BILL NUMBER: SB 1216 AMENDED
BILL TEXT
AMENDED IN SENATE APRIL 17, 2012
AMENDED IN SENATE MARCH 29, 2012
INTRODUCED BY Senator Lowenthal
FEBRUARY 22, 2012
An act to amend Sections 922.2, 922.4, 922.5, 922.8, and 12121 of,
to add Sections 717.5, 922.31, 922.42, 922.43, and 922.85 to, to add
and repeal Section 922.41 of, and to repeal and add Section 922.6
of, the Insurance Code, relating to reinsurance.
LEGISLATIVE COUNSEL'S DIGEST
SB 1216, as amended, Lowenthal. Reinsurance: professional
reinsurers.
(1) Existing law prohibits the transaction of any class of
insurance in this state without first being admitted for that class
of insurance, and admission is secured by procuring a certificate of
authority from the Insurance Commissioner. Before granting a
certificate of authority to any applicant, the commissioner is
required to consider the qualifications of the applicant, including,
but not limited to, capital and surplus and lawfulness and quality of
investments.
This bill would authorize the commissioner to designate an insurer
as a professional reinsurer when an insurer admitted and domiciled
in this state, or an insurer applying to become admitted and
domiciled in this state, is determined by the commissioner to be
qualified, as specified, which includes, but is not limited to, the
commissioner determining that the insurer is principally engaged in
the business of reinsurance, that the insurer does not conduct
significant amounts of direct insurance as a percentage of its net
premiums, and is not engaged, on an ongoing basis, in the business of
soliciting direct insurance.
(2) Existing law requires insurers doing business in this state to
annually make and file with the commissioner financial statements.
Existing law requires that credit for reinsurance as an asset or
deduction from liability be allowed a domestic ceding insurer only if
the reinsurance contract includes certain provisions, including, in
the event of insolvency and the appointment of a conservator,
liquidator, or statutory successor of the ceding company, that the
reinsurance will be payable, as specified, without diminution because
of the insolvency.
This bill would revise that requirement to additionally apply in
the event of a change in status of the ceding company, as specified,
including when the commissioner finds that the conditions for the
appointment of a conservator, liquidator, or statutory successor has
occurred with respect to the ceding company.
The bill would also require a ceding insurer to take steps to
manage its reinsurance recoverables proportionate to its own book of
business and to diversify its reinsurance program. The bill would
also require a domestic ceding insurer to notify the commissioner
within 30 days after reinsurance recoverables from any single
assuming insurer, or group of affiliated assuming insurers, exceed
50% of the domestic ceding insurer's last reported surplus to
policyholders, or after it is determined that the
reinsurances reinsurance recoverables are likely
to exceed that limit, as specified. The bill would also require a
domestic ceding insurer to notify the commissioner within 30 days
after ceding to any single assuming insurer, or group of affiliated
assuming insurers, more than 20% of the ceding insurer's gross
written premium in the prior calendar year, or after it has
determined that the reinsurance ceded is likely to exceed this limit,
as specified.
(3) Existing law also allows credit for reinsurance when the
reinsurance is ceded to an assuming insurer that is accredited as a
reinsurer in this state, except as specified. Existing law describes
an accredited reinsurer for purposes of this provision as one that,
among other criteria, maintains a surplus as regards to policyholders
in an amount that is either not less than $20,000,000, and whose
accreditation has not been denied by the commissioner within the last
90 days, or maintains a surplus that is less than $20,000,000 and
whose accreditation has been approved by the commissioner.
This bill would instead require that the reinsurer demonstrate to
the satisfaction of the commissioner that it has adequate financial
capacity to meet its reinsurance obligations and is otherwise
qualified to assume reinsurance from domestic insurers, and would
delete the provision authorizing a reinsurer whose accreditation has
been approved to maintain a surplus of less than $20,000,000. The
bill would instead provide that an assuming insurer who maintains a
surplus of not less than $20,000,000 and whose accreditation has not
been denied by the commissioner within the last 90 days shall be
deemed to meet that requirement and would require that an assuming
insurer who is not deemed to meet this requirement obtain the
affirmative approval of the commissioner. The bill would require that
the approval of the commissioner be based upon a finding that the
assuming insurer has adequate financial capacity to meet its
reinsurance obligations and is otherwise qualified to assume
reinsurance from domestic insurers.
(4) Existing law also provides that credit is allowed when
reinsurance is ceded to an assuming insurer that maintains a trust
fund, as specified.
This bill would authorize the commissioner to authorize a
reduction in the required trustee surplus after an assuming insurer
has permanently discontinued underwriting new business secured by the
trust for at least 3 full years, as specified.
The bill would also enact, only until January 1, 2016, provisions
governing the certification and rating of assuming insurers by the
commissioner and specify additional circumstances under which credit
shall be allowed to a domestic insurer when the reinsurance is ceded
to an assuming insurer that has been certified. The bill would
require, among other things, that the assuming insurer be domiciled
and licensed to transact insurance or reinsurance in a qualified
jurisdiction and would require the commissioner to create and publish
a list of qualified jurisdictions, as specified. The bill would also
require the assuming insurer to maintain minimum capital and
surplus, or its equivalent, in an amount determined by the
commissioner, and to maintain financial strength ratings from 2 or
more ratings agencies, as specified. The bill would impose various
filing requirements on certified reinsurers, including notification
within 10 days of any regulatory actions taken against the certified
reinsurer and annual audited financial statements. The bill would
also require the commissioner to assign a rating to each certified
reinsurer based on specified criteria, such as the certified insurer'
s financial strength rating from an acceptable rating agency and the
certified insurer's reputation for prompt payment of claims. The bill
would also authorize the commissioner to suspend or revoke an
accredited or certified reinsurer's accreditation or certification
after notice and opportunity for hearing, as specified.
The bill would make other related changes.
(5) Existing law provides that credit for reinsurance as an asset
or a deduction from liability is allowed a foreign ceding insurer,
with exceptions, to the extent the credit has been allowed by the
ceding insurer's state of domicile if the state of domicile is
accredited by the National Association of Insurance Commissioners
(NAIC), or the credit or deduction from liability would be allowed if
the foreign ceding insurer were domiciled in this state. Credit for
reinsurance as an asset or a deduction from liability may be
disallowed if the commissioner finds that the financial condition of
the reinsurer, or the collateral or other security provided by the
reinsurer, does not satisfy the credit for reinsurance requirements
applicable to a ceding insurer domiciled in this state.
This bill would instead require that credit for reinsurance not be
denied a foreign ceding insurer to the extent that credit is
recognized by the ceding insurer's domestic state regulator, provided
that the domestic state is accredited by the NAIC, or the domestic
state regulator has financial solvency requirements similar to the
requirements necessary for NAIC accreditation.
Vote: majority. Appropriation: no. Fiscal committee: yes.
State-mandated local program: no.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. Section 717.5 is added to the Insurance Code, to read:
717.5. (a) For purposes of Sections 700 and 717, the commissioner
may determine that an insurer admitted and domiciled in this state,
or an insurer applying to become admitted and domiciled in this
state, including an applicant pursuant to subdivision (a) of Section
709.5, is qualified to be designated as a professional reinsurer, if
the commissioner determines that the insurer is all of the following:
(1) Principally engaged in the business of reinsurance.
(2) Does not conduct significant amounts of direct insurance as
percentage of its net premiums.
(3) Is not engaged, on an ongoing basis, in the business of
soliciting direct insurance.
(b) The commissioner may consider any information relevant to this
determination. An insurer that holds, or is applying for
qualification as, a professional reinsurer, shall provide the
commissioner with information or documentation regarding the
determinations under this section, upon request. The commissioner may
prescribe terms and conditions applicable to the certificate of
authority, as appropriate under this section.
(c) A domestic, professional reinsurer shall continue to be
qualified as long as it continues to meet the requirements set forth
in this section.
(d) The commissioner may, after notice and an opportunity to be
heard, revoke a reinsurer's qualification, if the reinsurer no longer
qualifies under this section.
(e) A domestic insurer that is qualified as a professional
reinsurer may include that designation in its name, solicitations,
and advertisements.
(f) An insurer seeking qualification under this section shall pay
a filing fee of two thousand five hundred dollars ($2,500), in
advance, to the commissioner.
(g) The commissioner may adopt regulations in accordance with the
procedure provided in Chapter 3.5 (commencing with Section 11340) of
Part 1 of Division 3 of Title 2 of the Government Code or otherwise
prescribe requirements consistent with this section.
(h) The commissioner may post prescribed requirements, consistent
with this section, on the department's Internet Web site.
SEC. 2. Section 922.2 of the Insurance Code is amended to read:
922.2. (a) Credit for reinsurance shall be allowed a domestic
ceding insurer as either an asset or a deduction from liability in
accordance with Sections 922.4 and 922.5 only if the reinsurance
contract contains provisions that provide, in substance, as follows:
(1) The reinsurer shall indemnify the ceding insurer for the risk
it has assumed according to the terms and conditions contained in the
reinsurance contract.
(2) In the event of insolvency, or a change in the status of the
ceding company as defined in this section, and the appointment of a
conservator, liquidator, or statutory successor of the ceding
company, the reinsurance shall be payable to the conservator,
liquidator, or statutory successor on the basis of claims allowed
against the insolvent company by any court of competent jurisdiction
or by any conservator, liquidator, or statutory successor of the
company having authority to allow those claims, without diminution
because of that insolvency or change in status, or because the
conservator, liquidator, or statutory successor has failed to pay all
or a portion of any claims. Payments by the reinsurer as set forth
in this subdivision shall be made directly to the ceding insurer or
to its conservator, liquidator, or statutory successor, except where
the contract of insurance or reinsurance specifically provides
another payee of such reinsurance in the event of the insolvency or
change in status of the ceding insurer.
The reinsurance contract may provide that the conservator,
liquidator, or statutory successor of a ceding insurer shall give
written notice of the pendency of a claim against the ceding insurer
indicating the policy or bond reinsured, within a reasonable time
after such claim is filed and the reinsurer may interpose, at its own
expense, in the proceeding in which the claim is to be adjudicated,
any defense or defenses which it may deem available to the ceding
insurer or its conservator, liquidator, or statutory successor. The
expense thus incurred by the reinsurer shall be payable subject to
court approval out of the estate of the insolvent ceding insurer as
part of the expense of conservation or liquidation to the extent of a
proportionate share of the benefit which may accrue to the ceding
insurer in conservation or liquidation, solely as a result of the
defense undertaken by the reinsurer.
(b) Payment pursuant to a reinsurance contract shall be made
within a reasonable time with reasonable provision for verification
in accordance with the terms of the reinsurance agreement. However,
in no event shall the payments be beyond the period required by the
National Association of Insurance Commissioners (NAIC) Accounting
Practices and Procedures Manual.
(c) The original insured or policyholder shall not have any rights
against the reinsurer which are not specifically set forth in the
contract of reinsurance, or in a specific agreement between the
reinsurer and the original insured or policyholder.
(d) For purposes of this section, the phrase "change in the status
of the ceding company" means a finding by the commissioner that
conditions set forth in subdivision (d) or (i) of Section 1011, a
Regulatory Action Level Event as defined in Section 739.4, or any
other event which permits the appointment of a conservator,
liquidator, or statutory successor has occurred with respect to the
ceding company.
SEC. 3. Section 922.31 is added to the Insurance Code, to read:
922.31. (a) A ceding insurer shall take steps to manage its
reinsurance recoverables proportionate to its own book of business. A
domestic ceding insurer shall notify the commissioner within 30 days
after reinsurance recoverables from any single assuming insurer, or
group of affiliated assuming insurers, exceeds 50 percent of the
domestic ceding insurer's last reported surplus to policyholders, or
after it is determined that reinsurance recoverables from any single
assuming insurer, or group of affiliated assuming insurers, is likely
to exceed this limit. The notification shall demonstrate that the
exposure is safely managed by the domestic ceding insurer.
(b) A ceding insurer shall take steps to diversify its reinsurance
program. A domestic ceding insurer shall notify the commissioner
within 30 days after ceding to any single assuming insurer, or group
of affiliated assuming insurers, more than 20 percent of the ceding
insurer's gross written premium in the prior calendar year, or after
it has determined that the reinsurance ceded to any single assuming
insurer, or group of affiliated assuming insurers, is likely to
exceed this limit. The notification shall demonstrate that the
exposure is safely managed by the domestic ceding insurer.
SEC. 4. Section 922.4 of the Insurance Code is amended to read:
922.4. Credit for reinsurance shall be allowed a domestic ceding
insurer as either an asset or a deduction from liability on account
of reinsurance ceded only when the reinsurer meets the requirements
of subdivision (a), (b), (c), (d), or (e). Credit shall be allowed
under subdivision (a), (b), or (c) only for cessions of those kinds
or classes of business that the assuming insurer is licensed or
otherwise permitted to write or assume in its state of domicile or,
in the case of a United States branch of an alien assuming insurer,
in the state through which it is entered and licensed to transact
insurance or reinsurance.
(a) Credit shall be allowed when the reinsurance is ceded to an
assuming insurer that is licensed to transact insurance or
reinsurance in this state unless the assuming insurer is the subject
of a regulatory order or regulatory oversight by any state in which
it is licensed based upon a commissioner's determination that the
assuming insurer is in a hazardous financial condition.
(b) (1) Credit shall be allowed when the reinsurance is ceded to
an assuming insurer that is accredited as a reinsurer in this state
unless the assuming insurer is the subject of a regulatory order or
regulatory oversight by any state in which it is licensed based upon
a commissioner's determination that the assuming insurer is in a
hazardous financial condition. An accredited reinsurer is one that
does all of the following:
(A) Files with the commissioner evidence of its submission to this
state's jurisdiction.
(B) Submits to this state's authority to examine its books and
records.
(C) Designates the commissioner or a designated attorney in this
state as its true and lawful attorney upon whom may be served any
lawful process in any action, suit, or proceeding instituted by or on
behalf of the ceding insurer.
(D) Is licensed to transact insurance or reinsurance in at least
one state, or in the case of a United States branch of an alien
assuming insurer, is entered through and licensed to transact
insurance or reinsurance in at least one state.
(E) Files annually with the commissioner a copy of its annual
statement filed with the insurance department of its state of
domicile and a copy of its most recent audited financial statement
and other financial information requested by the commissioner.
(F) Submits a statement, signed and verified by an officer of the
assuming insurer to be true and correct, that discloses whether the
assuming insurer or any affiliated person who owns or has a
controlling interest in the assuming insurer is currently known to be
the subject of any of the following:
(i) Any order or proceeding regarding conservation, liquidation,
or receivership.
(ii) Any order or proceeding regarding the revocation or
suspension of a license or accreditation to transact insurance or
reinsurance in any jurisdiction.
(iii) Any order or proceeding brought by an insurance regulator in
any jurisdiction seeking to restrict or stop the assuming insurer
from transacting insurance or reinsurance based upon a hazardous
financial condition.
The assuming insurer shall provide the commissioner with copies of
any orders or other documents initiating proceedings subject to
disclosure under this paragraph. The statement shall affirm that no
actions, proceedings, or orders subject to this subparagraph are
outstanding against the assuming insurer or any affiliated person who
owns or has a controlling interest in the assuming insurer, except
as disclosed in the statement.
(G) Demonstrates to the satisfaction of the commissioner that it
has adequate financial capacity to meet its reinsurance obligations
and is otherwise qualified to assume reinsurance from domestic
insurers. An assuming insurer is deemed to meet this requirement if
it maintains a surplus as regards policyholders in an amount that is
not less than twenty million dollars ($20,000,000) and whose
accreditation has not been denied by the commissioner within 90 days
of its submission. An assuming insurer who is not deemed to meet this
requirement shall obtain the affirmative approval of the
commissioner. The approval of the commissioner shall be based upon a
finding that the assuming insurer has adequate financial capacity to
meet its reinsurance obligations and is otherwise qualified to assume
reinsurance from domestic insurers.
(2) The commissioner may deny or revoke an assuming insurer's
accreditation if the assuming insurer does not meet all of the
standards required of an accredited reinsurer, or if its
accreditation would be hazardous to the policyholders of this state.
In determining whether to deny or revoke accreditation, the
commissioner may consider the qualifications of the assuming insurer
with respect to all the following subjects:
(A) Its financial stability.
(B) The lawfulness and quality of its investments.
(C) The competency, character, and integrity of its management.
(D) The competency, character, and integrity of persons who own or
have a controlling interest in the assuming insurer.
(E) Whether claims under its contracts are promptly and fairly
adjusted and are promptly and fully paid in accordance with the law
and the terms of the contracts.
(3) Credit shall not be allowed a domestic ceding insurer if the
assuming insurer's accreditation has been revoked by the commissioner
after notice and hearing.
(c) Credit shall be allowed when the reinsurance is ceded to an
assuming insurer that has been certified by the commissioner pursuant
to Section 922.41.
(d) (1) Credit shall be allowed when the reinsurance is ceded to
an assuming insurer that maintains a trust fund in a qualified United
States financial institution as defined in subdivision (b) of
Section 922.7 for the payment of the valid claims of its United
States ceding insurers, their assigns, and successors in interest. To
enable the commissioner to determine the sufficiency of the trust
fund the assuming insurer shall report annually to the commissioner
information substantially the same as that required to be reported on
the NAIC Annual Statement form by licensed insurers or any other
form required by the NAIC.
(2) Credit for reinsurance shall not be granted under this
subdivision unless the form of the trust and any amendments to the
trust have been approved by either:
(A) The commissioner of the state where the trust is domiciled.
(B) The commissioner of another state who, pursuant to the terms
of the trust instrument, has accepted principal regulatory oversight
of the trust.
The trust and any trust amendments shall also be filed with the
commissioner of every state in which the ceding insurer beneficiaries
of the trust are domiciled. Notwithstanding the foregoing, nothing
in this paragraph shall prevent the commissioner from disapproving
the form of the trust if it is not in compliance with this state's
laws and regulations.
(3) Credit for reinsurance shall not be granted under this
subdivision unless the following requirements are met:
(A) The trust instrument shall provide that contested claims shall
be valid, enforceable, and payable out of funds in trust to the
extent remaining unsatisfied 30 days after entry of the final order
of any court of competent jurisdiction in the United States.
(B) The trust shall vest legal title to its assets in the trustees
of the trust for the benefit of the grantor's United States ceding
insurers, their assigns, and successors in interest.
(C) The trust and the assuming insurer shall be subject to
examination as determined by the commissioner.
(D) The trust shall remain in effect for as long as the assuming
insurer, or any member or former member of a group of insurers, shall
have outstanding obligations due under the reinsurance agreements
subject to the trust.
(E) No later than February 28 of each year, the trustees of the
trust shall report to the commissioner in writing setting forth the
balance of the trust and listing the trust's investments at the
preceding year end and shall certify the date of termination of the
trust, if so planned, or certify that the trust shall not expire
within the next 18 months.
(F) The assuming insurer shall do both of the following:
(i) Submit to the jurisdiction of any court of competent
jurisdiction in any state of the United States, comply with all
requirements necessary to give the court jurisdiction, and abide by
the final decision of the court or of any appellate court in the
event of an appeal.
(ii) Designate the commissioner or an attorney in this state as
its true and lawful agent upon whom may be served any lawful process
in any action, suit, or proceeding instituted by or on behalf of the
ceding insurer.
This subparagraph is not intended to conflict with or override the
obligation of the parties to a reinsurance agreement to arbitrate
their disputes, if this obligation is created in the agreement.
(G) The assuming insurer shall agree in the trust agreement that
notwithstanding any other provision in the trust instrument, if the
trust fund is inadequate because it contains an amount less than the
amount required by paragraph (4) of subdivision (d), or if the
grantor of the trust has been declared insolvent or placed into
receivership, rehabilitation, liquidation, or similar proceedings
under the laws of its state or country of domicile:
(i) The trustee shall comply with an order of the commissioner
with regulatory oversight over the trust or with an order of a court
of competent jurisdiction directing the trustee to transfer to the
commissioner with regulatory oversight all of the assets of the trust
fund.
(ii) The assets shall be distributed by, and insurance claims
shall be filed with and valued by, the commissioner with regulatory
oversight in accordance with the laws of the state in which the trust
is domiciled that are applicable to the liquidation of domestic
insurance companies.
(iii) If the commissioner with regulatory oversight determines
that the assets of the trust fund or any part thereof are not
necessary to satisfy the claims of the United States ceding insurers
of the grantor of the trust, the assets or part thereof shall be
returned by the commissioner with regulatory oversight to the trustee
for distribution in accordance with the trust agreement.
(iv) The grantor hereby waives any right otherwise available to it
under United States law that is inconsistent with this provision.
(4) The following requirements apply to the following categories
of assuming insurer:
(A) The trust fund for a single assuming insurer shall consist of
funds in trust in an amount not less than the assuming insurer's
liabilities attributable to reinsurance ceded by United States
domiciled ceding insurers, and, in addition, the assuming insurer
shall maintain a trusteed surplus of not less than twenty million
dollars ($20,000,000), except as provided in subparagraph (B), (C),
or (D).
(B) In the case of a group including incorporated and individual
unincorporated underwriters:
(i) For reinsurance ceded under reinsurance agreements with an
inception, amendment, or renewal date on or after January 1, 1993,
the trust shall consist of a trusteed account in an amount not less
than the respective underwriters' several liabilities attributable to
business ceded by United States domiciled ceding insurers to any
underwriter of the group.
(ii) For reinsurance ceded under reinsurance agreements with an
inception date on or before December 31, 1992, and not amended or
renewed after that date, notwithstanding the other provisions of this
article, the trust shall consist of a trusteed account in an amount
not less than the respective underwriters' several insurance and
reinsurance liabilities attributable to business written in the
United States.
(iii) In addition to the trusts required in clauses (i) and (ii),
the group shall maintain in trust a trusteed surplus of which one
hundred million dollars ($100,000,000) shall be held jointly for the
benefit of the United States domiciled ceding insurers of any member
of the group for all years of account.
(iv) The incorporated members of the group shall not be engaged in
any business other than underwriting as a member of the group and
shall be subject to the same level of regulation and solvency control
by the group's domiciliary regulator as are the unincorporated
members.
(v) The group shall, within 90 days after its financial statements
are due to be filed with the group's domiciliary regulator, provide
to the commissioner an annual certification by the group's
domiciliary regulator of the solvency of each underwriter member; or
if a certification is unavailable, financial statements prepared by
independent public accountants of each underwriter member of the
group.
(C) In the case of a group of incorporated insurers under common
administration, the group shall meet all of the following
requirements:
(i) Have continuously transacted an insurance business outside the
United States for at least three years immediately prior to making
application for accreditation and be in good standing with its
domiciliary regulator.
(ii) Demonstrate that individual insurer members maintain
standards and financial conditions reasonably comparable to admitted
insurers.
(iii) Maintain aggregate policyholders' surplus of at least ten
billion dollars ($10,000,000,000).
(iv) Maintain a trust fund in an amount not less than the group's
several liabilities attributable to business ceded by United States
domiciled ceding insurers to any member of the group pursuant to
reinsurance contracts issued in the name of such group.
(v) In addition, maintain a joint trusteed surplus of which one
hundred million dollars ($100,000,000) shall be held jointly for the
benefit of United States ceding insurers of any member of the group
as additional security for these liabilities. The commissioner shall
have the authority to require additional amounts to be held in the
trust as a condition for initial or continued accreditation if the
commissioner determines that these additional amounts are required
for the protection of ceding insurers.
(vi) Within 90 days after its financial statements are due to be
filed with the group's domiciliary regulator, make available to the
commissioner an annual certification of each underwriter member's
solvency by the member's domiciliary regulator, and financial
statements for each underwriter member of the group prepared by its
independent public accountant.
(D) At any time after the assuming insurer has permanently
discontinued underwriting new business secured by the trust for at
least three full years, the commissioner may authorize a reduction in
the required trusteed surplus, but only after a finding, based on an
assessment of the risk, that the new required surplus level is
adequate for the protection of United States ceding insurers,
policyholders, and claimants in light of reasonably foreseeable
adverse loss development. The risk assessment may involve an
actuarial review, including an independent analysis of reserves and
cash flows, and shall consider all material risk factors, including,
when applicable, the lines of business involved, the stability of the
incurred loss estimates, and the effect of the surplus requirements
on the assuming insurer's liquidity or solvency. The minimum required
trusteed surplus may not be reduced to an amount less than 50
percent of the assuming insurer's liabilities attributable to
reinsurance ceded by United States ceding insurers covered by the
trust.
(e) Credit shall be allowed when the reinsurance ceded to an
assuming insurer not meeting the requirements of subdivision (a),
(b), (c), or (d), but only as to the insurance of risks located in
jurisdictions where the reinsurance is required by applicable law or
regulation of that jurisdiction. As used in this section,
"jurisdiction" means state, district, or territory of the United
States and any lawful national government.
SEC. 5. Section 922.41 is added to the Insurance Code, to read:
922.41. (a) Credit shall be allowed a domestic insurer when the
reinsurance is ceded to an assuming insurer that has been certified
by the commissioner as a reinsurer in this state and secures its
obligations in accordance with the requirements of this section.
Credit shall be allowed at all times for which statutory financial
statement credit for reinsurance is claimed under this section. The
credit allowed shall be based upon the security held by or on behalf
of the ceding insurer in accordance with a rating assigned to the
certified reinsurer by the commissioner. The security shall be in a
form consistent with the provisions of this section, any regulations
promulgated by the commissioner and Section 922.5.
(b) In order to be eligible for certification, the assuming
insurer shall meet the following requirements:
(1) The assuming insurer shall be domiciled and licensed to
transact insurance or reinsurance in a qualified jurisdiction, as
determined by the commissioner pursuant to subdivisions (f) and (g).
(2) The assuming insurer shall maintain minimum capital and
surplus, or its equivalent, in an amount to be determined by the
commissioner, but no less than two hundred fifty million dollars
($250,000,000) calculated in accordance with subparagraph
(H) of paragraph (1) (4) of
subdivision (h) (f) of this section or
subparagraph (D) of paragraph (3) of subdivision (d) of
Section 922.4. 922.5. This
requirement may also be satisfied by an association including
incorporated and individual unincorporated underwriters having
minimum capital and surplus equivalents (net of liabilities) of at
least two hundred fifty million dollars ($250,000,000) and a central
fund containing a balance of at least two hundred fifty million
dollars ($250,000,000).
(3) The assuming insurer shall maintain financial strength ratings
from two or more rating agencies deemed acceptable by the
commissioner. These ratings shall be based on interactive
communication between the rating agency and the assuming insurer and
shall not be based solely on publicly available information. These
financial strength ratings will be one factor used by the
commissioner in determining the rating that is assigned to the
assuming insurer. Acceptable rating agencies include the following:
(A) Standard & Poor's.
(B) Moody's Investors Service.
(C) Fitch Ratings.
(D) A.M. Best Company.
(E) Any other nationally recognized statistical rating
organization.
(4) The assuming insurer shall agree to submit to the jurisdiction
of this state, appoint the commissioner or a designated attorney in
this state as its agent for service of process in this state, and
agree to provide security for 100 percent of the assuming insurer's
liabilities attributable to reinsurance ceded by United States ceding
insurers if it resists enforcement of a final United States
judgment.
(5) The assuming insurer shall agree to meet applicable
information filing requirements as determined by the commissioner,
both with respect to an initial application for certification and on
an ongoing basis.
(6) The certified reinsurer shall comply with any other
requirements deemed relevant by the commissioner.
(c) (1) If an applicant for certification has been certified as a
reinsurer in an NAIC accredited jurisdiction, the commissioner may
defer to that jurisdiction's certification, and has the discretion to
defer to the rating assigned by that jurisdiction if the assuming
insurer submits a properly executed Form CR-1 (as published on the
department's Internet Web site), and such additional information as
the commissioner requires. The
commissioner, however, may perform an independent review and
determination of any applicant. The assuming insurer shall then be
considered to be a certified reinsurer in this state.
(2) If the commissioner defers to a certification determination by
another state, any change in the certified reinsurer's status or
rating in the other jurisdiction shall apply automatically in this
state as of the date it takes effect in the other jurisdiction unless
the commissioner otherwise determines. The certified reinsurer shall
notify the commissioner of any change in its status or rating within
10 days after receiving notice of the change.
(3) The commissioner may withdraw recognition of the other
jurisdiction's rating at any time and assign a new rating in
accordance with subdivision (h).
(4) The commissioner may withdraw recognition of the other
jurisdiction's certification at any time, with written notice to the
certified reinsurer. Unless the commissioner suspends or revokes the
certified reinsurer's certification in accordance with this section
and Section 922.42, the certified reinsurer's certification shall
remain in good standing in this state for a period of three months,
which shall be extended if additional time is necessary to consider
the assuming insurer's application for certification in this state.
(d) An association , including incorporated and
individual unincorporated underwriters , may be a
certified reinsurer. In order to be eligible for certification, in
addition to satisfying requirements of subdivision (c)
(b) and subparagraphs (B) and (C) of paragraph
(4) of subdivision (d) of Section 922.4.
922.4, the reinsurer shall meet all of the following r
equirements:
(1) The association shall satisfy its minimum capital and surplus
requirements through the capital and surplus equivalents (net of
liabilities) of the association and its members, which shall include
a joint central fund that may be applied to any unsatisfied
obligation of the association or any of its members, in an amount
determined by the commissioner to provide adequate protection.
(2) The incorporated members of the association shall not be
engaged in any business other than underwriting as a member of the
association and shall be subject to the same level of regulation and
solvency control by the association's domiciliary regulator as are
the unincorporated members.
(3) Within 90 days after its financial statements are due to be
filed with the association's domiciliary regulator, the association
shall provide to the commissioner an annual certification by the
association's domiciliary regulator of the solvency of each
underwriter member; or if a certification is unavailable, financial
statements, prepared by independent public accountants, of each
underwriter member of the association.
(e) (1) The commissioner shall post notice on the department's
Internet Web site promptly upon receipt of any application for
certification, including instructions on how members of the public
may respond to the application. The commissioner may not take final
action on the application until at least 90 days after posting the
notice required by this subdivision.
(2) The commissioner shall issue written notice to an assuming
insurer that has made application and been approved as a certified
reinsurer. Included in such notice shall be the rating assigned the
certified reinsurer in accordance with subdivision (h). The
commissioner shall publish a list of all certified reinsurers and
their ratings.
(f) The certified reinsurer shall agree to meet applicable
information filing requirements as determined by the commissioner,
both with respect to an initial application for certification and on
an ongoing basis. All information submitted by certified reinsurers
that is not otherwise public information subject to disclosure shall
be exempted from disclosure under Chapter 3.5 (commencing with
Section 6250) of Division 7 of Title 1 of the Government Code, and
shall be withheld from public disclosure. The applicable information
filing requirements are as follows:
(1) Notification within 10 days of any regulatory actions taken
against the certified reinsurer, any change in the provisions of its
domiciliary license or any change in rating by an approved rating
agency, including a statement describing those changes and the
reasons for those changes.
(2) Annually, Form CR-F or CR-S, as applicable pursuant to the
instructions as published on the department's Internet Web site.
(3) Annually, the report of the independent auditor on the
financial statements of the insurance enterprise, on the basis
described in paragraph (4).
(4) Annually, audited financial statements (audited United States
Generally Accepted Accounting Principles), regulatory filings, and
actuarial opinion (as filed with the certified reinsurer's
supervisor) statements, (audited United States Generally Accepted
Accounting Principles basis if available, audited International
Financial Reporting Standards basis statements are allowed but must
include an audited footnote reconciling equity and net income to a
United States Generally Accepted Accounting Principles basis, or,
with the written permission of the commissioner, audited
International Financial Reporting Standards statements with
reconciliation to United States Generally Accepted Accounting
Principles certified by an officer of the company), regulatory
filings, and actuarial opinion (as filed with the certified reinsurer'
s supervisor). Upon the initial certification, audited financial
statements for the last three years filed with the certified
reinsurer's supervisor.
(5) At least annually, an updated list of all disputed and overdue
reinsurance claims regarding reinsurance assumed from United States
domestic ceding insurers.
(6) A certification from the certified reinsurer's domestic
regulator that the certified reinsurer is in good standing and
maintains capital in excess of the jurisdiction's highest regulatory
action level.
(7) Any other information that the commissioner may reasonably
require.
(g) If the commissioner certifies a non-United States domiciled
insurer, the commissioner shall create and publish a list of
qualified jurisdictions, under which an assuming insurer licensed and
domiciled in such jurisdiction is eligible to be considered for
certification by the commissioner as a certified reinsurer.
(1) In order to determine whether the domiciliary jurisdiction of
a non-United States assuming insurer is eligible to be recognized as
a qualified jurisdiction, the commissioner shall evaluate the
appropriateness and effectiveness of the reinsurance supervisory
system of the jurisdiction, both initially and on an ongoing basis,
and consider the rights, benefits and the extent of reciprocal
recognition afforded by the non-United States jurisdiction to
reinsurers licensed and domiciled in the United States. The
commissioner shall determine the appropriate process for evaluating
the qualifications of those jurisdictions. Prior to its listing, a
qualified jurisdiction shall agree in writing to share information
and cooperate with the commissioner with respect to all certified
reinsurers domiciled within that jurisdiction. A jurisdiction may not
be recognized as a qualified jurisdiction if the commissioner has
determined that the jurisdiction does not adequately and promptly
enforce final United States judgments and arbitration awards.
Additional factors may be considered in the discretion of the
commissioner, including, but not limited to, the following:
(A) The framework under which the assuming insurer is regulated.
(B) The structure and authority of the domiciliary regulator with
regard to solvency regulation requirements and financial
surveillance.
(C) The substance of financial and operating standards for
assuming insurers in the domiciliary jurisdiction.
(D) The form and substance of financial reports required to be
filed or made publicly available by reinsurers in the domiciliary
jurisdiction and the accounting principles used.
(E) The domiciliary regulator's willingness to cooperate with
United States regulators in general and the commissioner in
particular.
(F) The history of performance by assuming insurers in the
domiciliary jurisdiction.
(G) Any documented evidence of substantial problems with the
enforcement of final United States judgments in the domiciliary
jurisdiction.
(H) Any relevant international standards or guidance with respect
to mutual recognition of reinsurance supervision adopted by the
International Association of Insurance Supervisors or a successor
organization.
(I) Any other matters deemed relevant by the commissioner.
(2) The commissioner shall consider the list of qualified
jurisdictions published through the National Association of Insurance
Commissioners (NAIC) committee process in determining qualified
jurisdictions. The commissioner may include on the list published
pursuant to this section, any jurisdiction on the NAIC list of
qualified jurisdictions, or on any equivalent list of the United
States Treasury.
(3) If the commissioner approves a jurisdiction as qualified that
does not appear on either the NAIC list of qualified jurisdictions,
or the United States Treasury list, the commissioner shall provide
thoroughly documented justification in accordance with criteria to be
developed under this section.
(4) United States jurisdictions that meet the requirements for
accreditation under the NAIC financial standards and accreditation
program shall be recognized as qualified jurisdictions.
(5) If a certified reinsurer's domiciliary jurisdiction ceases to
be a qualified jurisdiction, the commissioner has the discretion to
suspend the reinsurer's certification indefinitely, in lieu of
revocation.
(h) The commissioner shall assign a rating to each certified
reinsurer, giving due consideration to the financial strength ratings
that have been assigned by rating agencies deemed acceptable to the
commissioner pursuant to this section. The commissioner shall publish
a list of all certified reinsurers and their ratings.
(1) Each certified reinsurer shall be rated on a legal entity
basis, with due consideration being given to the group rating where
appropriate, except that an association including incorporated and
individual unincorporated underwriters that has been approved to do
business as a single certified reinsurer may be evaluated on the
basis of its group rating. Factors that may be considered as part of
the evaluation process include, but are not limited to, the
following:
(A) The certified reinsurer's financial strength rating from an
acceptable rating agency. The maximum rating that a certified
reinsurer may be assigned will correspond to its financial strength
rating as set forth in regulations promulgated by the
commissioner clauses (i) to (vi), inclusive .
The commissioner shall use the lowest financial strength rating
received from an approved rating agency in establishing the maximum
rating of a certified reinsurer. A failure to obtain or maintain at
least two financial strength ratings from acceptable rating agencies
will result in loss of eligibility for certification.
(i) Ratings category "Secure - 1" corresponds to A.M. Best Company
rating A++; Standard & Poor's rating AAA; Moody's Investors Service
rating Aaa; and Fitch Ratings rating AAA.
(ii) Ratings category "Secure - 2" corresponds to A.M. Best
Company rating A+; Standard & Poor's rating AA+, AA, or AA-; Moody's
Investors Service rating Aa1, Aa2, or Aa3; and Fitch Ratings rating
AA+, AA, or AA-.
(iii) Ratings category "Secure - 3" corresponds to A.M. Best
Company rating A; Standard & Poor's rating A+ or A; Moody's Investors
Service rating A1 or A2; and Fitch Ratings rating A+ or A.
(iv) Ratings category "Secure - 4" corresponds to A.M. Best
Company rating A-; Standard & Poor's rating A-; Moody's Investors
Service rating A3; and Fitch Ratings rating A-.
(v) Ratings category "Secure - 5" corresponds to A.M. Best Company
rating B++ or B+; Standard & Poor's rating BBB+, BBB, or BBB-; Moody'
s Investors Service rating Baa1, Baa2, or Baa3; and Fitch Ratings
rating BBB+, BBB, or BBB-.
(vi) Ratings category "Vulnerable" corresponds to A.M. Best
Company rating B, B-, C++, C+, C, C-, D, E, or F; Standard & Poor's
rating BB+, BB, BB-, B+, B, B-, CCC, CC, C, D, or R; Moody's
Investors Service rating Ba1, Ba2, Ba3, B1, B2, B3, Caa, Ca, or C;
and Fitch Ratings rating BB+, BB, BB-, B+, B, B-, CCC+, CC, CCC-, or
D.
(B) The business practices of the certified reinsurer in dealing
with its ceding insurers, including its record of compliance with
reinsurance contractual terms and obligations.
(C) For certified reinsurers domiciled in the United States, a
review of the most recent applicable NAIC Annual Statement Blank,
either Schedule F (for property/casualty reinsurers) or Schedule S
(for life and health reinsurers).
(D) For certified reinsurers not domiciled in the United States, a
review annually of Form CR-F (for property/casualty reinsurers) or
Form CR-S (for life and health reinsurers) (as published on the
department's Internet Web site).
(E) The reputation of the certified reinsurer for prompt payment
of claims under reinsurance agreements, based on an analysis of
ceding insurers' Schedule F reporting of overdue reinsurance
recoverables, including the proportion of obligations that are more
than 90 days past due or are in dispute, with specific attention
given to obligations payable to companies that are in administrative
supervision or receivership.
(F) Regulatory actions against the certified reinsurer.
(G) The report of the independent auditor on the financial
statements of the insurance enterprise, on the basis described in
subparagraph (H).
(H) For certified reinsurers not domiciled in the United States,
audited financial statements on a United States Generally Accepted
Accounting Principles basis, regulatory filings, and actuarial
opinion (as filed with the non-United States jurisdiction supervisor)
statements, (audited United States Generally Accepted Accounting
Principles basis if available, audited International Financial
Reporting Standards basis statements are allowed but must include an
audited footnote reconciling equity and net income to a United States
Generally Accepted Accounting Principles basis, or, with the written
permission of the commissioner, audited International Financial
Reporting Standards statements with reconciliation to United States
Generally Accepted Accounting Principles certified by an officer of
the company), regulatory filings, and actuarial opinion (as filed
with the non-United States jurisdiction supervisor). Upon the initial
application for certification, the commissioner will consider
audited financial statements for the last three years filed with its
non-United States jurisdiction supervisor.
(I) The liquidation priority of obligations to a ceding insurer in
the certified reinsurer's domiciliary jurisdiction in the context of
an insolvency proceeding.
(J) A certified reinsurer's participation in any solvent scheme of
arrangement, or similar procedure, which involves United States
ceding insurers. The commissioner shall receive prior notice from a
certified reinsurer that proposes participation by the certified
reinsurer in a solvent scheme of arrangement.
(K) Any other information deemed relevant by the commissioner.
(2) Based on the analysis conducted under subparagraph (E) of
paragraph (1) of a certified reinsurer's reputation for prompt
payment of claims, the commissioner may make appropriate adjustments
in the security the certified reinsurer is required to post to
protect its liabilities to United States ceding insurers, provided
that the commissioner shall, at a minimum, increase the security the
certified reinsurer is required to post by one rating level under
regulations promulgated by the commissioner, if the commissioner
finds either of the following:
(A) More than 15 percent of the certified reinsurer's ceding
insurance clients have overdue reinsurance recoverables on paid
losses of 90 days or more which are not in dispute and which exceed
one hundred thousand dollars ($100,000) for each ceding insurer.
(B) The aggregate amount of reinsurance recoverables on paid
losses which are not in dispute that are overdue by 90 days or more
exceeds fifty million dollars ($50,000,000).
(3) The assuming insurer shall submit a properly executed Form
CR-1 (as published on the department's Internet Web site) as evidence
of its submission to the jurisdiction of this state, appointment of
the commissioner as an agent for service of process in this state,
and agreement to provide security for 100 percent of the assuming
insurer's liabilities attributable to reinsurance ceded by United
States ceding insurers if it resists enforcement of a final United
States judgment. The commissioner shall not certify any assuming
insurer that is domiciled in a jurisdiction that the commissioner has
determined does not adequately and promptly enforce final United
States judgments or arbitration awards.
(4) (A) In the case of a downgrade by a rating agency or other
disqualifying circumstance, the commissioner shall, upon written
notice, assign a new rating to the certified reinsurer in accordance
with the requirements of subdivision (a) (h)
.
(B) The commissioner shall have the authority to suspend, revoke,
or otherwise modify a certified reinsurer's certification at any time
if the certified reinsurer fails to meet its obligations or security
requirements under this section, or if other financial or operating
results of the certified reinsurer, or documented significant delays
in payment by the certified reinsurer, lead the commissioner to
reconsider the certified reinsurer's ability or willingness to meet
its contractual obligations.
(C) If the rating of a certified reinsurer is upgraded by the
commissioner, the certified reinsurer may meet the security
requirements applicable to its new rating on a prospective basis, but
the commissioner shall require the certified reinsurer to post
security under the previously applicable security requirements as to
all contracts in force on or before the effective date of the
upgraded rating. If the rating of a certified reinsurer is downgraded
by the commissioner, the commissioner shall require the certified
reinsurer to meet the security requirements applicable to its new
rating for all business it has assumed as a certified reinsurer.
(D) Upon revocation of the certification of a certified reinsurer
by the commissioner, the assuming insurer shall be required to post
security in accordance with Section 922.5 in order for the ceding
insurer to continue to take credit for reinsurance ceded to the
assuming insurer. If funds continue to be held in trust in accordance
with subdivision (d) of Section 922.4, the commissioner may allow
additional credit equal to the ceding insurer's pro rata share of
those funds, discounted to reflect the risk of uncollectibility and
anticipated expenses of trust administration. Notwithstanding the
change of a certified reinsurer's rating or revocation of its
certification, a domestic insurer that has ceded reinsurance to that
certified reinsurer may not be denied credit for reinsurance for a
period of three months for all reinsurance ceded to that certified
reinsurer, unless the reinsurance is found by the commissioner to be
at high risk of uncollectibility.
(i) A certified reinsurer shall secure obligations assumed from
United States ceding insurers under this subdivision at a level
consistent with its rating , as specified in regulations
promulgated by the commissioner . The amount of
security required in order for full credit to be allowed shall
correspond with the following requirements:
Ratings security required
Secure - 1: 0%
Secure - 2: 10%
Secure - 3: 20%
Secure - 4: 50%
Secure - 5: 75%
Vulnerable: 100%
(1) In order for a domestic ceding insurer to qualify for full
financial statement credit for reinsurance ceded to a certified
reinsurer, the certified reinsurer shall maintain security in a form
acceptable to the commissioner and consistent with the provisions of
Section 922.5, or in a multibeneficiary trust in accordance with
subdivision (d) of Section 922.4, except as otherwise provided in
this subdivision. In order for a domestic insurer to qualify for
full financial statement credit, reinsurance contracts entered into
or renewed under this section shall include a proper funding clause
that requires the certified reinsurer to provide and maintain
security in an amount sufficient to avoid the imposition of any
financial statement penalty on the ceding insurer under this section
for reinsurance ceded to the certified reinsurer.
(2) If a certified reinsurer maintains a trust to fully secure its
obligations subject to subdivision (d) of Section 922.4, and chooses
to secure its obligations incurred as a certified reinsurer in the
form of a multibeneficiary trust, the certified reinsurer shall
maintain separate trust accounts for its obligations incurred under
reinsurance agreements issued or renewed as a certified reinsurer
with reduced security as permitted by this subdivision or comparable
laws of other United States jurisdictions and for its obligations
subject to subdivision (d) of Section 922.4. It shall be a condition
to the grant of certification under this section that the certified
reinsurer shall have bound itself, by the language of the trust and
agreement with the commissioner with principal regulatory oversight
of each of those trust accounts, to fund, upon termination of any of
those trust accounts, out of the remaining surplus of those trusts
any deficiency of any other of those trust accounts.
(3) The minimum trusteed surplus requirements provided in
subdivision (d) of Section 922.4 are not applicable with respect to a
multibeneficiary trust maintained by a certified reinsurer for the
purpose of securing obligations incurred under this subdivision,
except that the trust shall maintain a minimum trusteed surplus of
ten million dollars ($10,000,000).
(4) With respect to obligations incurred by a certified reinsurer
under this subdivision, if the security is insufficient, the
commissioner shall reduce the allowable credit by an amount
proportionate to the deficiency, and have the discretion to impose
further reductions in allowable credit upon finding that there is a
material risk that the certified reinsurer's obligations will not be
paid in full when due.
(5) For purposes of this subdivision, a certified reinsurer whose
certification has been terminated for any reason shall be treated as
a certified reinsurer required to secure 100 percent of its
obligations.
(A) As used in this subdivision, the term "terminated" means
revocation, suspension, voluntary surrender, and inactive status.
(B) If the commissioner continues to assign a higher rating as
permitted by other provisions of this section, this requirement shall
not apply to a certified reinsurer in inactive status or to a
reinsurer whose certification has been suspended.
(6) The commissioner shall require the certified reinsurer to post
100-percent security in accordance with Section 922.5, for the
benefit of the ceding insurer or its estate, upon the entry of an
order of rehabilitation, liquidation, or conservation against the
ceding insurer.
(7) Affiliated reinsurance transactions shall receive the same
opportunity for reduced security requirements as all other
reinsurance transactions.
(8) In order to facilitate the prompt payment of claims, a
certified reinsurer shall not be required to post security for
catastrophe recoverables for a period of one year from the date of
the first instance of a liability reserve entry by the ceding company
as a result of a loss from a catastrophic occurrence that is
likely to result in significant insured losses, as recognized
by the commissioner. The one-year deferral period is contingent upon
the certified reinsurer continuing to pay claims in a timely manner
, as determined by the commissioner . Reinsurance
recoverables for only the following lines of business as reported on
the NAIC annual financial statement related specifically to the
catastrophic occurrence will be included in the deferral:
(A) Line 1: Fire.
(B) Line 2: Allied lines.
(C) Line 3: Farmowners multiple peril.
(D) Line 4: Homeowners multiple peril.
(E) Line 5: Commercial multiple peril.
(F) Line 9: Inland marine.
(G) Line 12: Earthquake.
(H) Line 21: Auto physical damage.
(9) Credit for reinsurance under this section shall apply only to
reinsurance contracts entered into or renewed on or after the
effective date of the certification of the assuming insurer. Any
reinsurance contract entered into prior to the effective date of the
certification of the assuming insurer that is subsequently amended
by mutual agreement of the parties to the reinsurance contract
after the effective date of the certification of the assuming
insurer, or a new reinsurance contract, covering any risk for which
collateral was provided previously, shall only be subject to this
section with respect to losses incurred and reserves reported from
and after the effective date of the amendment or new contract.
(10) Nothing in this section shall be construed to prohibit the
parties to a reinsurance agreement from agreeing to provisions
establishing security requirements that exceed the minimum security
requirements established for certified reinsurers under this section.
(j) A certified reinsurer that ceases to assume new business in
this state may request to maintain its certification in inactive
status in order to continue to qualify for a reduction in security
for its in-force business. An inactive certified reinsurer shall
continue to comply with all applicable requirements of this section,
and the commissioner shall assign a rating that takes into account,
if relevant, the reasons why the reinsurer is not assuming new
business.
(k) Notwithstanding this section, credit for reinsurance or
deduction from liability by a domestic ceding insurer for cessions to
a certified reinsurer may be disallowed upon a
finding by the commissioner that the
application of the literal provisions of this section does not
accomplish its intent, or either the financial condition of the
reinsurer or the collateral or other security provided by the
reinsurer does not, in substance, satisfy the credit for reinsurance
requirements in Section 922.4.
(l) This section shall remain in effect only until January 1,
2016, and as of that date is repealed, unless a later enacted
statute, that is enacted before January 1, 2016, deletes or extends
that date.
SEC. 6. Section 922.42 is added to the Insurance Code, to read:
922.42. (a) If an accredited or certified reinsurer ceases to
meet the requirements for accreditation or certification, the
commissioner may suspend or revoke the reinsurer's accreditation or
certification.
(b) The commissioner shall give the reinsurer notice and
opportunity for hearing. The suspension or revocation shall not take
effect until after the commissioner's order on hearing, unless any of
the following applies:
(1) The reinsurer waives its right to hearing.
(2) The commissioner's order is based on regulatory action by the
reinsurer's domiciliary jurisdiction or the voluntary surrender or
termination of the reinsurer's eligibility to transact insurance or
reinsurance business in its domiciliary jurisdiction or in the
primary certifying state of the reinsurer under subdivision (b) of
Section 922.41.
(3) The commissioner finds that an emergency requires immediate
action and a court of competent jurisdiction has not stayed the
commissioner's action.
(c) While a reinsurer's accreditation or certification is
suspended, no reinsurance contract issued or renewed after the
effective date of the suspension qualifies for credit except to the
extent that the reinsurer's obligations under the contract are
secured in accordance with Section 922.5. If a reinsurer's
accreditation or certification is revoked, no credit for reinsurance
may be granted after the effective date of the revocation except to
the extent that the reinsurer's obligations under the contract are
secured in accordance with subdivision (h)
(i) of Section 922.41 or Section 922.5.
SEC. 7. Section 922.43 is added to the Insurance Code, to read:
922.43. The actual costs and expenses incurred by the department
in reviewing requests for accreditation or certification, trusts, and
subsequent amendments established or maintained pursuant to Sections
922.1 to 922.7, inclusive, and subsequent reviews, shall be charged
to and collected from the requesting reinsurer. If the reinsurer
fails to pay the actual costs and expenses promptly when due, then
the commissioner may deny the requests, may refuse to allow credit
for reinsurance ceded to that reinsurer or group, or may revoke the
reinsurer's accreditation or certification.
SEC. 8. Section 922.5 of the Insurance Code is amended to read:
922.5. (a) An asset or a deduction from liability for reinsurance
ceded by a domestic insurer to an assuming insurer not meeting the
requirements of Section 922.4 shall be allowed in an amount not
exceeding the liabilities carried by the ceding insurer to the extent
of either of the following:
(1) The asset or deduction is not greater than the amount of funds
held by the ceding insurer under a reinsurance contract with that
assuming insurer as security for the payment of obligations
thereunder and such funds are held in the United States under the
exclusive control of the ceding insurer.
(2) The asset or deduction is not greater than the amount of funds
held in a trust, satisfactory to the commissioner, on behalf of the
ceding insurer under a reinsurance contract with such assuming
insurer as security for the payment of obligations thereunder and is
held in a qualified United States financial institution, as defined
in subdivision (b) of Section 922.7, subject to withdrawal solely by
the ceding insurer.
The security under this subdivision may be in the form of cash or
securities authorized as general investments under Article 3
(commencing with Section 1170) of Chapter 2, or securities listed by
the Securities Valuation Office of the NAIC, including those deemed
exempt from filing, as defined by the Purposes and Procedures Manual
of the National Association of Insurance Commissioners Securities
Valuation Office, qualifying as admitted assets under this code and
with liquidity meeting the requirements of Section 706.5, and not
otherwise disallowed in the commissioner's discretion.
(b) An asset or a deduction from liability for reinsurance ceded
by a domestic insurer to an assuming insurer not meeting the
requirements of Section 922.4 shall be allowed in an amount not
exceeding the liabilities carried by the ceding insurer to the extent
that security is provided in the form of letters of credit,
satisfactory to the commissioner, which shall be:
(1) Clean, irrevocable, unconditional letters of credit, issued or
confirmed by qualified United States financial institutions, as
defined in subdivision (a) of Section 922.7, effective no later than
December 31st in respect of the year for which filing is being made,
and in the possession of the ceding insurer on or before the filing
date of its annual statement.
(2) Letters of credit meeting applicable standards of issuer
acceptability as of the dates of their issuance or confirmation and
shall, notwithstanding the issuing or confirming institutions'
subsequent failure to meet applicable standards of issuer
acceptability, continue to be acceptable as security until their
expiration, extension, renewal, modification, or amendment, whichever
first occurs.
(c) For purposes of this section, the phrase "deemed exempt from
filing as defined by the Purposes and Procedures Manual of the
National Association of Insurance Commissioners Securities Valuation
Office" shall mean all United States government securities, and all
other securities or bonds with a rating of SVO 1 or FE 1 listed by
the National Association of Insurance Commissioners Securities
Valuation Office as exempt.
SEC. 9. Section 922.6 of the Insurance Code is repealed.
SEC. 10. Section 922.6 is added to the Insurance Code, to read:
922.6. Credit for reinsurance shall not be denied a foreign
ceding insurer to the extent that credit is recognized by the ceding
insurer's domestic state regulator, provided that the domestic state
is accredited by the National Association of Insurance Commissioners
(NAIC), or the domestic state regulator has financial solvency
requirements substantially similar to the requirements necessary for
NAIC accreditation.
SEC. 11. Section 922.8 of the Insurance Code is amended to read:
922.8. (a) The commissioner, after notice, comment period, and a
hearing if requested by more than 10 affected insurers, may issue a
bulletin setting forth reasonable requirements for the allowance of
reinsurance as an asset or deduction from liability consistent with
Sections 922.4 to 922.6, inclusive, including the following:
(1) Filing requirements for an accredited assuming insurer.
(2) Accreditation requirements for an assuming insurer with less
than a twenty million dollars ($20,000,000) surplus as regards
policyholders.
(3) The definition of "liabilities" as used in Sections 922.4 and
922.5.
(4) Investment guidelines for trust funds established and
maintained pursuant to subdivision (d) of Section 922.4.
(5) Definitions and required or permitted conditions for trust
funds established and maintained pursuant to Section 922.5.
(6) Requirements of letters of credit established and maintained
pursuant to Section 922.5.
(b) On or before January 1, 1998, the commissioner shall notify
the Legislature that the bulletin has been promulgated so that the
Legislature is able to ensure the commissioner's compliance with the
requirements of this subdivision.
(c) The bulletin authorized by this section shall have the same
force and effect, and may be enforced by the commissioner to the same
extent and degree, as regulations issued by the commissioner until
the time that the commissioner issues additional or amended
regulations pursuant to subdivision (d).
(d) The commissioner shall adopt regulations implementing the
provisions of this law, that shall supersede the bulletin authorized
by this section, no later than December 31, 2001.
SEC. 12. Section 922.85 is added to the Insurance Code, to read:
922.85. The commissioner may adopt regulations in accordance with
the procedures provided in Chapter 3.5 (commencing with Section
11340) of Part 1 of Division 3 of Title 2 of the Government Code or
otherwise prescribe requirements consistent with Sections 922.4,
922.41, 922.42, 922.43, and 922.5 , provided the commissioner
may update subparagraph (A) of paragraph (1) of subdivision (h) and
subdivision (i) of Section 922.41 to add other nationally recognized
statistical rating agencies, or to modify the rating categories, the
corresponding financia l ratings, or the percentage of
security required to conform to changes in these factors adopted by
the National Association of Insurance Commissioners .
SEC. 13. Section 12121 of the Insurance Code is amended to read:
12121. (a) For financial guaranty insurance that takes effect on
or after January 1, 1991, an insurer authorized to transact financial
guaranty insurance shall receive credit for reinsurance as an asset
or as a reduction from liabilities only if the reinsurance is placed
with a reinsurer as provided in subdivision (b), and if the
reinsurance agreement may be terminated or amended only if one or
more of the following applies:
(1) At the option of the reinsurer or the ceding insurer if the
reinsurance agreement provides that the liability of the reinsurer
with respect to policies in effect at the date of termination shall
continue until the expiration or cancellation of each such policy.
(2) With the consent of the ceding company, if the reinsurance
agreement provides for a cutoff of the reinsurance in force as of the
date of termination.
(3) At the discretion of the commissioner acting as rehabilitator,
liquidator, or receiver of the ceding or assuming insurer.
(b) Reinsurance may be placed with one of the following:
(1) Another financial guaranty insurance corporation admitted
pursuant to this article to transact financial guaranty insurance
which may be under common control with the ceding financial guaranty
insurer or financial guaranty corporation, but which does not own,
and is not owned by, in whole or in part, directly or indirectly, the
ceding financial guaranty insurer or financial guaranty insurance
corporation.
(2) Another financial guaranty insurance corporation admitted
pursuant to this article which does own, or is owned by, in whole or
in part, directly or indirectly, the ceding financial guaranty
insurer or financial guaranty insurance corporation provided that (A)
the value of the ownership interest in either case does not exceed
the greater of (i) 35 percent of its combined capital and surplus or
(ii) 50 percent of the excess of its surplus over its liabilities and
capital, and (B) the financial guaranty insurance corporation
providing the reinsurance is rated at the time of cession and
thereafter in one of the two top generic rating classifications by a
securities rating agency acceptable to the commissioner.
(3) An insurer admitted to transact surety insurance but not
financial guaranty insurance pursuant to this article, if the insurer
meets all of the following criteria:
(A) Has and maintains combined capital and surplus of at least
fifty million dollars ($50,000,000).
(B) Establishes and maintains the reserves required in Sections
12108, 12109, and 12110, except that if the reinsurance agreement is
not pro rata the contribution to the contingency reserve shall be
equal to 50 percent of the quarterly earned insurance premium.
(C) Complies with the provisions of subdivision (b) of Section
12114, except that its maximum aggregate assumed total net liability
shall be one-half that permitted for a financial guaranty insurance
corporation. For the purpose of determining compliance with this
clause, the assuming reinsurer, unless at the time of cession and
thereafter it is rated in one of the two top generic rating
classifications by a securities rating agency acceptable to the
commissioner, shall be limited to using 10 percent of its capital and
surplus in making this calculation.
(D) Complies with the provisions of Section 12115.
(E) If the insurer is an affiliate, parent, or subsidiary of the
financial guaranty insurance corporation, the affiliate, parent, or
subsidiary shall not assume a percentage of the corporation's total
liability in excess of its percentage of equity interest in the
corporation.
(F) Assumes from the financial guaranty insurance corporation and
any affiliate, parent, or subsidiary that is a financial guaranty
insurance corporation or an insurer writing only financial guaranty
insurance as is or would be permitted by this article, and any other
kinds of insurance that a financial guaranty insurance corporation
may write in this state, together with all other reinsurers subject
to this paragraph, less than 50 percent of the total exposures
insured by the financial guaranty insurance corporation and such
affiliates, parent, or subsidiaries after deducting any reinsurance
placed with another financial guaranty insurance corporation that is
not an affiliate, parent, or subsidiary or an insurer writing only
financial guaranty insurance as is or would be permitted by this
article that is not an affiliate, parent, or subsidiary.
(4) A nonadmitted insurer transacting only financial guaranty
insurance as is or would be permitted by this article and that
otherwise complies with the provisions of subparagraphs (A), (E), and
(F) of paragraph (3), and otherwise complies with paragraph (1) or
(2), and in compliance with the requirements of subdivision (b) or
(c) of Section 922.4 or subdivision (a) of Section 922.5, as
applicable.
(5) A nonadmitted insurer not transacting only financial guaranty
insurance as is or would be permitted by this article and that
complies with the provisions of subparagraphs (A), (C), (E), and (F)
of paragraph (3) in an amount not exceeding the liabilities carried
by the ceding financial guaranty insurance corporation and in
compliance with the requirements of subdivision (b), (c), or (d) of
Section 922.4 or subdivision (a) or (b) of Section 922.5, as
applicable.
(c) In determining whether the financial guaranty insurance
corporation meets the limitations imposed by Section 12115, in
addition to credit for other types of qualifying reinsurance, the
financial guaranty insurance corporation's aggregate risk may be
reduced to the extent of the limit for aggregate reinsurance but, in
no event, in an amount greater than the amount of the aggregate risk
that will become due during the unexpired term of the reinsurance
agreement in excess of the financial guaranty insurance corporation's
retention pursuant to the reinsurance agreement.