806 KAR 5:025.

Credit for reinsurance.

 

      RELATES TO: KRS

304.5-140

      STATUTORY AUTHORITY:

KRS 304.2-110

      NECESSITY, FUNCTION,

AND CONFORMITY: KRS 304.2-110 provides that the Executive Director of Insurance

may promulgate administrative regulations necessary to implement the Kentucky

Insurance Code, KRS Chapter 304. This administrative regulation implements KRS

304.5-140 by establishing credit for reinsurance.

 

      Section 1.

Definitions. As used in this section:

      (1)

"Beneficiary" means:

      (a) The entity for

whose sole benefit the trust has been established and any successor of the

beneficiary by operation of law; and

      (b) If a court of

law appoints a successor in interest to the named beneficiary, the named

beneficiary shall be the court appointed domiciliary receiver, including the

conservator, rehabilitator or liquidator.

      (2)

"Grantor" means:

      (a) The entity that

has established a trust for the sole benefit of the beneficiary; and

      (b) If the trust is

established in conjunction with a reinsurance agreement, the unlicensed,

unaccredited assuming insurer.

      (3) "Evergreen

clause" mans a provision in a letter of credit or its confirmation that

prevents the expiration of the letter of credit or its confirmation without

written notice to the beneficiary from the issuing or confirming bank or trust

company as provided by this administrative regulation.

      (4)

"Obligations", as used in Section 2(11)(c) of this administrative

regulation, means:

      (a) Reinsured losses

and allocated loss 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 expenses and unearned premiums.

 

      Section 2.

Requirements for Trust Agreements Qualified under KRS 304.5-140(3). (1) The

trust agreement shall be entered into between the beneficiary, the grantor, and

a trustee which shall be a qualified United States financial institution as

defined in KRS 304.5-140(1)(a).

      (2) The trust

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

      (3)(a) Except as

provided by paragraph (b) of this subsection, assets in the trust account shall

be held by the trustee at the trustee's office in the United States.

      (b) A bank may apply

for the executive director’s permission to use a foreign branch office of the

bank as trustee for trust agreements. If the executive director approves the

use of a foreign branch office as trustee, its use shall be approved by the

beneficiary in writing. The trust agreement shall provide that the written

notice described in subsection (4)(a) of this section shall be presentable, as

a matter of legal right, at the trustee's principal office in the United States.

      (4) The trust

agreement shall provide that:

      (a) The beneficiary

shall:

      1. Have

the right to withdraw assets from the trust account at any time after giving

written notice to the trustee; and

      2. Not be required

to give notice to the grantor;

      (b) The beneficiary:

      1. May be required

to acknowledge receipt of withdrawn assets; and

      2. Shall not be

required to present other statements or documents in order to withdraw assets.

      (c) The agreement

shall not be subject to conditions or qualifications outside of the trust

agreement; and

      (d) The agreement

shall not contain references to other agreements or documents except as

provided by subsection (11) of this section.

      (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 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 negotiate any assets whenever necessary, 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 both

at the inception and at intervals no less frequent than the end of each

calendar quarter;

      (d) Notify the

grantor and the beneficiary within ten (10) days, of any deposits to or

withdrawals from the trust account;

      (e) Upon written

demand of the beneficiary, immediately take all steps necessary to:

      1. Transfer

absolutely and unequivocally all right, title and interest in the assets held

in the trust account to the beneficiary; and

      2. Deliver physical

custody of the assets to the beneficiary; and

      (f) Allow no

substitutions or withdrawals of assets from the trust account, except upon:

      1. Written

instructions from the beneficiary; or

      2. The call or

maturity of a trust asset, the trustee may withdraw the asset so long as the

proceeds are paid into the trust account without the consent of the beneficiary

and after notice to the beneficiary.

      (7) The trust

agreement shall provide that at least thirty (30) days, but not more than

forty-five (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)(a) 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 for the purposes

permitted by paragraphs (b) through (d) of this subsection, if:

      1. A trust agreement

is established in conjunction with a reinsurance agreement covering risks other

than life, annuities, and accident and health; and

      2. It is customary

practice to provide a trust agreement for a specific purpose.

      (b) To pay or

reimburse the ceding insurer for the:

      1. 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

      2. Unearned premiums

due to the ceding insurer if not otherwise paid by the assuming insurer;

      (c) To make payment

to the assuming insurer of any amounts held in the trust account that exceed

102 percent of the actual amount required to fund the assuming insurer's

obligations under the specific reinsurance agreement; or

      (d)1. To withdraw

amounts equal to the obligations and deposit them in a separate account as

provided by subparagraph 2 of this paragraph, if the:

      a. Ceding insurer

has received notification of termination of the trust account; and

      b. Assuming

insurer's entire obligations under the specific reinsurance agreement remain

unliquidated and undischarged ten (10) days prior to the termination date.

      2. Amounts withdrawn

pursuant to subparagraph 1 of this paragraph shall be deposited:

      a. In the name of

the ceding insurer; and

      b. In a qualified United States financial institution as defined in KRS 304.5-140(1) apart from its general

assets; and

      c. In trust for the

uses and purposes specified in paragraphs (a) and (b) of this subsection that

may remain executory after the withdrawal for any period after the termination

date,

      (12) The reinsurance

agreement entered into in conjunction with the trust agreement may contain the

provisions required by Section 4(1)(b) of this administrative regulation, so

long as the conditions required by this section are included in the trust agreement.

 

      Section 3. Permitted

Conditions for Trust Agreements Qualified under KRS 304.5-140(3). (1) The trust

agreement may provide that the:

      (a) Trustee may

resign only if written notice of resignation is:

      1. Given to the

beneficiary and grantor; and

      2. Effective not

less than ninety (90) days after receipt of the notice.

      (b) Grantor may

remove the trustee if written notice is:

      1. Given to the

trustee and beneficiary;

      2. Effective not

less than ninety (90) days after receipt of the notice;

      (c) Resignation or

removal of the trustee shall not be effective until:

      1. A successor

trustee has been duly appointed and approved by the beneficiary and the

grantor; and

      2. All assets in the

trust have been duly transferred to the new trustee.

      (2)(a) The grantor

may have the full and unqualified right to:

      1. Vote any shares

of stock in the trust account; and

      2. Receive from time

to time payments of any dividends or interest upon any shares of stock or obligations

included in the trust account.

      (b) Interest or

dividends shall be:

      1. Forwarded

promptly upon receipt to the grantor; or

      2. Deposited in a

separate account established in the grantor's name.

      (3) The trustee may

be given authority to invest and accept substitutions of funds in the account

with prior approval of the beneficiary, unless the trust agreement:

      (a) Specifies

categories of investments acceptable to the beneficiary; and

      (b) Authorizes the

trustee to invest funds, and accept substitutions that the trustee determines

are:

      1. At least equal in

market value to the assets withdrawn; and

      2. Consistent with

the restrictions in Section 4(1)(b) of this administrative regulation.

      (4) The trust

agreement may:

      (a) Provide that the

beneficiary may designate a party to which all or part of the trust assets are

to be transferred; and

      (b) Condition the

transfer upon the trustee receiving, prior to or simultaneously, other

specified assets.

      (5) The trust

agreement may provide upon termination of the trust account that all assets not

previously withdrawn by the beneficiary shall be delivered over to the grantor

with written approval by the beneficiary.

 

      Section 4.

Additional Conditions for Reinsurance Agreements Qualified under KRS

304.5-140(3). (1) A reinsurance agreement, which is entered into in conjunction

with a trust agreement and the establishment of a trust account, may contain

provisions that:

      (a) Require the

assuming insurer to:

      1. Enter into a

trust agreement;

      2. Establish a trust

account for the benefit of the ceding insurer; and

      3. Specify what the

agreement is to cover.

      (b) Except as

provided by paragraph (e) of this subsection, stipulate that assets deposited

in the trust account shall:

      1. Be valued

according to the current fair market value of the assets; and

      2. Consist of:

      a. Cash that is United States legal tender;

      b. Certificates of

deposit, issued by a United States bank and payable in United States legal tender;

      c. Investments

permitted by the insurance code; or

      d. A combination of

the items specified in subparagraphs a through c of this paragraph;

      (c) As provided by

paragraph (b) of this subsection, specify the types of investments to be

deposited.

      (d) Investments

permitted by paragraph (b) of this subsection shall be issued by an institution

that is not the parent, subsidiary, or affiliate of the grantor or beneficiary.

      (e) If a trust

agreement is entered into in conjunction with a reinsurance agreement that

covers risks other than life, annuities and accident and health, the trust

agreement, rather than the reinsurance agreement, may contain the provisions

required by paragraphs (c) and (d) of this subsection.

      (f) Require the

assuming insurer, prior to depositing assets with the trustee, to:

      1. Execute

assignments or endorsements in blank; or

      2. Transfer legal

title to the trustee of shares, obligations, or other assets requiring

assignments, so that the ceding insurer, or the trustee on the direction of the

ceding insurer, may negotiate the assets without the consent or signature of

the assuming insurer or any other entity whenever necessary.

      (g) Require that all

settlements of account between the ceding insurer and the assuming insurer be

made in cash or its equivalent; and

      (h)1. As provided by

subparagraph 2 of this paragraph, 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.

      2. The assets shall

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 such company, without diminution because of

insolvency on the part of the ceding insurer or the assuming insurer, only for

the following purposes:

      a. 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 the policies;

      b. 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;

      c. 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

      d. 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 to withdraw

all or a part of the trust assets from the trust account and transfer the

withdrawn assets to the assuming insurer provided that:

      1. The assuming

insurer shall at the time of withdrawal replace the withdrawn assets with other

qualified assets having a market value equal to the market value of the assets

withdrawn so as to maintain the deposit in the required amount at all times; or

      2. After withdrawal

and transfer, the market value of the trust account is no less than 102 percent

of the required amount.

      3. The ceding

insurer shall not unreasonably or arbitrarily withhold its approval.

      (b) Provide for:

      1. The return of any

amount withdrawn in excess of the actual amounts required for subsection

(1)(h)1, 2 and 3 of this section or for payments under subsection (1)(h)4 of

this section, amounts that are subsequently determined not to be due; and

      2. Interest payments

at a rate not in excess of the prime rate of interest on the amounts held

pursuant to subsection (1)(e)3.

      (c) Permit the award

by an arbitration panel or court of competent jurisdiction of:

      1. Interest at a

rate different from that provided in paragraph (b)2 of this subsection;

      2. Court of

arbitration costs;

      3. Attorney's fees;

and

      4. Other reasonable

expenses.

      (3)(a) If

established on or before the date of filling the financial statement of the ceding

insurer, a trust agreement may be used to reduce a liability for reinsurance

ceded to an unauthorized assuming insurer in financial statements that are

required to be filed with the office pursuant to this administrative regulation.

      (b) The amount of a

reduction for the existence of an acceptable trust account:

      1. May

be lesser than or equal to the current fair market value of acceptable assets

that are available to be withdrawn from the trust account at the time of

withdrawal; and

      2. Shall not be

greater than the specific obligations under the reinsurance agreement that the

trust account was established to secure.

      (4) A trust

agreement or underlying reinsurance agreement in existence prior to January 1,

1996, shall:

      (a) Be acceptable

until January 1, 1997; and

      (b) Beginning

January 1, 1997, not be acceptable if it does not comply with the provisions of

this administrative regulation.

      (5) The failure of a

trust agreement to specifically identify the beneficiary shall not be construed

to affect actions or rights which the executive director may take or possess

pursuant to the provisions of the laws of this state.

 

      Section 5. Letters

of Credit Qualified under KRS 304.5-140(3). (1) A letter of credit shall:

      (a) Be clean,

irrevocable and unconditional;

      (b) Issued or

confirmed by a qualified United States financial institution;

      (c) Contain an issue

date, and date of expiration;

      (d) State that it is

not subject to a condition or qualification not contained in the letter of

credit;

      (e) Stipulate that

in order to obtain funds, the beneficiary need only draw and present a sight

draft under the letter of credit. and

      (f) Except as

provided by subsection (9)(a) of this section, not contain a reference to other

agreements, documents, or entities.

      (2) The heading of a

letter of credit may include a boxed section that:

      (a) Contains the

name of the applicant, and other appropriate notations that provide a reference

for the letter of credit; and

      (b) Is clearly

marked to indicate that the information is only for internal identification

purposes.

      (3) The letter of

credit shall contain a statement that the obligation of the qualified United States financial institution under the letter of credit is not contingent upon

reimbursement with respect thereto.

      (4) The term of the

letter of credit shall be for at least one (1) year and shall contain an

evergreen clause. The evergreen clause shall provide for a period of not less

than thirty (30) days' notice prior to the date of expiration or nonrenewal.

      (5) The letter of

credit shall state:

      (a) Whether it is

governed by the:

      1. Laws of Kentucky; or

      2. "Publication

500", of the Uniform Customs and Practice for Documentary Credits of the

International Chamber of Commerce; and

      (b) That a draft

drawn under the letter of credit shall be presentable at an office in the

United States of a qualified United States financial institution.

      (6) A letter of

credit shall provide for an extension of time to draw against it if it:

      (a) Is made subject

to "Publication 500" of the Uniform Customs and Practice for

Documentary Credits of the International Chamber of Commerce; and

      (b) An occurrence

specified in Article 19 of "Publication 500" of the Uniform Customs

and Practice for Documentary Credits of the International Chamber of Commerce

occurs.

      (7) The letter of

credit shall be issued or confirmed by a qualified United States financial

institution authorized to issue letters of credit, pursuant to KRS

304.5-140(1)(a).

      (8) If a letter of

credit is issued by a qualified United States financial institution authorized

to issue letters of credit, other than a qualified United States financial

institution described in subsection (7) of this section, the following

additional requirements shall be met:

      (a) The issuing

qualified United States financial institution shall formally designate the

confirming qualified United States financial institution as its agent for the

receipt and payment of the drafts; and

      (b) The evergreen

clause shall provide for thirty (30) days' notice prior to expiration date for

nonrenewal.

      (9) Reinsurance

agreement provisions.

      (a) The reinsurance

agreement for which the letter of credit is obtained may contain provisions

that:

      1. Require the

assuming insurer to provide letters of credit to the ceding insurer and specify

what they are to cover.

      2. Stipulate that

the assuming insurer and ceding insurer shall agree that, the letter of credit

provided by the assuming insure pursuant to the provisions of the reinsurance:

      a. May be drawn upon

at any time, notwithstanding other provisions in the agreement; and

      b. Shall be utilized

by the ceding insurer or its successors in interest only for one (1) or more of

the reasons specified in subparagraph 3 of this paragraph.

      3.a. To reimburse

the ceding insurer for the assuming insurer's share of premiums returned to the

owners of policies reinsured under the reinsurance agreement on account of

cancellations of such policies;

      b. To reimburse the

ceding insurer for the assuming insurer's share of surrenders and benefits or losses

paid by the ceding insurer under the terms and provisions of the policies

reinsured under the reinsurance agreement;

      c. To fund an

account with the ceding insurer in an amount at least equal to the deduction,

for reinsurance ceded, from the ceding insurer's liabilities for policies ceded

under the agreement; and

      d. To pay other

amounts the ceding insurer claims are due under the reinsurance agreement.

      4. The provisions of

paragraph (a) of this subsection shall be applied without diminution because of

insolvency on the part of the ceding insurer or assuming insurer.

      (b) Nothing

contained in paragraph (a) of this subsection shall preclude the ceding insurer

and assuming insurer from providing for:

      1. An interest

payment, at a rate not in excess of the prime rate of interest, on the amounts

held pursuant to paragraph (a)3c of this subsection; or

      2. The return of any

amounts drawn down on the letters of credit in excess of the actual amounts

required for the above or, in the case of paragraph (a)3d of this subsection,

any amounts that are subsequently determined not to be due.

      (c) In lieu of the

stipulation permitted by paragraph (a)2 of this subsection, a reinsurance

agreement may require that the parties enter into a "Trust

Agreement", that may be incorporated into the reinsurance agreement or be

a separate document, if:

      1. A letter of

credit is obtained in conjunction with a reinsurance agreement covering risks

other than life, annuities and health; and

      2. It is customary

practice to provide a letter of credit for a specific purpose.

      (10)(a) A letter of

credit shall not be used to reduce a liability for reinsurance ceded to an

unauthorized assuming insurer in financial statements required to be filed with

the department unless an acceptable letter of credit with the filing ceding

insurer as beneficiary has been issued on or before the date of filing of the

financial statement.

      (b) The reduction

for the letter of credit may be up to the amount available under the letter of

credit but not greater than the specific obligation under the reinsurance

agreement which the letter of credit was intended to secure.

 

      Section 6. Other

Security. A ceding insurer may take credit for unencumbered funds withheld by

the ceding insurer in the United States subject to withdrawal solely by the

ceding insurer and under its exclusive control.

 

      Section 7.

Reinsurance Contract. Upon the effective date of this administrative

regulation, credit shall not be granted to a ceding insurer for reinsurance

effected with assuming insurers meeting the requirements of KRS 304.5-140

unless the reinsurance agreement includes a:

      (1) Proper

insolvency clause pursuant to KRS 304.5-140(5) and 304.33-350 of the Insurance

Code; and

      (2) Provision

pursuant to KRS 304.5-140(2)(f), if the assuming insurer, is an unauthorized

assuming insurer, and has:

      (a) Submitted to the

jurisdiction of an alternative dispute resolution panel or court of competent

jurisdiction within the United States;

      (b) Agreed to comply

with all requirements necessary to give the court or panel jurisdiction;

      (c) Designated an

agent upon whom service of process may be effected; and

      (d) Agreed to abide

by the final decision of the court or panel.

 

      Section 8. An

assuming reinsurer shall file a "Certificate of Assuming Insurer",

Form AR-1:

      (1) To become

accredited pursuant to KRS 304.5-140; and

      (2) As evidence of

its submission to the jurisdiction of Kentucky and to its authority to examine

its books and records pursuant to KRS 304.5-140(2)(b)1.

 

      Section 9.

Incorporation by Reference. (1) "Certificate of Assuming Insurer, Form

AR-1 December 95" is incorporated by reference.

      (2) It may be

inspected, copied, or obtained from the Office of Insurance, P.O.

Box 517, 215 West Main Street, Frankfort, Kentucky 40602, Monday through

Friday, 8 a.m. to 4:30 p.m.

 

      Section 10.

Contracts Affected. All new and renewal reinsurance transactions entered into

after the effective date of the administrative regulation shall conform to the

requirements of the Act and this administrative regulation if credit is to be

given to the ceding insurer for such reinsurance. (22 Ky.R. 1755; Am. 2035; 23

Ky.R. 140; eff. 7-5-96; TAm eff. 8-9-2007.)