Utah Admin. Code 590-173-7

Current through Bulletin 2024-20, October 15, 2024

Section R590-173-7 - Credit for Reinsurance - Reinsurer Maintains a Trust Fund

(1)

(a) Credit is allowed for reinsurance ceded by a domestic insurer to an assuming insurer that, as of any date a ceding insurer claims reinsurance credit in a statutory financial statement, and thereafter for so long as:

(i) credit for reinsurance is claimed; and

(ii) the assuming insurer maintains a trust fund:

(A) in an amount prescribed in Subsection (2)(a); and

(B) in a qualified United States financial institution for the payment of the valid claims of its U.S. domiciled ceding insurers, their assigns, and successors in interest.

(b) An assuming insurer shall report annually to the commissioner substantially the same information required to be reported on the NAIC annual statement form by a licensed insurer, for the commissioner to determine the sufficiency of the trust fund.

(2) This subsection applies to each category of an assuming insurer.

(a) A trust fund for a single assuming insurer shall consist of funds in trust:

(i) in an amount not less than the assuming insurer's liabilities attributable to reinsurance ceded by a U.S. domiciled insurer; and

(ii) a trusteed surplus of not less than $20 million, except as provided in Subsection (2)(b).

(b)

(i) The commissioner with principal regulatory oversight of the trust may authorize a reduction in the required trusteed surplus if:

(A) the assuming insurer permanently discontinues underwriting new business secured by the trust for at least three years; and

(B) the commissioner makes a risk assessment finding that the new required surplus level is adequate for the protection of U.S. ceding insurers, policyholders, and claimants in light of reasonably foreseeable adverse loss development.

(ii) The risk assessment in Subsection (2)(b)(i):

(A) may involve an actuarial review, including an independent analysis of reserves and cash flows; and

(B) shall consider all material risk factors including:

(I) the lines of business involved;

(II) the stability of the incurred loss estimates; and

(III) the effect of surplus requirements on the assuming insurer's liquidity or solvency.

(iii) A reduction in trusteed surplus under Subsection (2)(b) may not fall below 30% of the assuming insurer's liabilities attributable to reinsurance ceded by U.S. ceding insurers covered by the trust.

(c)

(i) A trust fund for a group including incorporated and individual unincorporated underwriters shall consist of:

(A) for reinsurance ceded under a reinsurance agreement with an inception, amendment, or renewal date on or after January 1, 1993, funds in trust in an amount not less than the respective underwriters' several liabilities attributable to business ceded by U.S. domiciled ceding insurers to any underwriter of the group;

(B) for reinsurance ceded under a reinsurance agreement with an inception date on or before December 31, 1992, and not amended or renewed after that date, notwithstanding the other provisions of this rule, funds in trust in an amount not less than the respective underwriters' several insurance and reinsurance liabilities attributable to business written in the United States; and

(C) a trusteed surplus of which $100 million is held jointly for the benefit of the U.S. domiciled ceding insurers of any member of the group for all the years of account.

(ii) The incorporated members of the group:

(A) may not engage in any business other than underwriting as a member of the group; and

(B) are subject to the same level of regulation and solvency control by the group's domiciliary regulator as are the unincorporated members.

(iii) 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:

(A) an annual certification by the group's domiciliary regulator of the solvency of each underwriter member of the group; or

(B) if a certification is unavailable, a financial statement, prepared by an independent public accountant, of each underwriter member of the group.

(d)

(i) A trust fund for a group of incorporated insurers under common administration, whose members possess aggregate policyholders surplus of $10 billion, calculated and reported in substantially the same manner as prescribed by the annual statement instructions and the Accounting Practices and Procedures Manual of the NAIC, and that continuously transacted an insurance business outside the United States for at least three years immediately prior to applying for accreditation, shall:

(A) consist of funds in trust in an amount not less than the assuming insurers' several liabilities attributable to business ceded by U.S. domiciled ceding insurers to any members of the group pursuant to reinsurance contracts issued in the name of the group;

(B) maintain a joint trusteed surplus of which $100 million is held jointly for the benefit of the U.S. domiciled ceding insurers of any member of the group; and

(C)

(I) file with the commissioner a completed Form AR-1, available on the department's website, https://insurance.utah.gov, evidencing each member's submission to Utah's authority to examine its books and records; and

(II) certify that the member examined will bear the expense of the examination.

(ii) For each underwriter member of a group described in Subsection (2)(d)(i), the group shall file within 90 days after the financial statements are due to be filed with the group's domiciliary regulator:

(A) an annual certification of its solvency by its domiciliary regulator; and

(B) a financial statement prepared by an independent public accountant.

(3)

(a) Credit for reinsurance may not be granted unless the form of the trust and any amendments to the trust have been approved by either:

(i) the commissioner of the state where the trust is domiciled; or

(ii) the commissioner of another state who, pursuant to the terms of the trust instrument, accepted responsibility for regulatory oversight of the trust.

(b) The form of a trust and a trust amendment shall be filed with the commissioner of every state in which the ceding insurer beneficiaries of the trust are domiciled.

(c) The trust instrument shall provide that:

(i) contested claims be valid and enforceable out of funds in trust to the extent that they remain unsatisfied 30 days after entry of the final order of any court of competent jurisdiction in the United States;

(ii) legal title to the assets of the trust be vested in the trustee for the benefit of the grantor's U.S. ceding insurers, their assigns, and successors in interest;

(iii) it is subject to examination as determined by the commissioner;

(iv) it remains in effect for as long as the assuming insurer, or any member or former member of a group of insurers, has outstanding obligations under reinsurance agreements subject to the trust; and

(v) no later than February 28 of each year, the trustee of the trust submit a written report to the commissioner that:

(A) sets forth the balance in the trust;

(B) lists the trust's investments at the preceding year-end; and

(C)

(I) certifies the date of termination of the trust, if planned; or

(II) certifies that the trust may not expire before the following December 31.

(d)

(i) Notwithstanding any provision in the trust instrument, a 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, that directs the trustee to transfer to a receiver, including a commissioner with regulatory oversight over the trust, the assets of the trust if:

(A) the trust fund is inadequate because it contains an amount less than the amount required by Subsection (3)(d); or

(B) the grantor of the trust is declared insolvent or placed into receivership, rehabilitation, liquidation, or similar proceedings under the laws of its state or country of domicile.

(ii) A receiver described in Subsection (3)(d) shall receive and value claims and distribute assets in accordance with the laws applicable to the liquidation of a domestic insurer in the state in which the trust is domiciled.

(iii) If a receiver described in Subsection (3)(d) determines that the assets of the trust fund or any part thereof are not necessary to satisfy the claims of the U.S. beneficiaries of the trust, the receiver shall return the assets, or any part thereof, to the trustee for distribution in accordance with the trust agreement.

(iv) The grantor shall waive any right otherwise available to it under U.S. law that is inconsistent with Subsection (3)(d).

(4)

(a) An asset deposited in a trust shall:

(i) be valued according to its current fair market value; and

(ii) consist only of:

(A) cash in U.S. dollars;

(B) certificates of deposit issued by a qualified United States financial institution; and

(C) clean, irrevocable, unconditional, and "evergreen" letters of credit issued or confirmed by a qualified United States financial institution; and

(D) an investment in or issued by an entity controlling, controlled by, or under common control with either a grantor or a beneficiary of the trust, not to exceed 5% of total investments;

(b) No more than 20% of the total investment in the trust may be foreign investments authorized under Subsection (4)(d)(i)(E), (4)(d)(iii), (4)(d)(iv), or (4)(d)(vi).

(c)

(i) No more than 10% of the total investment in the trust may be securities denominated in foreign currencies.

(ii) A depository receipt denominated in U.S. dollars and representing rights conferred by a foreign security is classified as a foreign investment denominated in a foreign currency.

(d) An asset of a trust may be invested only in:

(i) a valid and legally authorized government obligation that is not in default as to principal and interest and is issued, assumed, or guaranteed by:

(A) the United States or its agency or instrumentality;

(B) a state of the United States;

(C) a territory, possession, or other governmental unit of the United States;

(D) an agency or instrumentality of a governmental unit in Subsection (4)(d)(i)(B) or (4)(d)(i)(C) if the obligation is payable, as to principal and interest, from taxes levied or by law required to be levied, or from adequate special revenues pledged or otherwise appropriated, or by law required to be provided for making these payments, but not if the obligation is payable solely out of special assessments on properties benefited by local improvements; or

(E) the government of a country that is a member of the Organization for Economic Cooperation and Development and whose government obligations are rated A or higher, or the equivalent, by a rating agency recognized by the Securities Valuation Office of the NAIC;

(ii) an obligation that satisfies the following requirements:

(A)

(I) is issued in the United States;

(II) is dollar denominated and issued in a non-U.S. market by a solvent U.S. institution other than an insurance company; or

(III) is assumed or guaranteed by a solvent U.S. institution other than an insurance company;

(B) is not in default as to principal or interest;

(C)

(I) is rated A or higher, or the equivalent, by a securities rating agency recognized by the Securities Valuation Office of the NAIC; or

(II) is similar in structure and other material respects to other obligations of the same institution that are rated A or higher; and

(D)

(I) is insured by at least one authorized insurer, other than the investing insurer or a parent, subsidiary, or affiliate of the investing insurer, licensed to insure obligations in this state, and, after considering the insurance, is rated AAA or the equivalent by a securities rating agency recognized by the Securities Valuation Office of the NAIC; or

(II) is designated as Class One or Class Two by the Securities Valuation Office of the NAIC;

(iii) an obligation rated A or higher, or the equivalent, by a rating agency recognized by the Securities Valuation Office of the NAIC and is:

(A) issued, assumed, or guaranteed by a solvent non-U.S. institution chartered in a country that is a member of the Organization for Economic Cooperation and Development; or

(B) an obligation of a U.S. corporation issued in a non-U.S. currency;

(iv) an equity interest in a solvent U.S. institution other than an insurance company, if:

(A) the institution's obligations and preferred shares are eligible as investments under Subsection (4)(d)(iv); and

(B) the equity interest is:

(I) registered on a national securities exchange under the Securities Exchange Act of 1934, 15 U.S.C. Sections 78a to 78kk; or

(II) otherwise registered under the Securities Exchange Act of 1934 and a price quotation for the interest is furnished through a nationwide automated quotation system approved by the Financial Industry Regulatory Authority or successor organization; and

(C) the total amount of equity interest investments does not exceed 1% of the assets of the trust;

(v) an equity interest in a solvent non-U.S. institution that is organized under the laws of a member country of the Organization for Economic Cooperation and Development, if:

(A) the institution's obligations are rated A or higher, or the equivalent, by a rating agency recognized by the Securities Valuation Office of the NAIC;

(B) the institution's equity interests are registered on a securities exchange regulated by the government of a member country of the Organization for Economic Cooperation and Development;

(C) an investment in or loan upon the institution's outstanding equity interests does not exceed 1% of the assets of the trust; and

(D) the cost of investments in equity interests, when added to the aggregate cost of other investments in equity interests already held pursuant to Subsection (4)(d)(v), may not exceed 10% of the assets in the trust;

(vi) an obligation issued, assumed, or guaranteed by a multinational development bank, if the obligation is rated A or higher, or the equivalent, by a rating agency recognized by the Securities Valuation Office of the NAIC;

(vii) securities of an investment company registered pursuant to the Investment Company Act of 1940, 15 U.S.C. Sec. 80a, if the investment company:

(A)

(I) invests at least 90% of its assets in the types of securities that qualify as an investment under Subsection (4)(d)(i), (4)(d)(ii), or (4)(d)(iii);

(II) invests in securities that the commissioner determines are substantively similar to the types of securities set forth in Subsections (4)(d)(i), (4)(d)(ii), and (4)(d)(iii); or

(III) invests at least 90% of its assets in the types of equity interests that qualify as an investment under Subsection (4)(d)(iv); and

(B) includes the aggregate amount of investments in qualifying investment companies when calculating the permissible aggregate value of equity interests pursuant to Subsection (4)(d)(iv); or

(viii) a letter of credit, if:

(A) in the case where a letter of credit expires without being renewed or replaced, the trustee has the right and duty under the deed of trust or other binding agreement, as approved by the commissioner, to immediately draw down the full amount of the letter of credit and hold the proceeds in trust for the beneficiaries of the trust; and

(B) the trust agreement provides that the trustee is liable for negligence, willful misconduct, or lack of good faith, which may include the failure of a trustee to draw against a letter of credit.

(e) An investment made pursuant to Subsection (4)(d) is subject to the following additional limitations:

(i) an investment in or loan on the obligations of an institution other than an institution that issues mortgage-related securities may not exceed 5% of the assets of the trust;

(ii) an investment in a mortgage-related security may not exceed 5% of the assets of the trust;

(iii) the aggregate total investment in mortgage-related securities may not exceed 25% of the assets of the trust;

(iv) preferred or guaranteed shares issued or guaranteed by a solvent U.S. institution are permissible investments if the institution's obligations are eligible under Subsections (4)(d)(ii)(D)(I) and (4)(d)(ii)(D)(II), but may not exceed 2% of the assets of the trust;

(v) a trust's investment in investment companies may not exceed 10% of the assets in the trust;

(vi) the aggregate amount of investments in qualifying investment companies may not exceed 25% of the assets in the trust; and

(vii) an investment in an investment company qualifying under Subsection (4)(e)(vi) may not exceed 5% of the assets in the trust.

(5) A specific security provided to a ceding insurer by an assuming insurer pursuant to Section R590-173-11 is applied, until exhausted, to the payment of liabilities of the assuming insurer to the ceding insurer holding the specific security prior to, and as a condition precedent for, presenting a claim by the ceding insurer for payment by a trustee of a trust established by the assuming insurer.

Utah Admin. Code R590-173-7

Amended by Utah State Bulletin Number 2017-3, effective 1/10/2017

Adopted by Utah State Bulletin Number 2022-12, effective 6/7/2022