By: Antonio J. Ramírez-Aponte, Esq., CPCU, ARe, ARM | September 2024
Antonio Ramírez is a Capital Member at McConnell Valdés LLC and a Board Member at the Puerto Rico International Insurers Association (PRIIA).
The Puerto Rico International Insurance Insurers and Reinsurers Act, Act No. 399 of September 22, 2004, incorporated into the Puerto Rico Insurance Code as Chapter 61 (the “IIC Act”), has proven itself to be a key tool in promoting economic development in the insurance industry and in Puerto Rico. It is safe to affirm that the express purpose of the IIC Act to “establish the legal basis to develop Puerto Rico as an International Insurance Center, through which insurers and reinsurers export and import insurance and related services to the insurance industry” (Article 61.010 of the Puerto Rico Insurance Code) has been substantially fulfilled.
Since its inception, the promotion of the International Insurance Center and the IIC Act have been important pillars in the economic platforms of all governments, and essential parts of Puerto Rico’s public policy on insurance and economic development. Until recently, administrations of both principal political parties engaged in important efforts, both within and outside of Puerto Rico, directed at promoting the International Insurance Center and the IIC Act. Additionally, existing international insurers, as well as entities who provide services to such insurers, have also played an essential role in promoting the International Insurance Center, and Puerto Rico as a welcoming jurisdiction in which to establish insurance facilities.
As a result, no fewer than thirty-two (32) International Insurers and International Reinsurers have been authorized under the IIC Act, all of whom chose Puerto Rico as their domicile over other important insurance centers, such as Bermuda, Barbados, Cayman, London, and the United States.
However, a change in strategic direction took place during the year 2022. Presumably as a result of the loss of the accreditation of the Office of the Commissioner of Insurance (“OCI”) by the National Association of Insurance Commissioners (“NAIC”), the OCI took some measures that were directed at substantially impacting the ability of International Insurers to underwrite insurance on US risks, or assume reinsurance from US domiciled ceding insurers, including conditioning the issuance of Certificates of Authority for new International Insurers on a commitment not to engage in business in the US, and the issuance of at least one Cease and Desist order on an existing International Reinsurer, requiring said reinsurer to stop assuming reinsurance from US domiciled ceding insurers.
The OCI’s strategy to curtail the activities of International Insurers in the US reached its apex with the issuance of Circular Letter No. CC-2022-2007-ARI on December 7, 2022. In its pertinent part, the Circular Letter stated:
It is reiterated that any insurer that is organized under the laws of Puerto Rico and is seeking to transact insurance business in another state or territory of the United States that is accredited by the NAIC shall comply with the processes and requirements of Chapters 3, 28 and 29 of the Insurance Code of Puerto Rico, as a traditional domestic insurer.
In issuing CC-2022-2007, which essentially would require any Puerto Rico insurer seeking to transact insurance in the US to be authorized as a “traditional domestic insurer”, the OCI acted in a manner contrary to the IIC Act, and its public policy underpinnings, ultimately curtailing the development of the International Insurance Center.
Anybody who is familiar with how international insurance and reinsurance markets work, knows that the US is the largest reinsurance market in the world. Closing such market to Puerto Rico International Insurers would have put an end to any growth in the International Insurance Center, for the simple reason that no new insurer would be willing to establish operations in a jurisdiction that would restrict them from accessing the US insurance and reinsurance market. Additionally, existing International Insurers would surely look to redomesticate to other jurisdictions where no such restriction exists.
Enactment of Act 49-2024
Concerned about the impact that such actions by the OCI could have on the insurance sector, economic development, and on Puerto Rico’s reputation as a law-abiding jurisdiction, on October 6, 2023, Senator Juan Zaragoza, Chair of the Senate Committee on Finance, Federal Affairs and Fiscal Oversight Board, filed Senate Bill No. 1352, which was subsequently approved by the House and Senate and signed into law by Governor Pedro Pierluisi as Act 49-2024 (“Act 49”).
The Statement of Motives of Act 49 references findings from an investigation by the Senate Committee chaired by Senator Zaragoza, pursuant to Senate Resolution No. 612 (“RS 612”), regarding the loss of and subsequent reaccreditation of the OCI by the NAIC, and the actions taken by the OCI in regards thereto. In pertinent part, the Statement of Motives states:
The investigation conducted by [the Senate Committee on Finance, Federal Affairs and Fiscal Oversight Board] concluded that, in his quest to achieve reaccreditation of the OCI by the NAIC, the OCI took actions contrary to the IIC Act, Rule 80 of the Rules of the Insurance Code, and the public policy established for more than 18 years regarding the development of the International Insurance Center, by attempting to prohibit, through regulation, International Insurers from writing insurance in the United States. This, in addition to constituting illegal conduct on the part of the Commissioner, dangerously infringes on the principle of separation of powers, since it is the Legislative Assembly and the Governor who are responsible for determining whether a statute should be amended to change previously established public policy.
The Commissioner’s conduct was motivated by concerns about the impact that International Insurers could have on the NAIC’s evaluation of the OCI.
This Legislative Assembly is aware of the benefit that the NAIC accreditation represents for our insurance industry but is also aware of the importance of the international insurer and reinsurance sector, and of the serious reputational risk for Puerto Rico that, after extending the invitation for them to establish operations in Puerto Rico, we tried to close our doors to them.
The NAIC conducts its accreditation processes through the protocol established in its manual entitled Financial Regulation Standards and Accreditation Program (the “Accreditation Manual”).
The NAIC Accreditation Manual expressly provides that the evaluation of multi-state insurers for purposes of the Part A Standards excludes any domestic insurer from a state organized or authorized under special statutes for captive insurers, special purpose vehicles or similar statutory structures (“This section does not apply to a state’s domestic insurers licensed and/or organized under its captive or special purpose vehicle statutes or any other similar statutory construct.”)
The IIC Act is, precisely, a special law that created the category of International Insurers and Reinsurers distinct and separate from domestic insurers organized under Chapters 28 and 29 and authorized under Chapter 3 of the Insurance Code, and whose regulations are different from the regulations contemplated for multi-state insurers under the standards of the NAIC. In accordance with the NAIC’s own rules, international insurers organized and authorized under the IIC Act must not be considered by the NAIC in any OCS accreditation process, nor should they present an obstacle for the OCS to maintain said accreditation.
In view of the foregoing, this bill is aimed at reaffirming that, beyond any doubt, the IIC Act is a special law separate and distinct from the law applicable to traditional domestic insurers and to make it clear that international insurers authorized under the IIC Act may do business in the United States and other jurisdictions, provided they comply with the IIC Act and the applicable laws of such jurisdictions.
(Our translation.)
In fulfilling the purpose set forth in its Statement of Motives, Act 49 amends the IIC Act to achieve three things:
1. Clarifies that the IIC Act is a special law or statutory construct, separate from the regulations in the Puerto Rico Insurance Code that apply to domestic insurers.
This is accomplished by amending Article 61.010 of the Puerto Rico Insurance Code to read as follows:
Article 61.010. - Purpose
This chapter will be known as the “Puerto Rico International Insurance Insurers and Reinsurers Act” and its purpose is to establish the legal basis to develop Puerto Rico as an International Insurance Center, through which insurers and reinsurers export and import insurance and services related to the insurance industry. These entities will provide insurance and consulting services in the United States market and in other international markets , and as captive entities, while entities dedicated to the reinsurance or surplus lines business will provide insurance and services inside and outside of Puerto Rico.
This chapter is established by a special law that creates the category of international insurers and reinsurers distinct and separate from domestic or country insurers organized under Chapters 28 and 29 and authorized under Chapter 3 of this Code, and subject to regulations that in turn, are different from the contemplated for multi-state insurers under the standards of the National Association of Insurance Commissioners (NAIC). Except in the case of the branches referred to in Article 6.180 of this Code, international insurers and reinsurers organized or authorized under this chapter will have their domicile in the Commonwealth of Puerto Rico but will not be considered insurers incorporated in Puerto Rico for purposes of the corresponding definition in article 3.010 of this Code, and the provisions of this Code that extend to the insurers thus defined in said article 3.010 will not be applicable.
THE IIC ACT HAS ESTABLISHED PUERTO RICO AS A PREFERRED DOMICILE FOR INTERNATIONAL INSURERS AND REINSURERS, WITH OVER THIRTY-TWO COMPANIES CHOOSING IT OVER OTHER GLOBAL INSURANCE CENTERS.
(Our translation.)
As a special statutory construct, the IIC Act is separate and distinct from the regulations in the Puerto Rico Insurance Code that apply to Puerto Rico domestic insurers, and, in accordance with the Part A Standards of the NAIC Accreditation Manual, should have no impact on the NAIC accreditation of the OCI. The amended Article 61.010 makes this abundantly clear.
2. Clarifies that no provision in the IIC Act shall be construed as prohibiting an International Insurer from conducting insurance business in any state or territory of the United States.
Act 49 added a new Article 61.035 to the Puerto Rico Insurance Code that reads as follows:
Article 61.035. – Different Statutory Treatment; Reciprocity.
By being subject to statutory treatment different from that applicable to domestic or country insurers authorized under Chapter 3 of this Code, an international insurer or reinsurer may not request reciprocal treatment in a state or territory of the United States for insurance licensing purposes or credit for reinsurance, based on the provisions of the law and regulations of Puerto Rico applicable to the international insurer or reinsurer being considered substantially similar to those of such state or territory.
No provision in this Chapter shall be construed to prevent an international insurer or reinsurer from writing direct insurance on, or reinsuring, risks located, residents or to be performed in any state or territory of the United States, or in any other foreign jurisdiction, provided that the international insurer or reinsurer complies with the regulations of such state, territory or jurisdiction or with any federal regulations applicable to such direct insurance or reinsurance underwriting activity, including for these purposes, without being understood as a limitation, any regulations applicable to the insurance or reinsurance by insurers or reinsurers not authorized (non-admitted basis) in such state, territory or jurisdiction.
(Our translation.)
This is likely the most important provision in Act 49. Notwithstanding the fact that all OCI and government administrations since the enactment of the IIC Act in 2004 understood that the Act allowed International Insurers to conduct insurance business in the US, and in fact promoted the International Insurance Center as a point of entry into the US insurance market, the OCI assumed a diametrically different position in 2022 and 2023. Article 61.035 serves to impede this incorrect interpretation of the Act, and again points the International Insurance Center in the right direction.
3. Imposes on the OCI the obligation to maintain, protect and prioritize the development and growth of the International Insurance Center.
Act 49 added the following new subsection (7) to Article 61.260 of the Puerto Rico Insurance Code:
Article 61.260.- Powers and Responsibilities of the Commissioner.
(1) …
…
(7) It shall be the obligation of the Commissioner to maintain, protect and assign priority to the development and growth of the International Insurance Center. Likewise, it will be the obligation of the Commissioner to submit an annual report to the Legislative Assembly, on or before June 30 of each year, on the efforts made by the Office of the Insurance Commissioner to comply with this obligation. This report must include: (a) a list of the projects conceptualized and/or executed during the year for the development of the International Insurance Center and the status of each one; (b) a list of possible legislative or regulatory initiatives that may impact the International Insurance Center; (c) statistical information on applications for authorization of new international insurers and reinsurers; (d) legislative, regulatory or public policy issues that may impact the International Insurance Center; (e) any other matter or conflict that may impact the development of the International Insurance Center.
(Our translation.)
This provision empowers the Legislature to assure that the OCI is, in fact, complying with its responsibility to develop the International Insurance Center.
Act 49 truly represents a new beginning for the International Insurance Center, and a righting of the course, a correction of the deviation that took place during the years 2022 and 2023, to once again place the International Insurance Center in a direction of continued growth.
For more information about this article feel free to contact Antonio J. Ramírez, Esq. at ajx@mcvpr.com or https://www.mcvpr.com.
McConnell Valdés LLC has offices in Puerto Rico and Miami located at:
McConnell Valdés LLC
270 Muñoz Rivera Avenue
Hato Rey, Puerto Rico 00918
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