OGC Opinion No. 06-01-05

The Office of General Counsel issued the following opinion on January 4, 2006, representing the position of the New York State Insurance Department.

Re: Reinsurance - Percentage of Risks Retained by Ceding Insurer

Question Presented:

Does New York Insurance Law or the regulations promulgated thereunder limit the percentage of risks that a ceding authorized property/casualty insurer may cede to an assuming insurer?

Conclusion:

See analysis below.

Facts:

The inquiry is general in nature.

Analysis:

N.Y. Ins. Law § 1308 addresses, among other things, how an insurer may cede its risks. In terms of property/casualty insurance, neither the Insurance Law nor its regulations contain an absolute limitation regarding the amount of risks that an authorized insurer may cede. However, N.Y. Ins. Law § 1308(e) (McKinney 2000) defines a type of reinsurance agreement that requires the Superintendent's prior approval. That section provides in pertinent part, as follows:

Section 1308(e) limits the amount of risks that a domestic insurer or alien branch may cede during any period of twelve consecutive months. That section provides that without the Superintendent's permission, reinsurance premiums paid may not exceed one-half of unearned premiums on the net amount of insurance in force at the beginning of the twelve month period. Pursuant to Section 1308(e)(2) the limitation does not apply to reinsurance made in the ordinary course of business reinsuring specified individual risks under reinsurance agreements relating to current business.

In addition to the limitation in Section 1308(e), except where the insurer participates in a reinsurance pooling agreement with affiliated insurers, reinsurance agreements whereby authorized insurers accept and underwrite insurance business in New York and then cede all or a substantial amount of such business to assuming insurers, are of particular concern to the Department. The result of such cessions is that the ceding insurers who initially underwrote the risks have transferred all, or virtually all, of the financial obligation for ultimate payment to another authorized insurer. The Department's concern is that an insurer will not employ strict underwriting guidelines when it does not retain a significant portion of its risks.

The Department is also concerned about the issue of fronting, which generally arises when a ceding insurer is 100% or substantially insured on a risk, by an unauthorized insurer. This situation occurs when unauthorized insurers, in order to avoid New York's statutory requirements, enter into reinsurance agreements with domestic companies who, in essence, act as fronting companies for the unauthorized insurers. Any arrangement or activity that would constitute the aiding of an unauthorized insurer would violate Section 2117 of the Insurance Law, and any authorized insurer that did any business that is equivalent to one of the specified types of insurance contained in N.Y. Ins. Law § 1101(b)(1) (McKinney Supp. 2005) in a manner designed to evade the provisions of the Insurance Law would be in violation of N.Y. Ins. Law § 1102 (McKinney Supp. 2005). Each case would be evaluated on its own facts.

This opinion is limited to an interpretation of the Insurance Law.

For further information please contact Associate Attorney D. Monica Marsh at the New York City Office.