Ill. Admin. Code tit. 50 § 1104.70

Current through Register Vol. 48, No. 45, November 8, 2024

Section 1104.70 - Trust Agreements Qualified Under Section 1104.60

a) As used in this Section:

1) Beneficiary means the entity for whose sole benefit the trust has been established and any successor of the beneficiary by operation of law. If a court of law appoints a successor in interest to the named beneficiary, the named beneficiary includes and is limited to the court appointed domiciliary receiver (including conservator, rehabilitator or liquidator).

2) Grantor means the entity that has established a trust for the sole benefit of the beneficiary. When established in conjunction with a reinsurance agreement, the grantor is the unlicensed, unaccredited assuming insurer.

3) Obligations, as used in subsection (b)(11), means:

A) Reinsured losses and allocated loss adjustment expenses paid by the ceding company, but not recovered from the assuming insurer;

B) Reserves for reinsured losses reported and outstanding;

C) Reserves for reinsured losses incurred but not reported; and

D) Reserves for allocated reinsured loss adjustment expenses and unearned premiums.

b) Required Conditions

1) The trust agreement shall be entered into between the beneficiary, the grantor and a trustee that shall be a qualified U.S. financial institution as defined in Section 173.1(3)(B) of the Code.

2) The trust agreement shall create a trust account into which assets shall be deposited.

3) All assets in the trust account shall be held by the trustee at the trustee's office in the U.S., except that a bank may apply for the Director's permission to use a foreign branch office of the bank as trustee for trust agreements established pursuant to this Section. If the Director approves the use of the foreign branch office as trustee, then its use must be approved by the beneficiary in writing and the trust agreement must provide that the written notice described in subsection (b)(4)(A) must also be presentable, as a matter of legal right, at the trustee's principal office in the U.S..

4) The trust agreement shall provide that:

A) The beneficiary shall have the right to withdraw assets from the trust account at any time, without notice to the grantor, subject only to written notice from the beneficiary to the trustee;

B) No other statement or document is required to be presented in order to withdraw assets, except that the beneficiary may be required to acknowledge receipt of withdrawn assets;

C) It is not subject to any conditions or qualifications outside of the trust agreement; and

D) It shall not contain references to any other agreements or documents except as provided for under subsections (b)(11) and (12).

5) The trust agreement shall be established for the sole benefit of the beneficiary.

6) The trust agreement shall require the trustee to:

A) Receive assets and hold all assets in a safe place;

B) Determine that all assets are in such form that the beneficiary, or the trustee upon direction by the beneficiary, may, whenever necessary, negotiate any such assets, without consent or signature from the grantor or any other person or entity;

C) Furnish to the grantor and the beneficiary a statement of all assets in the trust account upon its inception and at intervals no less frequent than the end of each calendar quarter;

D) Notify the grantor and the beneficiary, within 10 days, of any deposits to or withdrawals from the trust account;

E) Upon written demand of the beneficiary, immediately take any and all steps necessary to transfer absolutely and unequivocally all right, title and interest in the assets held in the trust account to the beneficiary and deliver physical custody of the assets to the beneficiary; and

F) Allow no substitutions or withdrawals of assets from the trust account, except on written instructions from the beneficiary, except that the trustee may, without the consent of but with notice to the beneficiary, upon call or maturity of any trust asset, withdraw the asset upon condition that the proceeds are paid into the trust account.

7) The trust agreement shall provide that, at least 30 days, but not more than 45 days, prior to termination of the trust account, written notification of termination shall be delivered by the trustee to the beneficiary.

8) The trust agreement shall be made subject to and governed by the laws of the state in which the trust is established.

9) The trust agreement shall prohibit invasion of the trust corpus for the purpose of paying compensation to, or reimbursing the expenses of, the trustee.

10) The trust agreement shall provide that the trustee shall be liable for its own negligence, willful misconduct or lack of good faith.

11) Notwithstanding other provisions of this Part, when a trust agreement is established in conjunction with a reinsurance agreement covering risks other than life, annuities and accident and health, when it is customary practice to provide a trust agreement for a specific purpose, the trust agreement may, notwithstanding any other conditions in this Part, provide that the ceding insurer shall undertake to use and apply amounts drawn upon the trust account, without diminution because of the insolvency of the ceding insurer or the assuming insurer, for the following purposes:

A) To pay or reimburse the ceding insurer for the assuming insurer's share under the specific reinsurance agreement regarding any losses and allocated loss expenses paid by the ceding insurer, but not recovered from the assuming insurer, or for unearned premiums due to the ceding insurer if not otherwise paid by the assuming insurer;

B) To make payment to the assuming insurer of any amounts held in the trust account that exceed 102% of the actual amount required to fund the assuming insurer's obligations under the specific reinsurance agreement; or

C) When the ceding insurer has received notification of termination of the trust account and when the assuming insurer's entire obligations under the specific reinsurance agreement remain unliquidated and undischarged 10 days prior to the termination date, to:

i) withdraw amounts equal to the obligations; and

ii) deposit those amounts:

* in a separate account;

* in the name of the ceding insurer;

* in any qualified U.S. financial institution as defined in Section 173.1(3)(B) of the Code;

* a part from its general assets; and

* in trust for the uses and purposes specified in subsections (b)(11)(A) and (B) as may remain executory after the withdrawal and for any period after the termination date.

12) Notwithstanding other provisions of this Part, when a trust agreement is established to meet the requirements of Section 1104.60 in conjunction with a reinsurance agreement covering life, annuities, or accident and health risks, when it is customary to provide a trust agreement for a specific purpose, the trust agreement may provide that the ceding insurer shall undertake to use and apply amounts drawn upon the trust account, without diminution because of the insolvency of the ceding insurer or the assuming insurer, only for the following purposes:

A) To pay or reimburse the ceding insurer for:

i) The assuming insurer's share under the specific reinsurance agreement of premiums returned, but not yet recovered from the assuming insurer, to the owners of policies reinsured under the reinsurance agreement on account of cancellations of the policies; and

ii) The assuming insurer's share under the specific reinsurance agreement of surrenders and benefits or losses paid by the ceding insurer, but not yet recovered from the assuming insurer, under the terms and provisions of the policies reinsured under the reinsurance agreement;

B) To pay the assuming insurer amounts held in the trust account in excess of the amount necessary to secure the credit or reduction from liability for reinsurance taken by the ceding insurer; or

C) When the ceding insurer has received notification of termination of the trust and when the assuming insurer's entire obligations under the specific reinsurance agreement remain unliquidated and undischarged 10 days prior to the termination date to:

i) withdraw amounts equal to the assuming insurer's share of liabilities, to the extent that the liabilities have not yet been funded by the assuming insurer; and

ii) deposit those amounts:

* in a separate account;

* in the name of the ceding insurer;

* in any qualified U.S. financial institution;

* apart from its general assets; and

* in trust for the uses and purposes specified in subsections (b)(12)(A) and (B) as may remain executory after withdrawal and for any period after the termination date.

13) Either the reinsurance agreement or the trust agreement must stipulate that assets deposited in the trust account shall be valued according to their current fair market value and shall consist only of cash in U.S. dollars, certificates of deposit issued by a U.S. bank and payable in U.S. dollars, and investments permitted by the Code, or any combination of the above, provided investments in or issued by an entity controlling, controlled by, or under common control with, either the grantor or the beneficiary of the trust shall not exceed 5% of total investments. The agreement may further specify the types of investments to be deposited. If the reinsurance agreement covers life, annuities, or accident and health risks, the provisions of this subsection (b)(13) must be included in the reinsurance agreement.

c) Permitted Conditions

1) The trust agreement may provide that the trustee may resign upon delivery of a written notice of resignation, effective not less than 90 days after receipt by the beneficiary and grantor of the notice, and that the trustee may be removed by the grantor, by delivery to the trustee and the beneficiary, of a written notice of removal, effective not less than 90 days after receipt by the trustee and the beneficiary of the notice. However, no resignation or removal shall be effective until a successor trustee has been duly appointed and approved by the beneficiary and the grantor and all assets in the trust have been duly transferred to the new trustee.

2) The grantor may have the full and unqualified right to vote any shares of stock in the trust account and to receive from time to time payments of any dividends or interest upon any shares of stock or obligations included in the trust account. Any such interest or dividends shall be either forwarded promptly upon receipt to the grantor or deposited in a separate account established in the grantor's name.

3) The trustee may be given authority to invest, and accept substitutions of, any funds in the account, provided that no investment or substitution shall be made without prior approval of the beneficiary, unless the trust agreement specifies categories of investments acceptable to the beneficiary and authorizes the trustee to invest funds and to accept substitutions that the trustee determines are at least equal in current fair market value to the assets withdrawn and that are consistent with the restrictions in subsection (d)(1)(B).

4) The trust agreement may provide that the beneficiary may, at any time, designate a party to which all or part of the trust assets are to be transferred. The transfer may be conditioned upon the trustee receiving, prior to or simultaneously with, other specified assets.

5) The trust agreement may provide that, upon termination of the trust account, all assets not previously withdrawn by the beneficiary, with written approval by the beneficiary, shall be delivered over to the grantor.

d) Additional Conditions Applicable to Reinsurance Agreements

1) A reinsurance agreement that is entered into in conjunction with a trust agreement and the establishment of a trust account must contain provisions that:

A) Require the assuming insurer to:

i) enter into a trust agreement, specifying what the agreement is to cover; and

ii) establish a trust account for the benefit of the ceding insurer;

B) Require the assuming insurer, prior to depositing assets with the trustee, to execute assignments or endorsements in blank, or to transfer legal title to the trustee of all shares, obligations or any other assets requiring assignments, in order that the ceding insurer, or the trustee upon the direction of the ceding insurer, may, whenever necessary, negotiate these assets without consent or signature from the assuming insurer or any other entity;

C) Require that all settlements of account between the ceding insurer and the assuming insurer be made in cash or its equivalent; and

D) Stipulate that the assuming insurer and the ceding insurer agree that the assets in the trust account, established pursuant to the provisions of the reinsurance agreement, may be withdrawn by the ceding insurer at any time, notwithstanding any other provisions in the reinsurance agreement, and be utilized and applied by the ceding insurer or its successors in interest by operation of law, including without limitation any liquidator, rehabilitator, receiver or conservator of the company, without diminution because of insolvency on the part of the ceding insurer or the assuming insurer, only for the following purposes:

i) To reimburse the ceding insurer for the assuming insurer's share of premiums returned to the owners of policies reinsured under the reinsurance agreement because of cancellations of those policies;

ii) To reimburse the ceding insurer for the assuming insurer's share of surrenders and benefits or losses paid by the ceding insurer pursuant to the provisions of the policies reinsured under the reinsurance agreement;

iii) To fund an account with the ceding insurer in an amount at least equal to the deduction, for reinsurance ceded, from the ceding insurer liabilities for policies ceded under the agreement. The account shall include, but not be limited to, amounts for policy reserves, claims and losses incurred (including losses incurred but not reported), loss adjustment expenses, and unearned premium reserves; and

iv) To pay any other amounts the ceding insurer claims are due under the reinsurance agreement.

2) The reinsurance agreement may also contain provisions that:

A) Give the assuming insurer the right to seek approval from the ceding insurer (the ceding insurer shall not unreasonably or arbitrarily withhold its approval) to withdraw from the trust account all or any part of the trust assets and transfer those assets to the assuming insurer, provided:

i) The assuming insurer shall, at the time of withdrawal, replace the withdrawn assets with other qualified assets having a current fair market value equal to the market value of the assets withdrawn so as to maintain at all times the deposit in the required amount; or

ii) After withdrawal and transfer, the current fair market value of the trust account is no less than 102% of the required amount.

B) Provide for:

i) The return of any amount withdrawn in excess of the actual amounts required for subsections (d)(1)(D)(i), (ii) and (iii), or in the case of subsection (d)(1)(D)(iv), any amounts that are subsequently determined not to be due; and

ii) Interest payments, at a rate not in excess of the prime rate of interest, on the amounts held pursuant to subsection (d)(1)(D)(iii).

C) Permit the award by any arbitration panel or court of competent jurisdiction of:

i) Interest at a rate different from that provided in subsection (d)(2)(B)(ii);

ii) Court of arbitration costs;

iii) Attorney's fees; and

iv) Any other reasonable expenses.

e) Financial reporting. A trust agreement may be used to reduce any liability for reinsurance ceded to an unauthorized assuming insurer in financial statements required to be filed with the Department in compliance with the provisions of this Part when established on or before the date of filing of the financial statement of the ceding insurer. Further, the reduction for the existence of an acceptable trust account may be up to the current fair market value of acceptable assets available to be withdrawn from the trust account at that time, but the reduction shall be no greater than the specific obligations under the reinsurance agreement that the trust account was established to secure.

f) The failure of any trust agreement to specifically identify the beneficiary as defined in subsection (a) shall not be construed to affect any actions or rights the Director may take or possess pursuant to the provisions of the laws of this State.

Ill. Admin. Code tit. 50, § 1104.70

Amended at 33 Ill. Reg. 9314, effective June 18, 2009

Amended at 43 Ill. Reg. 14163, effective 11/19/2019