State Of Ohio DEPARTMENT OF INSURANCE 2100 Stella Court, Columbus, Ohio 43215 (614) 644-2658        www.ohioinsurance.gov	Bob Taft, Governor J. Lee Covington II, Director

Testimony of Rich Frederick
Legislative Liaison
Ohio Department of Insurance
Before
The Senate Insurance, Commerce & Labor Committee
Regarding
Substitute House Bill 212

 

Mr. Chairman and members of the Committee:

My name is Rich Frederick. I am the Legislative Liaison at the Department of Insurance (ODI). Thank you for the opportunity to appear before you this morning.

I am here today to testify in support of Substitute H.B. 212, Representative Wolpert's legislation to permit reinsurance payments to be made directly to a policyholder when a "cut-through" is included in a reinsurance agreement. Under current law, cut-throughs are not allowed once a company is placed in liquidation unless they have been specifically approved by ODI. Under this legislation, a cut-through provision will be honored when the primary insurer is placed in liquidation, even if it has not been approved by ODI.

As Representative Wolpert explained in his sponsor testimony last week, reinsurance is insurance for insurance companies; it is a way for a primary insurer to protect against unforeseen or extraordinary losses. Reinsurance promotes the efficient operation of insurance markets because it prevents large losses from overwhelming the primary insurer's resources and helps insurers stabilize their business against large swings in profit and loss margins.

Many reinsurance agreements include what are referred to as cut-through clauses. A cut-through clause obligates the reinsurer to directly pay a policyholder's claim, and in some cases entitles the policyholder to proceed directly against the reinsurer for payment of a claim when the primary insurer becomes insolvent and is unable to pay the claim.

Insurance companies are specifically excluded from the federal bankruptcy laws, so when an Ohio domestic insurance company becomes insolvent, it is liquidated under Ohio's insurance liquidation statutes. These statutes are similar to the federal bankruptcy laws. When an insurer is liquidated, the company's ongoing business operations are discontinued, the Liquidator sells all of its assets, and the proceeds are used to pay its creditors and insureds. In addition to the assets of the liquidated insurer, funds from the Ohio guaranty associations may be available to pay outstanding claims filed by Ohio residents. Funded by insurers who are licensed to do business in Ohio, the guaranty associations assume the insolvent company's obligations to policyholders upon the filing of a liquidation order and provide an immediate source of payment for claims, within the limits established by statute.

The entire liquidation process is conducted under the supervision of the Common Pleas Court in Franklin County. Under Ohio law, the Superintendent of the Ohio Department of Insurance is appointed as the Liquidator. The length of the liquidation process depends on the complexity of the case, but liquidations often take several years to complete.

Reinsurance is often one of the largest assets recovered by the Liquidator. Under the current statute, all reinsurance recoveries are paid to the Liquidator, even if the reinsurance contact contains a cut-through clause, and those reinsurance recoveries become general assets of the liquidation estate to be shared by all creditors according to the priorities established by statute. Under the proposed legislation, this would be changed to allow a particular policyholder to be paid directly by the reinsurer on a claim, thus bypassing the liquidation estate. The cut-through does not change the amount of the claim paid by the reinsurer; it merely changes the allocation of the reinsurance payment. Instead of being shared by all of the creditors of the insolvent company, the reinsurance proceeds are paid to the underlying policyholder directly.

Although this has the effect of reducing the overall assets collected by the liquidator, it also reduces the number of claims that the liquidator and the guaranty associations must review and pay, thus saving time and administrative cost for the liquidation estate. For those policies that are reinsured with cut-through provisions, the payment of policyholder claims would go forward without entanglement in the liquidation process. For these reasons, ODI supports H.B. 212 as it is currently written.

Thank you for your time and consideration. I would be happy to answer any questions the Committee might have.