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By Richard G. Liskov and John J. Sarchio
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This chapter discusses the regulation of alien multi-national insurers—insurers domiciled outside the United States but operating in U.S. insurance markets. The chapter begins with an overview in Section 103.01 of such insurers and how they are structured, either as U.S. branches of the alien company or as separate subsidiaries of the alien parent. A "U.S. branch" is a division of the insurer that operates in the United States but is not a separate company. Alien insurers operate in the U.S. both as licensed direct insurers and reinsurers, but have played an even more prominent role as unlicensed surplus lines insurers and reinsurers.
Cross References: Sections 9.09 and 12.10 above discuss regulation and taxation of insurance placed in the surplus lines market, and Chapter 78 above details how states regulate the cession of reinsurance by licensed direct insurers to unlicensed reinsurers.
The remainder of Section 103.01 addresses licensure of alien insurers to underwrite insurance in various states involving the same financial and regulatory requirements that are applicable to U.S. insurers. Because much of the insurers' capital and surplus may be sited outside of the United States, however, alien insurers must also satisfy stringent requirements to establish trust funds for the exclusive benefit of U.S. policyholders and creditors. These trust arrangements must receive prior regulatory approval and are subject to examination by state regulators. Additionally, the trust agreements must provide that withdrawals may only be made with regulatory consent, although alien insurers are allowed to collect investment income on trust assets.
A number of states have enacted "port of entry" or "state of entry" laws that permit the U.S. branch of an alien insurer to become licensed in the state as if it were a domestic insurer and to then apply for licensure in other states. Once licensed, alien insurers are subject to the same solvency and market conduct rules applicable to U.S. insurers underwriting the same kinds of insurance, including financial statement submissions, Risk-Based Capital assessments, periodic examinations, premium taxes, guaranty association assessments, advertising rules, prohibitions on unfair or anti-competitive conduct, and rate and policy form filing and approval mandates.
Alien insurers that are licensed in one or more U.S. states and that are members of insurer holding company systems must also comply with registration and reporting provisions of those states' holding company acts. A number of states have adopted amendments requiring the parent companies of certain controlled insurers to file annual "enterprise risk management" reports detailing the financial and operational risks faced by the entire group and discussing how those risks could adversely affect the financial condition of the insurer. These reporting requirements may be imposed on non-U.S. holding companies, thereby raising interesting questions of the reach of U.S. insurance regulators' powers.
Cross References: Detailed discussions of these types of regulation appear in Chapters 8 through 14 above.
Section 103.02 addresses the subject of non-U.S. insurance solvency regulation, an authoritative discussion of which is outside the scope of this U.S. law treatise. Salient aspects of the insurance solvency regimes of selected non-U.S. jurisdictions are described generally, and cross-references are provided to indigenous authorities in selected non-U.S. jurisdictions to provide the reader with apposite sources discussing the specified non-U.S. insurance solvency laws.
Section 103.03 focuses on receivership proceedings in state courts involving alien insurers. When non-U.S. insurers with U.S. operations become insolvent, various state laws authorize ancillary liquidation or conservation proceedings in state courts. For those alien insurers that "entered" through a particular state under a "state of entry" law, numerous states empower the chief insurance regulator of the entry state to petition a designated state court to become a "domiciliary" liquidator of the U.S. branch vested with possession and title to the assets of the alien insurer located in the United States. Under these statutes, the liquidator enjoys the same powers as a liquidator of a U.S. insurer domiciled in that state, except that the liquidator does not have title to or possession of the alien insurer's assets located outside of the United States.
In rare circumstances, a U.S. branch of an alien insurer may become the subject of ancillary liquidation proceedings in other states in which they have made special deposits of trust assets as a condition of licensure in those states. Residents of states in which such ancillary liquidators have been appointed may file claims against those trust assets with such ancillary liquidators, or with the "domiciliary" liquidator. To the extent that any trusteed assets of an alien insurer remain after completion of ancillary liquidation proceedings, the applicable statutes require the ancillary liquidator to transfer these assets to the "domiciliary" liquidator in the "state of entry."
Most alien insurers operating in the U.S. have not established U.S. branches, but instead issue surplus lines insurance policies or assume reinsurance without obtaining licenses. As to these unlicensed alien insurers, many state insurance codes authorize the institution of ancillary conservation proceedings in state courts in which claimants can file claims against trust assets deposited in the state in accordance with surplus lines and reinsurance regulations. The chief insurance regulator in the state is appointed conservator and accepts or rejects claims subject to court supervision and adjudication of contested claims.
When an alien insurer becomes the subject of liquidation or conservation proceedings in a state court, policyholders, claimants under insurance policies issued by the alien insurer, and other creditors may assert "special deposit" claims against the deposit accounts and trust accounts established by such insurer, either under licensing rules or under regulations affecting surplus lines policies or reinsurance. These "special deposit" claims receive priority under numerous state statutes, but those same laws provide that if the amount of the deposit or trust account is insufficient to fully pay all valid "special deposit" claims, then the claimants may share in the general assets of the insurer, but only in the same percentage applicable to other creditors.
Section 103.04 discusses ancillary proceedings in federal courts involving insolvent alien insurers. Unlike U.S. insurers who are expressly outside the definition of "debtor" in the Federal Bankruptcy Code, an alien insurer can be the subject of federal bankruptcy proceedings under current Chapter 15 of the Bankruptcy Code, if certain conditions are met. Under Chapter 15 federal bankruptcy courts are authorized to enjoin suits to recover the property of the alien insurer located in the U.S. and also have the power to bind U.S. creditors of the insurer to schemes of arrangement and similar plans adopted in the alien insurer's home country.
In order for a federal bankruptcy court to exercise its powers under Chapter 15, it must first make a finding that the alien insurer is the subject of a "foreign proceeding" similar to bankruptcy outside of the U.S. and that a duly authorized representative of that proceeding is seeking to invoke Chapter 15. Chapter 15 is the successor statute to former Section 304 of the Bankruptcy Code, and was enacted in 2005. One key difference between current Chapter 15 and former Section 304 is that Section 1501(d) expressly divests the Bankruptcy Court of jurisdiction over trust assets and deposits which an alien insurer has established pursuant to state insurance regulatory laws "for the benefit of claimholders in the United States." Thus, where an alien insurer has established a trust account in a state in order to be an eligible surplus lines insurer, to be licensed as a U.S. branch, or to reinsure policies of a licensed direct insurer, the federal bankruptcy court may not apply Chapter 15 to those trust accounts. Section 103.04 discusses several leading cases decided under former Section 304 in which the result would likely be different under current Chapter 15.
Richard G. Liskov is a partner at Holland & Knight LLP and a member of the firm's Insurance Industry Practice Team. He formerly served as Deputy Superintendent and General Counsel of the New York State Insurance Department and Assistant Attorney General of the State of New York, and is an adjunct faculty member and lecturer-in-law at Columbia Law School. John J. Sarchio is a partner at Holland & Knight LLP and chairs the firm's Insurance Industry Practice Team.
The authors gratefully acknowledge the assistance of their partner, Arthur E. Rosenberg, their associates, Tiana M. McLean, Duvol M. Thompson and Benjamin R. Wilson, and their Insurance Industry Practice Coordinator, Francis L. McGrath in preparing this chapter.
Table of Contents
§ 103.01 Overview of the U.S. Regulation of Alien Insurers
 Multi-National Insurers Domiciled Outside of the U.S.
[a] Extent of Participation in the U.S. Market
[b] Typical Organizational Structures Used
[i] Some Alien Insurers Are Divisions of Existing Insurance Companies
[ii] Some Alien Insurers Operate as Separate Subsidiaries
 States Typically Define "Foreign" and "Alien" Insurer Differently
 Alien Insurers Play an Important Role in the U.S. as Direct Insurers and as Reinsurers
 Regulation of Alien Insurers
[a] Alien Insurers Must Satisfy the Same Licensure Requirements as U.S. Insurers, Along With Additional Requirements
[b] Using One State as the "Port of Entry"
 Regulation of Alien Insurers Within Holding Company Systems
 Other Regulatory Provisions Affecting Licensed Alien Insurers
§ 103.02 Non-U.S. Solvency Regulation
§ 103.03 Ancillary Proceedings in State Courts in the United States Involving Alien Insurers
 Alien Insurers Subject to Receivership Proceedings in Their Home Countries Are Subject to Ancillary Proceedings in State Courts
 Ancillary Proceedings Administer Claims on In-State Assets
 Liquidation Proceedings
[a] Liquidation Proceedings in States Where the Alien Insurer Is "Entered"
[b] Ancillary Liquidation Proceedings
 Conservation Proceedings Involving Alien Insurers That Have No U.S. Branch
§ 103.04 Ancillary Proceedings in Federal Courts Involving Alien Insurers
 Chapter 15 of Federal Bankruptcy Code
 Ancillary Relief Under Former § 304 of the Bankruptcy Code
 Consequences of the Repeal of Former § 304 of the Bankruptcy Code
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