost higher than a specified level. For an offer from an
admitted insurer, the level is the insurer’s filed rate or the PCJUA
premium, whichever is greater, and, for a surplus lines insurer, the
Florida Creates level is 125% of the PCJUA premium.
Joint Underwriting The emergency rule offers no guidance on eligibility for excess
Association for coverage or reinsurance.
Commercial Rates, Forms, and Underwriting Rules
The rates may be used only after they are approved by OIR.
Property Insurance PCJUA rates must be actuarially sound and otherwise in
compliance with the Rating Law. There is no requirement,
By Leonard Schulte
however, either in the PCJUA statute or in the rule, that prevents
In recent months, many Florida businesses have been unable PCJUA rates from being competitive with the voluntary market.
to obtain property insurance coverage or have been able to There is no indication in the rule of what means the PCJUA will
obtain coverage only with lower limits, increased deductibles use to price reinsurance coverage, nor is there any established
or significantly higher premiums.1 On August 15, 2006, the methodology under which OIR will review reinsurance rates.
Florida Governor and Cabinet, sitting as the Financial Services
The PCJUA must file forms and underwriting rules, which are
Commission, responded by creating a residual market entity for
subject to prior approval by OIR.
commercial property insurance, the Property and Casualty Joint
Underwriting Association (PCJUA).2 Assessments
The PCJUA will operate under a 13-member Board of Governors All insurers writing commercial property coverage will be subject to
appointed by the State Chief Financial Officer, including four assessments to fund PCJUA deficits in proportion to their market
members representing insurance trade associations and two shares. Assessments are levied by OIR upon a request from the
members representing insurance agents. PCJUA. Premiums for residential coverage and liability coverage
will not be included in the assessment base.
The aggregate amount of an assessment with respect to a
The PCJUA will write commercial property insurance covering
particular year’s deficit may not exceed 10% of that year’s
non-residential risks.3 The coverage may include direct insurance,
aggregate voluntary market net direct premium for commercial
excess coverage for individual risks, or reinsurance for commercial
FOCUS on the Insurance Industry Fall 2006 6
property insurance. If the 10% assessment is not sufficient to cover
the deficit, the PCJUA may issue bonds backed by further annual
assessments until the bonds are retired. The aggregate amount of Regulation: A
these further assessments is capped at 10% of the prior year’s
aggregate voluntary market net direct premium for commercial
Bird’s Eye View of
property insurance or 10% of the deficit, whichever is greater. the Battle
The rule also gives the PCJUA the authority to request
assessments to fund its start-up. No caps are specified for
By Ethan D. Lenz and
the startup assessments. Joseph J. Lotus
An insurer subject to assessment may recoup assessments from The current state-based insurance
its policyholders under Florida Statutes Section 627.3512. That regulatory system is being challenged
provision authorizes an insurer to apply a uniform percentage factor by the National Insurance Act of
to the premiums of all of its policyholders for the lines of business 2006 (NIA), which, if passed, would
subject to assessment. The insurer then must make a recoupment create a uniform federal system of
filing with OIR at least 15 days prior to applying the recoupment regulation for insurers and insurance
factor. OIR’s review of the recoupment filing is limited to verification producers. The NIA attempts to
of the insurer’s arithmetic calculations. address the claims of some life
Startup insurers and some property and
casualty insurers that the current
The Governor and Cabinet, in discussions of the PCJUA, have
state-based insurance regulatory
instructed OIR to make every effort to have the facility in place as
framework is inefficient, stifles the
soon as possible. The first policies could be issued as early as
development of new and creative products and imposes
unnecessary compliance costs on state-licensed insurers and
The emergency rule creating the PCJUA remains in effect for only insurance producers.
90 days. The preamble to the rule, however, indicates an intention
The NIA would establish an “optional federal charter” so that
to replace the emergency rule with a rule adopted through the
insurers and insurance producers could choose to operate
regular rulemaking process.
nationwide under a single federal regulator rather than under the
current state-based system. The NIA would create a central Office
An unscientific Internet survey conducted by the Florida Office of Insurance Regulation of National Insurance within the Department of the Treasury. The
found that, of 1501 respondents, 17% were unable to find any coverage, 15% found only Office of National Insurance would be headed by a National
some of the coverage they needed, 10% found coverage with higher deductibles, and 39% Commissioner, appointed by the President, who would be
found coverage with premiums that seemed unreasonable. The survey results are available responsible for issuing regulations and for overseeing the
online at http://www.floir.com/pdf/CommercialPropertySurvey.pdf.
operation of the newly created federal regulatory system.
The PCJUA was established by Emergency Rule 69OER06-03, available online at
http://www.floir.com/pdf/ER-69OER06-3.pdf, under the authority of Florida Statutes The NIA would allow insurers and insurance agencies to be
Section 627.351(5). organized under federal law and would permit existing insurers
Commercial residential coverage is currently provided by another residual market entity, and agencies to replace their state charters and licenses with
Citizens Property Insurance Corp., under Florida Statutes Section 627.351(6). federal charters. The NIA would regulate and license these insurers
Letter from Marsha A. Cohen and Dennis C. Burke, RAA, to Kevin McCarty, Insurance (National Insurers) and agencies (National Agencies) as well as
Commissioner, August 14, 2006.
other individual producers that qualify and elect to do business
under federal law. (The NIA refers to National Agencies and the
other qualifying producers collectively as National Producers.)
The Relationship Between Federal and State
Regulation Under the NIA
The federal regulatory system proposed by the NIA would not
replace the regulatory systems of the individual states. The states
would continue to regulate insurers and insurance producers that
retain state charters and licenses. Nonetheless, there is concern
within the insurance industry and among state regulators of the
industry that the NIA would undermine the state regulatory system
by granting the National Commissioner broad rulemaking power,
coupled with federal authority to preempt conflicting state law.
FOCUS on the Insurance Industry Fall 2006 7
National Insurers and National Producers would be regulated insurers and insurance producers, who currently compete with
exclusively under federal law. Critics of the NIA argue that, as banks and investment firms that now have lower compliance costs.
a result of federal preemption, states may be prevented from For these reasons, the life insurance industry has been the
regulating state-licensed producers in their dealings with National strongest supporter of the NIA.
Insurers, as well as state-chartered insurers in their dealings with Major opposition to the NIA comes from state insurance
National Producers. An example commonly used to illustrate regulators, state governments, and certain insurance industry
the issue is a state’s prohibition on the payment of contingent trade groups. Those opposed include the National Governors’
commissions by a state-licensed insurer. If the NIA were held to Association, the National Association of Insurance Commissioners
have broad preemptive effect, a state might be precluded from (NAIC), the National Conference of Insurance Legislators (NCOIL),
enforcing such a prohibition as it applies to business placed by the National Conference of State Legislators (NCSL), the
National Producers with state-licensed insurers. Independent Insurance Agents and Brokers of America, the
Some parts of the state regulatory system would continue to apply National Association of Mutual Insurance Companies (NAMIC), the
to National Insurers. For example, National Insurers would still have National Association of Professional Insurance Agents (PIA), the
to pay state premium taxes. They also would have to participate in National Association of Professional Surplus Lines Offices and the
residual market plans and state insurance guaranty associations, Property Casualty Insurers Association of America (PCI). Some
subject to restrictions. Furthermore, the NIA does not provide for opponents believe that passage of the NIA would eventually lead
a surplus lines marketplace, and that marketplace would continue to federal insurance regulation to the exclusion of any meaningful
to be governed by state law. role for the states.
The NIA versus the SMART Act Moreover, although the NIA establishes a Division of Consumer
The NIA differs substantially from the State Modernization and Protection within the Office of National Insurance, consumer
Regulatory Transparency Act (SMART Act). The SMART Act also groups have expressed concern that the NIA will weaken consumer
would involve the federal government in insurance regulation, but protection by reducing regulatory limitations on insurance rates,
on a more limited basis than the NIA. Representative Oxley (R-OH) forms, and market behavior, currently enforced by state regulatory
and Representative Baker (R-LA) released a draft of the SMART Act systems. The consumer groups also argue that the dual regulatory
in August 2004, but the draft has not yet been introduced as a bill. system will lead to policyholder confusion, market uncertainty and
unintended consequences that will hurt consumers and taxpayers.
The draft SMART ACT would require states to comply with uniform
standards and resolve disputes, speed up the process of getting Opponents of the NIA argue that state regulation is better tailored
new products to the market and move toward a system of market- to the needs of many insurance consumers. They say that
based rates without creating a federal regulator to monitor many insurance products, such as auto, farm and homeowners’
compliance. The SMART Act would establish a seven-member insurance, are tailored to specific state and regional needs that do
panel consisting of insurance commissioners and appointees not relate to interstate activities. These opponents believe that state
from several federal agencies, including the Securities and regulators have a better understanding of the local insurance
Exchange Commission. The panel would have no regulatory markets and, if regulatory changes are needed for these specific
authority per se, but it would assess compliance with the statute markets, state regulators are more likely to act quickly and produce
and mediate and resolve conflicts over uniformity requirements. better results in response to local insurance market needs.
The SMART Act would also require states to adopt flex rating, Finally, opponents of the NIA have argued that the legislation
which allows insurers to raise rates as long as they are kept would leave many of the details of the new federal regulatory
within a certain percentage range for the year. It would call for scheme, such as procedures for policy approval by the National
states to develop and implement procedures on market conduct Commissioner, open to future regulation and rule-making by the
and standards. With regard to licensing, the SMART Act would National Commissioner. This broad delegation of regulatory power,
require states to adopt a “single point-of-entry” system, whereby vested in the new position of a National Commissioner, could leave
an insurance company in good standing in one state could submit the insurance industry susceptible to political shifts and create
a uniform application to do business in other states. uncertainty in the industry.
The Battlefield: Who’s For the NIA and Who’s Against It Current Status of the NIA
Those supporting adoption of the NIA include the American Council Senators John Sununu (R-NH) and Tim Johnson (D-SD) introduced
of Life Insurers (ACLI), the American Insurance Association (AIA), the the NIA into the US Congress on April 4, 2006. Adverse reactions,
Council of Insurance Agents and Brokers, the American Bankers however, have slowed its passage. The legislation is currently in
Insurance Association (ABIA) and the Financial Services Roundtable. the Senate Committee on Banking, Housing, and Urban Affairs
Supporters argue that the legislation will create a more efficient without a scheduled vote or hearing and without additional
regulatory system and encourage new and creative products. They sponsorship in the Senate.
also argue that it will lower compliance costs for state-licensed
FOCUS on the Insurance Industry Fall 2006 8
LEGEND Insolvency/Guranty Fund = IG Public Affairs = PA Risk Management/
Intellectual Property = IP Regulatory = RG Captives = RM
Agency/Distribution = AD
Litigation = LT Reinsurance/Commutation/ Tax = TX
Runoff = RE
Announcements Variable Insurance = FP M&A/Transactional = MA
Successes Annoye, Linda M. Harrell, Michael P. Luettgen, David G. Reuter, Bartholomew F.
Partner Wm. Carlisle Herbert wrote the article, “Keeping the Equity in ERISA: Limiting Associate, RE Public Affairs Director, PA Partner, IP Senior Counsel, LT/RE
Judicial Relief to What is ‘Appropriate’,” published in the June issue of the University of 414.319.7301 850.513.3379 414.297.5769 414.297.5826
Hanover’s Journal of Academic Legal Studies. firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com
Insurance Industry Team members Lisa S. Neubauer, Anne E. Ross, and Michael B. Aprahamian, Michael J. Heffernan, Michael S. Maassen, Eric L. Ridley, Eileen R.
Van Sicklen were named 2006 Wisconsin Super Lawyers. Attorneys Paul S. Hunter, Partner, LT Special Counsel, RE Partner, LT/RE Partner, IP/LT/RE/RM
Ethan D. Lenz, Brett H. Ludwig, and Bartholomew F. Reuter were deemed 2006 414.297.5516 608.258.4298 414.297.5585 415.438.6469
Wisconsin Risings Stars. In Illinois, the 2006 Super Lawyers named from the team were firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com
Richard Bromley and Wm. Carlisle Herbert.
Bishop, Martin J. Herbert, W. Carlisle Mahe, Henry E. Riley, Leigh C.
Foley has been named to the 2006 BTI “Power Elite” list, a ranking of the top 21 law firms Senior Counsel, IP/LT/RE Partner, IG/LT/RE Strategic Counselor, PA Partner, RG
with the strongest market positions based upon the quality of their client relationships. 312.832.5154 312.832.4551 202.295.4106 414.297.5846
Foley ranks fifth, which represents the firm’s highest ranking in the survey and an firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com
improvement of three positions from BTI’s 2005 list. Foley also is one of only 14 law firms
nationwide to appear on the list in consecutive years. Bolden, Kenyatta Hosay, Robert H. Maida, Thomas J. Ross, Anne E.
Associate, MA/RG Special Counsel, PA Partner, MA/PA/RG/RE Partner, MA/RG
In addition, Foley has been named to the 2006 BTI Market Movers list, a ranking of law 414.297.5541 850.513.3382 850.513.3377 608.258.4218
firms identified by corporate counsel as leaders implementing a strategic approach to firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com
delivering legal services. Foley is recognized as one of four Market Trailblazers, along with
DLA Piper, Jones Day and Skadden, identified by corporate counsel for their unique ability Branch, Joseph C. Hrdlick, Thomas R. Martire, Mary Kay Schroeder, Jennifer K.
to leverage client-focused strategies with bold approaches to the market. Partner, MA/RG/RE Partner, IG/MA/RG/RE Partner, IG/LT Associate, AD/MA/RG/RE/RM
414.297.5837 414.297.5812 312.832.4560 414.297.5647
Upcoming Presentations firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com
On September 9, 2006, Foley will be organizing the International Association of Insurance
Bromley, Richard Hunter, Paul S. Monsees, Paul R. Schulte, Leonard
Receivers (IAIR) Roundtable in St. Louis. Partner Richard Bromley will serve as the host.
Partner, IG/TX Senior Counsel, IP Partner, RE Public Affairs Advisor, PA
Partner John N. Gavin will discuss the Insurer Receivership Model Act (IRMA) and issues 312.832.4517 608.258.4292 202.672.5342 850.513.3380
relating to fraudulent conveyance and voidable preference. Senior Counsel Brian Kaas will firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com
present on IRMA and reinsurance, while Partners Mary Kay Martire and Wm. Carlisle
Herbert will moderate on panels during the roundtable. Chester, Maksim Kaas, Brian S. Morgan, Belinda S. Soble, Jeff
Associate, RE Senior Counsel, MA/RG/RE/RM Associate, IG/TX Partner, LT
Partner Richard Bromley is scheduled to speak on a federal income tax panel on the topic
414.297.5573 414.297.5847 312.832.4562 312.832.5170
of loss reserves a seminar hosted by the Casualty Actuarial Society on September 12, firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com
2006 in Atlanta, GA.
On October 17, 2006, Partner Tracy D. Williams will give a tax update at the Illinois CPA Christie, R. Lee Kanwit, Glen H. Moser, Gregory V. Strickland, Nate Wesley
Partner, IG/RM/TX Partner, RE Partner, RM Senior Counsel, MA/RG
Society Insurance Seminar.
312.832.4525 312.832.4380 619.685.6426 850.513.3369
Partner R. Lee Christie will be speaking at the Insurance Tax Conference (to be held firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com
November 2 – 3, 2006, in Chicago) on the topic “Risk Transfer and the Emerging Definitions
of Insurance.” Richard Bromley, partner, will chair a panel on developments with respect to Davenport III, Gordon Keller, George Neal, Austin B. Van Sicklen, Michael B.
the FASB proposal regarding bifurcation of insurance contacts, finite risk reinsurance and Partner, AD/LT Partner, LT Partner, MA/RG Partner, RE
608.258.4208 415.438.6415 850.513.3363 608.258.4206
captive insurance. In addition, Partner Tracy D. Williams will be presenting “IRS Audit,
firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com
Appeals & Litigation — Current Issues.”
Partner Foley Partner Tracy D. Williams will speak on “Constitutional Issues in State Tax Fitzgerald, Kevin G. Kuhlmann, Patrick M. Neubauer, Lisa S. Wang, Peter N.
Litigation.” Partner, AD/MA/RG/RE/RM Associate, RE Partner, LT Partner, LT
414.297.5841 414.297.5614 414.297.5507 212.682.7474
Foley Partners Tracy D. Williams, R. Lee Christie and Richard Bromley also are firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com
presenting at the Blue Cross & Blue Shield Association conference on November 30, 2006.
Gavin, John N. Lee, Ladonna Y. Oberdeck, Andrew A. Williams, Tracy D.
Recent Speaking Engagements Partner, IG/MA/RG/RE/RM Strategic Counselor, PA Associate, AD/MA/RG/RE Partner, TX
Partner Gordon Davenport, III presented “Director & Officer Liability Update: Current 312.832.4544 202.295.4107 414.297.5598 312.832.4593
Liability Trends and D&O Insurance Strategies” at the August 16, 2006 InsideCounsel Web firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com
conference. Also, on May 17, 2006 in New York, Mr. Davenport presented “D&O
Insurance: Current Hot Button Issues” at the D&O Insurance ExecuSummit. Goodman, George R. Lenz, Ethan D. Ossyra, James D. Zinkgraf, Gary M.
Partner, IG/TX Partner, AD/MA/RG/RM Partner, LT/RE Partner, RE
Foley sponsored the “Patenting Business Methods in the Financial Services Industry” 312.832.4545 414.297.5835 312.832.4565 202.672.5303
conference from July 25 – 27, 2006 in New York City. Senior Counsel Paul S. Hunter firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com
spoke on improving patent prosecution.
Grane, Karen M. Leventhal, Robert C. Pasulka-Brown, Kathleen R.
Partners Kevin G. Fitzgerald and John N. Gavin spoke on state and federal regulation Special Counsel, RE Partner, RE Partner, LT
of managed care at the Friday Focus Web conference hosted by Foley on July 21, 2006. 202.672.5506 310.975.7734 312.832.5164
Recent Events firstname.lastname@example.org email@example.com firstname.lastname@example.org
Foley’s Jacksonville office and the Insurance Industry Team hosted a fundraising reception for Gustafson, Christine A. Lotus, Joseph J. Patel, Jamshed J.
Alex Sink, candidate for Chief Financial Officer for the State of Florida on August 22, 2006. Special Counsel, RM/TX Associate, PA Partner, RM/TX
Foley’s Insurance Industry Team also proudly sponsored the Property Casualty Insurers 312.832.4529 312.832.5171 414.297.5742
email@example.com firstname.lastname@example.org email@example.com
Association of America’s (PCI) Legislative Action Day in Washington, D.C. on June 22, 2006.
The one-day event provided insurance company executives with a forum to discuss important Hakim, Anat Ludwig, Brett H. Pontrelli, Michael R.
issues with their congressional representatives. Partner, IP Partner, RE Partner, LT/RE
On June 11, 2006, Foley’s Insurance Industry Team hosted a reception for attendees of the 202.295.4046 414.297.5524 617.342.4074
firstname.lastname@example.org email@example.com firstname.lastname@example.org
National Association of Insurance Commissioners (NAIC) Summer Meeting in Washington, D.C.