The global reinsurance landscape is an interconnected, intertwined marketplace that continues to grow and evolve. As insurance companies, agencies, program administrators and other industry actors continue to expand their creative horizons and develop innovative insurance products, the need for reinsurance coverage has accelerated as well. The evolution of sophisticated “insurtech” managing general agents requiring fronting insurance company relationships has also driven the demand for more creative, international reinsurance solutions.
Just as emerging insurance needs generate a robust agency market, so have reinsurance intermediaries flourished in facilitating reinsurance covers around the world. Yet, the reinsurance intermediary regulatory landscape is intricate and unique. It is a common misconception to assume that reinsurance intermediaries are less-regulated than their insurance agency counterparts simply due to the fact that clients are sophisticated insurance company actors. When entrepreneurs consider the acquisition or disposition of a reinsurance intermediary firm, or when reinsurance intermediary executives and compliance officers are tasked with evaluating the permissibility of its operations, it is imperative to have a thorough understanding of the legal landscape that reinsurance intermediaries must navigate. This article attempts to identify a few of the regulatory hurdles that reinsurance intermediaries must navigate to comply with U.S. law.
- Most states separately regulate reinsurance intermediary-brokers and reinsurance intermediary-managers.
Most state reinsurance intermediary licensing laws are modeled after the Reinsurance Intermediary Model Act (RIMA) as promulgated by the National Association of Insurance Commissioners.
Under the majority rule, a “reinsurance intermediary” is categorized as either a reinsurance intermediary-broker (RB) or a reinsurance intermediary-manager (RM). The difference between the two is which party the reinsurance intermediary is representing. If acting as a “broker” for the ceding company, the reinsurance intermediary is acting in a broker capacity. Whereas, when acting as “agent” for the reinsurer, reinsurance intermediaries are commonly referred to as managers.
Some states, such as New York, do not draw this distinction, but most states, as well as the RIMA, do. This distinction is important when contemplating an M&A transaction involving a reinsurance intermediary as the regulatory standards are quite different, as will be further discussed.
- Licensing standards are relaxed in some, but not all, states for reinsurance intermediary firms.
Under the RIMA, a reinsurance intermediary that is licensed as an RB or insurance broker in at least one state need not necessarily hold a non-resident RB license in most other states. Rather, under Section 3.A of the RIMA, an RB need only hold an RB or insurance producer license in a state if it maintains an office in the state. Otherwise, as long as it holds an insurance producer or RB license in another state with substantially similar laws, no additional reinsurance intermediary licensure is required.
However, not all states follow the RIMA’s standard. For example, New York requires a separate reinsurance intermediary license in the state to conduct any reinsurance intermediary business there (although New York provides an exemption for “licensed insurance agents acting within the scope of their agency authority in the placement or acceptance of reinsurance on risks produced or managed by such agents”, see N.Y. Ins. Law § 2101(f)(3)). Some states, like North Carolina, require an application for an exemption from RB licensing, which is nearly as rigorous as applying for an actual RB license itself. There are over a dozen U.S. jurisdictions that differ from the RIMA’s RB licensing standards in some respects.
RBs must also be aware of other licensing requirements. For example, if an RB also underwrites an amount of gross written premium equal to or more than five percent (5%) of the insurer’s policyholder surplus, it may need to obtain an “MGA” license or registration (in addition to an insurance producer license) in many states.
The licensing standards for RMs are similar to those applicable to RBs, but there are some instances where an RM is required to hold a reinsurance intermediary license when an RB is not. Under the RIMA, an RM or insurance producer license is required in the states where the RM maintains offices and, in addition, an RM or insurance producer license is also required when the RM is acting on behalf a reinsurer domiciled in a state. Again, like RBs, RMs are subject to non-resident RM licensing requirements in a minority of U.S. jurisdictions that differ from the RIMA.
- Individuals at reinsurance intermediary firms must be aware of their licensing and appointment obligations as well.
Fortunately, most U.S. jurisdictions do not require the licensing of individuals as reinsurance intermediaries if acting under the license of the entity in that state. Under Section 3.D of the RIMA, a reinsurance intermediary license issued to a firm “will authorize all the members of the firm or association and any designated employees to act as reinsurance intermediaries under the license, and all such persons shall be named in the application and any supplements thereto.” However, again, not all states follow the RIMA’s exemption from individual licensing. For example, Ohio’s reinsurance intermediary licensing laws do not contain such exemption (see Ohio Rev. Code Ann. § 3905.81).
A nuance that is often missed on the individual licensing front is that even the states that allow for individuals to act under a firm’s license do not expressly exempt individuals from licensing standards when they are acting under their firm’s license in a different jurisdiction. In other words, while the firm may be able to act as a reinsurance intermediary in a certain state by virtue of holding a reinsurance intermediary or insurance producer license in another state having substantially similar laws, the individual would also have to separately meet an exemption from reinsurance intermediary licensure and cannot necessarily “borrow” the exemption from his or her firm.
In addition, some states require carrier appointments of reinsurance intermediaries. For example, in Florida, under Fla. Stat. § 626.7492, “[r]einsurance intermediaries shall be licensed, appointed, renewed, continued, reinstated, or terminated as prescribed [under Florida’s insurance laws].” (Emphasis added).
- What does it mean to “act” as a reinsurance intermediary?
In the insurance producer world, a state’s regulatory and licensing standards generally kick in when the insurance producer sells, solicits or negotiates insurance in the state. On one level, the rule is generally the same with respect to reinsurance intermediaries, where the cedent can be equated to the “insured” and the assuming reinsurer deemed to be the insurance company in the transaction. But, such view doesn’t capture the full picture. For example, RMs are required to be licensed in the state where its assuming reinsurer client is domiciled, even if all activities are conducted elsewhere; this is in contrast to traditional insurance agency licensing standards that focus primarily on the location of the insured rather than the issuing carrier.
Generally, states will not attempt to exercise jurisdiction over a reinsurance intermediary simply because a portion of the reinsured risk portfolio resides in a particular state. However, with respect to RBs, some states will require an RB to hold an RB or insurance producer license (or utilize or apply for an exemption therefrom) and will otherwise apply their RB laws when the ceding company is a “foreign” insurer that is only licensed rather than domiciled in the state. For example, in Alaska, under Alaska Stat. § 21.27.690, “[a]n insurer may use a nonresident [RB] who is not licensed [in Alaska] if the [RB] has filed a certification with the director that the [RB] is operating only for a foreign insurer and the person is licensed in good standing as a resident [RB] by an insurance regulator of another state that is accredited by the National Association of Insurance Commissioners.” (Emphasis added). By contrast, in New York, under OGC opinion No. 10-01-06 (January 19, 2010), “[t]he fact that the ceding insurer is authorized to do business in [New York] has no bearing on whether the [RB] must be licensed here.”
One practical implication of the foregoing is that, even if a state does not affirmatively require the RB or RM to obtain a license, such state may nonetheless require certain additional clauses be inserted into the applicable RB or RM agreement with its ceding company or assuming reinsurer client (as further discussed below) or otherwise assert its rights to inspect the records of the RB or RM.
- Reinsurance intermediary-broker agreements are highly regulated and must contain certain provisions.
Insurance producers generally have wide discretion regarding how they structure their agreements with clients or carriers (assuming they do not trip the legal definition of “managing general agent” which can impose additional contractual obligations). Reinsurance intermediaries, by contrast, must insert very specific provisions into their agreements with their ceding company clients (commonly referred to as “brokerage authorization agreements” or “BAAs”).
Under the Section 5 of the RIMA, all arrangements between an RB and its ceding company client must be in writing and must contain certain provisions, including (i) allowing the insurer to terminate at any time, (ii) requiring the RB to render certain accounts to the insurer detailing transactions effectuated under the agreement and to remit funds to the insurer within 30 days of receipt, (iii) stipulating that funds will be held in a fiduciary capacity in the qualified U.S. financial institution, (iv) mandating that the RB will comply with the insurer’s reinsurance and retrocession underwriting guidelines, (v) indicating that the RB will disclose any relationship it has with any potential assuming reinsurer and (vi) requiring that the RB will comply with the books and records requirement as set forth under Section 5 of the RIMA.
Some states require additional clauses in the governing agreement between the RB and the insurer beyond what is required by the RIMA. For example, New York requires that the agreement provide specific authorization for the RB to place reinsurance and set forth certain underwriting standards in the agreement itself, see N.Y. Comp. Codes R. & Regs. tit. 11, § 32.1. Each state’s RB laws must be carefully analyzed to determine what must be inserted into the applicable RB agreement.
- Reinsurance intermediary-manager agreements cannot escape regulation either.
RMs are also subject to rigorous standards relating to their agreements with their assuming reinsurer clients. Under Section 7 of the RIMA, each agreement between an RM and a reinsurer must be approved by the reinsurer’s board of directors and filed with the commissioner of the applicable state for approval. The agreement must contain similar provisions applicable to RBs but also must contain additional provisions as provided under the RIMA or applicable law.
- Some states require that specific clauses relating to the reinsurance intermediary be contained in the reinsurance agreement.
Some states require express reference to the reinsurance intermediary in the reinsurance agreement between the carriers. In New York, N.Y. Comp. Codes R. & Regs. tit. 11, § 125.6 notes that “[w]here a ceding insurer obtains reinsurance through a ‘reinsurance intermediary,’ … from an assuming insurer which is neither licensed in this State nor has placed funds with the ceding insurer … the ceding insurer shall not be allowed credit unless … the reinsurance agreement includes a provision whereby the reinsurer assumes all credit risks of the intermediary related to payments to the intermediary.”
- The books and records requirements applicable to reinsurance intermediaries are robust.
As noted above, one of the requirements for RB and RM agreements is that they set forth how the RB or RM, as applicable, will handle their books and records. Under the RIMA, such standards are comprehensive and, in comparison to analogous laws applicable to insurance producers, are often more robust. In particular, under Section 5 of the RIMA, RBs must, for at least 10 years after the expiration of a reinsurance treaty, keep a complete record of the transaction showing, among other things, the type of contract and parties (including addresses), limits, underwriting restrictions, classes or risk and territory, applicable period, effective and expiration dates, cancellation provisions, balance and premium reporting, commissions, proof of placement, certain correspondences and memoranda, retrocession details, certain financial records, and written evidence in certain cases that the assuming reinsurer has agreed to take on risk. Similar requirements apply to RMs under Section 7 of the RIMA.
Again, certain states differ from the RIMA as to their books and records requirements. Some states require that reinsurance intermediaries abide by the books and records requirements but do not affirmatively require that such provisions be inserted into the applicable agreement. A few other states differ from the RIMA books and records requirements in substance; for example, in Oregon, an RB need only keep books and records related to first party property reinsurance coverages for five years, see Or. Rev. Stat. § 744.806.
- Reinsurance intermediaries must be aware of state-specific premium trust requirements as well.
The RIMA requires that funds collected by an RB or an RM be held in a fiduciary capacity in a bank that is a qualified U.S. financial institution, which effectively requires reinsurance intermediaries to establish premium trust accounts. Reinsurance intermediaries must therefore pay careful attention to state-specific laws applicable to premium trust accounts generally, such as whether general operating funds may be co-mingled with fiduciary funds, if the premium trust accounts are subject to any naming or labeling requirements, whether such accounts must be set up with a bank physically located in a particular state, and whether multiple accounts must be established dependent upon the location of the reinsurance intermediary’s client or where business is generated.
- Anti-inducement laws, in some instances, apply to reinsurance intermediaries as well.
Like insurance producers, reinsurance intermediaries are often paid a form of commission as well (commonly referred to as “brokerage”). In addition, RBs often enter into separate revenue-sharing agreements under “brokerage services agreements” or “BSAs”. This can present an issue in some states under anti-inducement laws that traditionally prohibit insurance brokers from sharing commissions with their customers unless expressly stipulated in the insurance policy. Fortunately, some states have expressly contemplated this issue and have exempted reinsurance intermediaries from such inducement prohibitions. For example, in New York, N.Y. Ins. Law § 2324(e) states that the inducement prohibitions “shall not apply to any policy or contract of reinsurance ….” Many states remain silent on this issue, but some states have promulgated guidance expressly extending their anti-inducement laws to reinsurance transactions in some instances.
These are just a few of the regulatory issues that face reinsurance intermediaries across the United States. As the global reinsurance market becomes further interconnected we expect to see insurance departments increase their focus on the reinsurance intermediary space.
This article was first published on November 15, 2021. Copyright Insurance Journal 2021.