New Hampshire Reinsurance Exam

The New Hampshire Insurance Department plays a crucial role in overseeing reinsurance agreements to protect the solvency of domestic insurers and safeguard policyholder interests. The Department’s authority stems from New Hampshire Revised Statutes Annotated (RSA) 402-C, which governs reinsurance transactions. The Department has the power to review and approve or disapprove reinsurance agreements based on several factors, including the financial stability of the reinsurer, the terms of the agreement, and the potential impact on the ceding insurer’s financial condition. Specifically, the Department assesses whether the reinsurance agreement adequately transfers risk, provides sufficient collateral if necessary, and complies with all applicable statutory and regulatory requirements. Disapproval can occur if the agreement is deemed detrimental to the ceding insurer’s solvency or unfairly prejudices policyholders. The Department also ensures compliance with accounting standards and reporting requirements related to reinsurance, as outlined in the New Hampshire Administrative Rules, Ins 300.

In New Hampshire, a ceding insurer can take credit for reinsurance on its financial statements under specific conditions outlined in RSA 402-C. For authorized reinsurers (those licensed or accredited in New Hampshire), credit is generally allowed without additional security. However, for unauthorized reinsurers, the ceding insurer must secure the reinsurance obligation through one of several permissible methods. These methods include: (1) assets held in the United States under a trust agreement for the benefit of U.S. ceding insurers, (2) a clean and irrevocable letter of credit issued by a qualified U.S. financial institution, (3) collateral held in the form of cash, securities, or other assets deemed acceptable by the Insurance Commissioner, or (4) the assuming insurer maintains a specified level of capital and surplus and is subject to regulatory oversight deemed adequate by the Commissioner. The specific requirements for these forms of security are detailed in Ins 305.03 of the New Hampshire Administrative Rules, which specifies the types of assets, valuation methods, and reporting requirements necessary to ensure the security is sufficient to cover the reinsurance obligation.

The Reinsurance Intermediary Act (RSA 402-D) in New Hampshire aims to regulate reinsurance intermediaries to ensure their competence, integrity, and financial responsibility, thereby protecting insurers and policyholders. The Act requires all reinsurance intermediaries to be licensed by the New Hampshire Insurance Department. Licensing requirements include demonstrating competence, passing an examination, and maintaining adequate errors and omissions insurance. The Act distinguishes between reinsurance intermediary brokers (RIBs), who solicit, negotiate, or place reinsurance on behalf of ceding insurers, and reinsurance intermediary managers (RIMs), who manage the reinsurance business of assuming insurers. Both RIBs and RIMs have specific responsibilities outlined in the Act. RIBs must act in a fiduciary capacity, maintain accurate records, and disclose all material information to the ceding insurer. RIMs must adhere to the assuming insurer’s underwriting guidelines, establish proper internal controls, and report regularly to the assuming insurer’s board of directors. Insurers using reinsurance intermediaries are responsible for ensuring that the intermediary is properly licensed and for exercising due diligence in selecting and monitoring the intermediary’s performance. Failure to comply with the Act can result in penalties, including fines, suspension or revocation of licenses, and legal action.

Under New Hampshire regulations, a reinsurance agreement is considered to have an improper risk transfer if it does not adequately shift the economic risk of loss from the ceding insurer to the reinsurer. This determination is based on a qualitative and quantitative assessment of the agreement’s terms and conditions. Qualitatively, the agreement must demonstrate a genuine transfer of underwriting risk, such as exposure to significant loss from insured events. Quantitatively, the agreement must demonstrate a reasonable expectation that the reinsurer will experience a significant loss under reasonably possible scenarios. Factors considered include the premium paid, the coverage provided, and the probability of loss. If the New Hampshire Insurance Department determines that a reinsurance agreement lacks adequate risk transfer, the ceding insurer may be prohibited from taking credit for the reinsurance on its financial statements. This can significantly impact the insurer’s reported solvency and capital adequacy. Additionally, the Department may require the insurer to restate its financial statements, increase its reserves, or take other corrective actions to address the deficiency. The Department’s authority to assess risk transfer is derived from RSA 402-C:10, which empowers the Commissioner to establish standards for determining the adequacy of risk transfer in reinsurance agreements.

An unauthorized reinsurer can become an accredited reinsurer in New Hampshire by meeting specific financial and regulatory requirements and completing the accreditation process outlined by the New Hampshire Insurance Department. To be eligible for accreditation, the reinsurer must demonstrate financial stability, competence, and integrity. This typically involves meeting minimum capital and surplus requirements, which are specified in Ins 305.02 of the New Hampshire Administrative Rules. The reinsurer must also submit an application to the Department, including detailed financial statements, information about its management and ownership, and a description of its reinsurance operations. The Department reviews the application to assess the reinsurer’s financial condition, business practices, and regulatory compliance. If the application is approved, the reinsurer is granted accredited status, allowing ceding insurers in New Hampshire to take credit for reinsurance ceded to the accredited reinsurer without requiring collateral. However, accredited reinsurers are subject to ongoing reporting obligations, including annual financial statement filings and periodic examinations by the Department. Failure to comply with these requirements can result in the suspension or revocation of accredited status.

The New Hampshire Insurance Commissioner has the authority to order a domestic insurer to cease ceding reinsurance to a particular reinsurer under specific circumstances, primarily when the Commissioner determines that the reinsurance arrangement poses a threat to the solvency or financial stability of the domestic insurer or is otherwise detrimental to the interests of policyholders. This authority is derived from RSA 402-C:11. Factors the Commissioner would consider in making such a determination include: (1) the financial condition of the reinsurer, including its capital adequacy, profitability, and liquidity; (2) the reinsurer’s regulatory history, including any instances of non-compliance or disciplinary actions; (3) the terms of the reinsurance agreement, including the amount of risk transferred, the premium paid, and the presence of any unusual or unfavorable provisions; (4) the impact of the reinsurance arrangement on the domestic insurer’s financial condition, including its surplus, reserves, and risk-based capital; and (5) any other relevant factors that could affect the domestic insurer’s ability to meet its obligations to policyholders. The Commissioner would typically conduct a thorough investigation, including a review of financial statements, reinsurance agreements, and other relevant documents, before issuing such an order. The domestic insurer would have the right to appeal the Commissioner’s decision through administrative and judicial channels.

The “follow the fortunes” doctrine, prevalent in reinsurance agreements, generally obligates a reinsurer to indemnify the reinsured for payments made in good faith, provided the payments are reasonably within the terms of the original policy. In New Hampshire, while the doctrine is recognized, its application is not absolute. Ambiguities in the original policy are typically construed against the insurer (the reinsured). However, the reinsurer retains the right to challenge settlements if they were made in bad faith, were grossly negligent, or if the reinsured did not reasonably investigate the claim. The burden of proof lies with the reinsurer to demonstrate that the reinsured’s actions fell outside the bounds of good faith and reasonable judgment. New Hampshire courts consider factors such as the thoroughness of the reinsured’s investigation, the clarity of the original policy language, and industry custom and practice when evaluating such challenges. The reinsurer cannot simply disagree with the reinsured’s interpretation; they must prove a material breach of the reinsurance contract or a failure to act in a commercially reasonable manner. This is supported by general contract law principles and reinsurance case law precedents.

To obtain credit for reinsurance in New Hampshire, a domestic ceding insurer must comply with RSA 405:17-a. If the reinsurer is licensed in New Hampshire or is a reciprocal jurisdiction reinsurer, the ceding insurer receives credit automatically. However, if the reinsurer is unlicensed, the ceding insurer can only take credit for reinsurance if one of the following conditions is met: (1) the reinsurance is ceded to an assuming insurer meeting the requirements of RSA 405:17-a, II(a); (2) the reinsurance is secured by a trust fund meeting the requirements of RSA 405:17-a, II(b); (3) the reinsurance is secured by a clean and irrevocable letter of credit meeting the requirements of RSA 405:17-a, II(c); or (4) the reinsurance is ceded to an assuming insurer that maintains a surplus as regards policyholders in an amount not less than $250,000,000 and is licensed or accredited as a reinsurer in at least one state. For unlicensed reinsurers, collateral requirements typically involve establishing a trust fund or providing a letter of credit equal to the reinsurer’s liabilities attributable to reinsurance ceded by the New Hampshire insurer. The trust agreement must comply with specific requirements outlined in the statute, ensuring the funds are available to cover the reinsurer’s obligations.

The New Hampshire Insurance Guaranty Association Act (RSA 404-B) provides a mechanism for the payment of covered claims of insolvent insurers. In the context of reinsurance, the Act stipulates that reinsurance recoveries are an asset of the insolvent insurer’s estate and are to be used to pay covered claims. Solvent reinsurers remain obligated to fulfill their contractual obligations to the insolvent insurer, and any reinsurance proceeds received by the Guaranty Association are used to reduce its obligations to policyholders. The Act does not relieve reinsurers of their responsibilities. Reinsurers cannot use the insolvency of the primary insurer as a basis to avoid payment, provided the underlying claims are covered by the reinsurance agreement. The Guaranty Association steps into the shoes of the insolvent insurer to collect reinsurance proceeds, ensuring that these funds are available to protect policyholders. The Act aims to minimize disruption to policyholders and maintain the stability of the insurance market in the event of an insurer’s failure.

Conflicts of interest in reinsurance can arise in various scenarios, including fronting arrangements (where an insurer issues a policy on behalf of another entity, often a captive) and transactions involving captive insurers (insurers owned by the insured). New Hampshire regulations address these conflicts through several mechanisms. Firstly, related-party transactions, including reinsurance agreements between a ceding insurer and its affiliate, are subject to heightened scrutiny by the New Hampshire Insurance Department. These transactions must be fair and reasonable to the ceding insurer and not detrimental to policyholders. Secondly, regulations may limit the amount of credit a ceding insurer can take for reinsurance ceded to a captive insurer, particularly if the captive is not adequately capitalized or regulated. Thirdly, disclosure requirements mandate that insurers disclose any material conflicts of interest to the Insurance Department. The Department has the authority to disapprove transactions that are deemed to be unfair, unreasonable, or detrimental to the solvency of the ceding insurer or the interests of policyholders. These measures aim to ensure that reinsurance transactions are conducted at arm’s length and that the interests of policyholders are protected.

New Hampshire regulates reinsurance intermediaries through RSA 405:81-90. Reinsurance intermediaries are required to be licensed as insurance producers with a reinsurance intermediary authorization. They owe a duty of utmost good faith to both the ceding insurer and the reinsurer. This includes a duty to accurately represent the risks being reinsured, to disclose all material information, and to act in the best interests of their clients. Intermediaries must maintain adequate records of all transactions and are subject to examination by the New Hampshire Insurance Department. Potential liabilities for breaches of duty can include errors and omissions claims, breach of contract claims, and regulatory sanctions. If an intermediary fails to properly place reinsurance coverage, misrepresents the terms of the reinsurance agreement, or fails to disclose material information, they may be held liable for any resulting losses suffered by the ceding insurer or the reinsurer. The Insurance Department can also impose fines, suspend or revoke licenses, and take other disciplinary actions against intermediaries who violate the regulations.

“Ultimate net loss” (UNL) in a reinsurance contract refers to the total sum the ceding company ultimately pays in settlement of losses for which it is liable, after making deductions for all recoveries, salvages, and other reinsurance (excluding the specific reinsurance agreement in question). The definition of UNL is crucial and often subject to negotiation. Common disputes arise over the inclusion or exclusion of certain expenses, such as allocated loss adjustment expenses (ALAE) and unallocated loss adjustment expenses (ULAE). ALAE, which are directly attributable to specific claims (e.g., legal fees, expert witness fees), are often included in UNL, but the contract must clearly define what constitutes ALAE. ULAE, which are general expenses related to claims handling (e.g., salaries of claims adjusters), are often excluded unless the reinsurance agreement specifically provides for their inclusion. The interpretation of UNL is governed by the specific language of the reinsurance contract and applicable law. New Hampshire courts would likely apply general contract interpretation principles, giving effect to the parties’ intent as expressed in the contract language. Any ambiguities would be construed against the drafter. Clear and unambiguous definitions of UNL and its components are essential to avoid disputes.

Finite reinsurance, which transfers limited risk and often involves significant loss-sensitive features, is subject to scrutiny in New Hampshire due to its potential for misuse as a tool for regulatory capital arbitrage. Unlike traditional reinsurance, which provides significant risk transfer, finite reinsurance may primarily serve to smooth earnings or manage capital without genuinely transferring underwriting risk. New Hampshire regulators assess finite reinsurance agreements based on the level of risk transfer, using quantitative and qualitative criteria. Quantitative criteria involve analyzing the probability of loss to the reinsurer and the expected loss ratio. Qualitative criteria include evaluating the business purpose of the transaction, the degree of control retained by the ceding insurer, and the presence of features that limit the reinsurer’s potential losses. If a finite reinsurance agreement is deemed to lack sufficient risk transfer, the ceding insurer may not be allowed to take credit for reinsurance, and the transaction may be subject to further regulatory action. The Insurance Department is concerned that finite reinsurance can mask underlying financial weaknesses and create a false impression of solvency. Therefore, it closely monitors these transactions to ensure they are used appropriately and do not undermine the integrity of the insurance market.