WSR 97-01-131

PROPOSED RULES

INSURANCE COMMISSIONER'S OFFICE

[Filed December 19, 1996, 11:19 a.m.]

Original Notice.

Preproposal statement of inquiry was filed as WSR 96-19-065.

Title of Rule: Credit for reinsurance from alien insurance companies.

Purpose: In 1996 the legislature amended RCW 48.12.160 regarding when a domestic insurance company may take credit on ceded risks reinsured by an insurer not authorized in this state. These proposed rules will establish criteria and procedures under which the commissioner can determine that such a credit for reinsurance from alien insurance companies is permitted.

Other Identifying Information: Insurance Commissioner Matter No. R 96-10.

Statutory Authority for Adoption: RCW 48.02.060, 48.12.160 (as amended by chapter 297, Laws of 1996).

Statute Being Implemented: RCW 48.12.160 (amended) - see chapter 297, Laws of 1996.

Summary: These proposed rules establish the criteria and procedures which the commissioner will use to determine when a credit for reinsurance ceded to an alien insurer maintaining a trust is permitted. These proposed rules are generally based on the credit for reinsurance model regulation of the National Association of Insurance Commissioners.

Reasons Supporting Proposal: Rules are required and desirable to effectuate the amendments made to RCW 48.12.160 by chapter 297, Laws of 1996. That legislation was enacted to allow insurers to take credit for reinsurance ceded to certain insurance companies maintaining a trust fund.

Name of Agency Personnel Responsible for Drafting: Jim Tompkins, Lacey, Washington, (360) 407-0537; Implementation and Enforcement: John Woodall, Lacey, Washington, (360) 407-0535.

Name of Proponent: Insurance Commissioner Deborah Senn, governmental.

Rule is not necessitated by federal law, federal or state court decision.

Explanation of Rule, its Purpose, and Anticipated Effects: The 1996 legislature amended RCW 48.12.160 to permit domestic insurance companies to take a credit on their financial statements for reinsurance placed with an insurance company not authorized in this state that maintains a trust fund. These proposed rules establish the criteria and procedures under which the commissioner will determine that such a credit for reinsurance from an alien insurance company maintaining a trust fund will be permitted. The rules are based upon the model regulation for credit for reinsurance of the National Association of Insurance Commissioners.

The adoption of rules is required by chapter 297, Laws of 1996. The legislation was enacted to permit such a credit for reinsurance to domestic insurance companies for reinsurance ceded to alien insurance companies maintaining a trust fund.

Proposal Changes the Following Existing Rules: The proposed amendments offer an alternative method a domestic insurer that maintains a trust fund may use to take a credit on its financial statement for reinsurance with an insurance company not authorized in this state.

This proposal changes the following sections of chapter 284-13 WAC in the following manner: WAC 284-13-505 and 284-13-515 propose new definitions; WAC 284-13-520 repeals and amends portions of section such that it conforms with current statutes; WAC 284-13-530 and 284-13-535 propose new "significant legislative rules"; WAC 284-13-540 modifies references to conform with changes in statute; WAC 284-13-550 modifies references and text to conform with new statute and proposed new rules; WAC 284-13-560 modifies references and text to conform with new statutes and proposed new rules; WAC 284-13-570 includes statutory clarification; WAC 284-13-590 changes the effective date to conform with proposed rules; WAC 284-13-595 proposes a new "significant legislative rule."

No small business economic impact statement has been prepared under chapter 19.85 RCW. No small business economic impact statement is required. Attached is a statement that summarizes both the economic costs and benefits of the proposed rules.

Section 201, chapter 403, Laws of 1995, applies to this rule adoption. This rule making includes some new sections that can be classified as "significant legislative rules."

evaluation of probable costs and benefits

and

small business economic impact statement

Credit for Reinsurance

Background: This evaluation covers three proposed rules and is completed to demonstrate that the proposed rules impose no additional costs on the regulated industry affected by the proposed rules. An analysis of the economic impact on small businesses is also included as part of this evaluation. The 1996 legislature amended RCW 48.12.160 to permit domestic insurance companies to take credit on their financial statements for reinsurance placed with an insurance company not authorized in this state that maintains a trust fund. Without this amendment, domestic companies may not take credit on ceded risk to alien reinsurers unless these insurers have obtained a letter of credit according to rules set forth in WAC 284-13-540. This practice of meeting credit standards is not changed in these proposed rules (WAC 284-13-530, 284-13-535, and 284-13-595). These proposed rules introduce an additional option to establish credit such that a domestic company may take credit for ceded risks reinsured by an alien insurer that either establishes a letter of credit or establishes a trust fund determined by the commissioner to meet certain standards. These rules are proposed as part of a legislative request to establish criteria and procedures under which the commissioner will determine that such a credit for reinsurance will be permitted (chapter 297, Laws of 1996).

Because these rules extend the options available to the insurers, rather than limit or modify the previously established option, they do not impose any direct costs on the regulated body. In addition, by establishing an alternative form of accreditation for alien insurers, the proposed rules potentially benefit domestic insurers wishing to take credit for ceded risks. Three new significant legislative rules are proposed to provide for this allowance of a credit: WAC 284-13-530, 284-13-535, and 284-13-595.

Federal Law and Other State Law: These proposed rules are not required by federal law or federal regulation. These rules do not require any person to take an action that violates requirements of any other federal or state law. The rules propose amending WAC 284-13-500 in order to carry out the statutory requirements set forth in RCW 48.12.160.

Industry Codes: The proposed rules would affect all alien insurers that reinsure risks ceded by domestic insurance companies. The rules impact domestic insurers that take credit on ceded risk reinsured by alien companies. The Standard Industrial Classifications Manual's industry codes for these companies include: 6311, 6321, 6331, 6351, 6361, 6399, 6411.

Probable Costs: The proposed rules are written as part of a legislative request (RCW 48.12.160 (1)(b)) to establish criteria and procedures under which the commissioner determines that credit for reinsurance from an alien insurance company maintaining a trust fund is permitted. To carry out this request, one of the proposed rules establishes a list of financial information that an alien company must provide to the commissioner in order to verify that the trust fund meets credit standards (WAC 284-13-530). If the alien company chooses to establish the trust fund in accordance with these rules, they will have to incur the costs of filing the required information; however, this alien company is also free to forego all of the filing requirements proposed in this rule and instead establish a letter of credit in accordance with WAC 284-13-540. Therefore, because the filing requirements are optional and the costs only incurred if the insurer chooses the newly incorporated trust fund option, no additional costs are directly imposed on insurers by these rules.

Representatives of the alien insurance companies that would be affected by the proposed rules have testified that the proposed requirements to establish a trust fund would offer a financially desirable alternative to the fees associated with establishing a letter of credit. Furthermore, these requirements are based on the credit for reinsurance model regulation of the National Association of Insurance Commissioners (NAIC). Most of the alien insurers that offer reinsurance to domestic insurers in the state of Washington already comply with similar trust fund filing requirements established by other states based on the same NAIC model regulation. In order to be in compliance with the proposed Washington state rules, many of these companies would essentially be photocopying documents they have filed previously with other states. Representatives of insurance companies impacted by these rules strongly supported the 1996 amendment to RCW 48.12.160 that authorizes the proposed rules.

The commissioner recognizes the potential for costs associated with the time required to read and comprehend the new rules; however, this would be a cost associated with any rules that carry out this legislative request. Compliance with the proposed rules should not increase the costs of administration to the insurance industry; however, it will have a financial impact on the Office of Insurance Commissioner. The OIC will have to devote staff time to administer the new trust fund requirements and track the information requested. The OIC will bear the costs of its administration.

Probable Benefits: The rules extend the options available to the insurers, rather than limit or modify the previously set criteria for establishing credit connected to reinsurance. Representatives of insurance companies that would be potentially impacted by this rule strongly supported the 1996 amendment to RCW 48.12.160 that authorizes the proposed rules. These companies prefer the flexibility to establish either the letter of credit or the trust fund in accordance with the way they do business.

By permitting the use of trust funds for reinsurance credit, these assuming companies would potentially realize savings by avoiding fees associated with obtaining letters of credit. These savings could potentially be passed on to cedent companies in the state of Washington. In addition, cedents may also appreciate the expanded number of reinsurers from which domestic ceding insurers may take credit, which provides for a more stable reinsurance capacity in the state.

Small Business Impact: The proposed rules do not impose a disproportionately higher economic burden on small businesses within the four-digit classification. The only small businesses that may be affected by the rules are domestic insurers that choose to take credit, as an asset or as a deduction from loss or claim, risks ceded to an alien reinsurer. The proposed rules would have a beneficial impact to these small cedent companies. The rules allow alien reinsurers to establish trust funds as an alternative to obtaining letters of credit. Representatives of the insurance industry claim that by permitting the use of trust funds for allowance of a credit, these assuming companies will realize savings by avoiding fees associated with obtaining letters of credit. These savings could potentially be passed on to the domestic insurers taking credit on ceded risk which includes small businesses. In addition, small companies would also likely appreciate the expanded number of reinsurers from which small cedent companies may take credit, thus providing a more stable reinsurance capacity for small domestic companies in the state of Washington.

The only filing requirements associated with the proposed rules are optional and would only be potentially imposed on alien reinsurance companies. None of these alien insurers are considered to be "small businesses," as defined in RCW 19.85.020(1). Small businesses will not be required to change their business practices in any way.

Mitigation: Mitigation to reduce the economic impact of the proposed rules on small businesses would not be appropriate because there are no cost impacts on small businesses. The proposed rules are actually a form of mitigation themselves because all potential impacts on small businesses are beneficial. In order to ensure the least burdensome filing alternatives associated with the rules, the commissioner designated staff to study the regulations already in place in other states regarding credit for reinsurance. In order to reduce potential filing costs, the OIC drafted rules based on the NAIC model regulation. This NAIC model regulation is followed by most states that allow domestic companies to take credit for reinsurance provided by alien companies. By following this model and communicating with other states, these rules have been drafted consistently with regulations regarding this issue in many other states. This consistency minimizes the potential administrative compliance costs to the industry because many of these alien insurance companies are familiar and already in compliance with the regulations of other states.

Industry Involvement: Businesses that will be affected by the proposed rules were invited to provide input to the OIC throughout the rule-writing process. Throughout October, November, and December of 1996, OIC staff worked closely with representatives of the insurance industry to formalize draft rules regarding credit for reinsurance. During the first week of December, representatives of the insurance industry were contacted and asked specifically to discuss the financial impacts of the proposed rules. Also, as part of a legislative request, OIC staff members have devoted a great deal of time studying the issue and meeting with members of the National Association of Insurance Commissioners that have experience with the trust fund accreditation regulations. In addition, a copy of the proposed rule will be sent to the Association of Washington Businesses and to the Independent Business Association. Insurers known to be interested in the rules, regardless of size, were directly involved.

Conclusion: The rules extend the options available to insurers rather than limit or modify the previously established option. They do not impose any direct costs on the regulated body. The proposed rules benefit domestic insurers that cede risk reinsured by alien companies by making it easier for them to take credit on this ceded risk. The proposed rules also benefit the alien insurers that reinsure risk ceded by the domestic companies by allowing them the flexibility to establish either the letter of credit or the trust fund in accordance with the way they do business. As required by RCW 34.05.328, the commissioner must demonstrate that the probable benefits of a proposed rule exceed its probable costs. Based on the fact that the proposed rules provide more options to insurers and impose no additional costs, the probable benefits of this rule exceed the probable costs.

Hearing Location: Insurance Commissioner's 2nd Floor Conference Room, 14th and Water, Olympia, Washington 98504-0255, on January 24, 1997, at 9:00 a.m.

Assistance for Persons with Disabilities: Contact: Steve Carlsberg, TDD (360) 664-3154 by January 22, 1997.

Submit Written Comments to: Kacy Brandeberry, P.O. Box 40255, Olympia, WA 98504-0255, e-mail inscomr@aol.com, FAX (360) 586-3535, by January 23, 1997.

Date of Intended Adoption: February 7, 1997.

December 19, 1996

Melodie Bankers

Rules Coordinator

NEW SECTION

WAC 284-13-505 Actual reinsurance. Ceding insurers, have at times, entered into reinsurance agreements primarily as financing arrangements which have the principle purpose of producing increased surplus for the ceding insurer, typically on a temporary basis, but which provide little or no indemnification of insurance risks by the reinsurer. Credit for reinsurance shall not be allowed in any accounting or financial statement of the ceding insurer in respect to any so-called reinsurance contract unless, in such contract, the reinsurer undertakes to indemnify the ceding insurer, not only in form but in fact, against all or a part of the loss or liability arising out of the original insurance.

[]

NEW SECTION

WAC 284-13-515 Qualified United States financial institution. A qualified United States financial institution means an institution that:

(1) Is organized or, in the case of a U.S. office of a foreign banking organization, licensed under the laws of the United States or any state thereof;

(2) Is regulated, supervised, and examined by U.S. federal or state authorities having regulatory authority over banks and trust companies;

(3) Has been designated by the Securities Valuation Office of the National Association of Insurance Commissioners as meeting its credit standards for issuing or confirming letters of credit; and

(4) Is not affiliated with the assuming company.

[]

AMENDATORY SECTION (Amending Order R 93-6, filed 9/1/93, effective 10/2/93)

WAC 284-13-520 Credit for reinsurance--Certain reinsurers maintaining trust funds. (1) Pursuant to RCW 48.12.160 (1)(a), the commissioner shall allow credit for reinsurance ceded by a domestic insurer to an assuming insurer described in subsection (2) of this section which, as of the date of the ceding insurer's statutory financial statement, maintains a trust fund in an amount prescribed below in a qualified United States ((bank)) financial institution as provided in ((RCW 48.12.160)) WAC 284-13-515, for the payment of the valid claims of its United States policyholders and ceding insurers, their assigns and successors in interest. The assuming insurer shall report annually to the commissioner substantially the same information as that required to be reported on the NAIC annual statement form by licensed insurers, to enable the commissioner to determine the sufficiency of the trust fund.

(2) The trust fund for a group of insurers that includes ((individual)) incorporated and unincorporated underwriters shall consist of funds in trust in an amount not less than the group's aggregate gross liabilities attributable to business written in the United States and, in addition, the group shall maintain a trusteed surplus of which one hundred million dollars shall be held jointly and exclusively for the benefit of the United States ceding insurers of any member of the group. The group shall make available to the commissioner annual certifications by the group's domiciliary regulator and its independent public accountants of the solvency of each underwriter member of the group.

(3) ((The trust under RCW 48.12.160 (1)(a) or (b)(i) shall be established in a form approved by the commissioner and complying with that statute and this section. The trust instrument shall provide that:

(a) Contested claims shall be valid and enforceable out of funds in trust to the extent remaining unsatisfied thirty days after entry of the final order of any court of competent jurisdiction in the United States.

(b) Legal title to the assets of the trust shall be vested in the trustee for the benefit of the grantor's United States policyholders and ceding insurers, their assigns and successors in interest.

(c) The trust 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 under 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 in 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 prior to the next following December 31.

(f) No amendment to the trust shall be effective unless reviewed and approved in advance by the commissioner.)) The credit allowed for reinsurance shall not be greater than the amount of funds held in trust.

(4) The trust established shall comply with WAC 284-13-535.

[Statutory Authority: RCW 48.02.060 and 48.12.160. 93-19-002 (Order R 93-6), 284-13-520, filed 9/1/93, effective 10/2/93.]

NEW SECTION

WAC 284-13-530 Credit for reinsurance--Certain alien reinsurers maintaining trust funds. (1) Under RCW 48.12.160 (1)(b), the commissioner shall allow credit for reinsurance ceded by a domestic insurer to a single assuming alien insurer which, as of the date of the ceding insurer's statutory financial statement, maintains a trust fund in an amount not less than the assuming alien insurer's liabilities attributable to reinsurance ceded by United States domiciled insurers plus maintain a trusteed surplus of not less than twenty million dollars, and the assuming alien insurer maintaining the trust fund has received a registration from the commissioner. The assuming alien insurer shall report on or before February 28 to the commissioner substantially the same information as that required to be reported on the NAIC annual statement form by licensed insurers, to enable the commissioner to determine the sufficiency of the trust fund. To be registered the assuming alien insurer must:

(a) File a properly executed Form AR-1 under WAC 284-13-595 as evidence of its submission to this state's jurisdiction and to this state's authority to examine its books and records under chapter 48.03 RCW.

(b) File with the commissioner a certified copy of a letter or a certificate of authority or of compliance issued by the assuming alien insurer's alien domiciliary jurisdiction and the domiciliary jurisdiction of its United States reinsurance trust.

(c) File with the commissioner within sixty days after its financial statements are due to be filed with its domiciliary regulator, a copy of the assuming alien insurer's annual financial report converted to United States dollars, and a copy of its most recent audited financial statement converted to United States dollars.

(d) File annually with the commissioner on or before February 28, a statement of actuarial opinion in conformance with the NAIC's annual statement and instructions attesting to the adequacy of the reserves for United States liabilities which are backed by the trust fund. Unless the commissioner notifies the assuming alien insurer otherwise, the opinion may be given by an actuary of the assuming alien insurer, who is duly qualified to provide actuarial opinions in the domiciliary jurisdiction of the assuming alien insurer.

(e) File and maintain with the commissioner a list of the assuming alien insurer's United States reinsurance intermediaries.

(f) File and maintain with the commissioner copies of service and management agreements, including binding authorities, entered into by the assuming alien insurer.

(g) File annually with the commissioner a holding company registration statement containing the information required by RCW 48.31B.025 (2)(a) through (e) in the form proscribed in WAC 284-18-920.

(h) File annually with the commissioner the assuming alien insurer's account and report which reports the overall business of the assuming alien insurer in United States dollars.

(i) File other information, financial or otherwise, which the commissioner reasonably requests.

(2) If the commissioner determines that the assuming alien insurer has failed to meet or maintain any of these qualifications, the commissioner may, consistent with chapters 48.04 and 34.05 RCW, revoke the registration of the assuming insurer maintaining the trust fund. No credit shall be allowed a domestic ceding insurer with respect to reinsurance ceded after December 31, 1997, if the assuming alien insurer's registration under this section has been denied or revoked by the commissioner.

(3) The required amount of the trust shall be based upon the gross United States liabilities, including incurred but not reported claims (IBNR), of the assuming alien insurer reduced only for those liabilities for which specific collateralization has been provided to individual ceding companies, with such adjustments, if any, as the commissioner may from time to time consider appropriate.

(4) The credit allowed for reinsurance shall not be greater than the amount of funds held in trust.

(5) The trust established shall comply with WAC 284-13-535.

[]

NEW SECTION

WAC 284-13-535 Trust fund requirements. The trust under RCW 48.12.160 (1)(a), (b) or (c)(i) shall be established in a form filed with and approved by the commissioner and complying with that statute and this section. The trust instrument shall provide that:

(1) Contested claims shall be valid and enforceable out of funds in trust to the extent remaining unsatisfied thirty days after entry of the final order of any court of competent jurisdiction in the United States.

(2) Legal title to the assets of the trust shall be vested in the trustee for the benefit of the grantor's United States policyholders and ceding insurers, their assigns and successors in interest.

(3) The trust shall be subject to examination as determined by the commissioner.

(4) 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 under reinsurance agreements subject to the trust.

(5) No later than February 28 of each year the trustees of the trust shall report to the commissioner in writing setting forth the balance in 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 prior to the next following December 31.

(6) Furnish to the commissioner 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.

(7) At least sixty days, but not more than one hundred twenty days, prior to termination of the trust, written notification of termination shall be delivered by the trustee to the commissioner.

(8) Notwithstanding any other provisions in the trust instrument, if the trust fund is inadequate because it contains an amount less than the amount required by RCW 48.12.160, WAC 284-13-520 and 284-13-530 or if the grantor(s) of the trust has been declared insolvent or placed in receivership, rehabilitation, liquidation or similar proceedings under the laws of its state or country of domicile, 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 over the trust or other designated receiver all of the assets of the trust fund. The assets shall be applied in accordance with the laws of the state in which the trust is domiciled that are applicable to the liquidation of insurance companies. 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(s) 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.

(9) No amendment to the trust shall be effective unless:

(a) It has been reviewed and approved in advance by either the commissioner of the state where the trust is domiciled or the commissioner of another state who, pursuant to the terms of the trust instrument, has accepted responsibility for regulatory oversight of the trust; and

(b) It has been filed with the commissioner and it has not been disapproved within thirty days of its receipt by the commissioner.

(10) The form of the trust and any amendments to the trust shall also be filed with the commissioner of every state in which the ceding insurer beneficiaries of the trust are domiciled.

[]

AMENDATORY SECTION (Amending Order R 93-6, filed 9/1/93, effective 10/2/93)

WAC 284-13-540 Credit for reinsurance ceded to an assuming insurer that does not have a certificate of authority. Pursuant to RCW 48.12.160 (1)(((b))) (c), the commissioner shall allow a reduction from liability for reinsurance ceded by a domestic insurer to an assuming insurer ((not meeting the requirements of RCW 48.12.160 (1)(a))) in an amount not exceeding the liabilities carried by the ceding insurer. Such reduction shall not be ((in)) greater than the amount of funds or other assets that are of the types and amounts that are authorized under chapter 48.13 RCW, held subject to withdrawal by and under the control of the ceding insurer, including funds or other such assets held in trust for the exclusive benefit of the ceding insurer, under a reinsurance contract with such assuming insurer as security for the payment of obligations thereunder. Such security must be held in ((the)) a qualified United States financial institution as defined in WAC 284-13-515 subject to withdrawal solely by, and under the exclusive control of, the ceding insurer ((or, in the case of a trust, held in a qualified United States financial institution as defined in RCW 48.12.160 (1)(b)(ii))). This security may be in the form of:

(1) Deposits or funds that are assets of the types and amounts that are authorized under chapter 48.13 RCW; or

(2) Clean, irrevocable, unconditional, and "evergreen" letters of credit issued or confirmed by a qualified United States institution, as defined in ((RCW 48.12.160 (1)(b)(ii))) WAC 284-13-515, effective no later than December 31 of the year for which filing is being made, and in the possession of the ceding company on or before the filing date of its annual statement. Letters of credit meeting applicable standards of issuer acceptability as of the dates of their issuance (or confirmation) shall, notwithstanding the issuing institution's 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.

An admitted asset or a reduction from liability for reinsurance ceded to an unauthorized assuming insurer pursuant to this section shall be allowed only when the requirements of WAC ((284-13-550 or)) 284-13-560 are met.

[Statutory Authority: RCW 48.02.060 and 48.12.160. 93-19-002 (Order R 93-6), 284-13-540, filed 9/1/93, effective 10/2/93.]

AMENDATORY SECTION (Amending Order R 93-6, filed 9/1/93, effective 10/2/93)

WAC 284-13-550 Trust agreements qualified under WAC 284-13-540.(1) As used in this section:

(a) "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, then the named beneficiary includes and is limited to the court appointed domiciliary receiver (including conservator, rehabilitator, or liquidator).

(b) "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 assuming alien insurer not holding a certificate of authority for that kind of business.

(c) "Obligations," as used in subsection (((3))) (2)(k) of this section, means:

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

(ii) Reserves for reinsured losses reported and outstanding;

(iii) Reserves for reinsured losses incurred but not reported; and

(iv) Reserves for allocated reinsured loss expenses and unearned premiums.

(2) Required conditions.

(a) 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 ((RCW 48.12.160 (1)(b))) WAC 284-13-515.

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

(c) All assets in the trust account shall be held by the trustee at the trustee's office in the United States((, except that a bank may apply for the commissioner's permission to use a foreign branch office of such bank as trustee for trust agreements established pursuant to this section. If the commissioner approves the use of such 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 (d)(i) of this subsection must also be presentable, as a matter of legal right, at the trustee's principal office in the United States)).

(d) The trust agreement shall provide that:

(i) 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;

(ii) 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;

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

(iv) It shall not contain references to any other agreements or documents except as provided for under (k) of this subsection.

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

(f) The trust agreement shall require the trustee to:

(i) Receive assets and hold all assets in a safe place;

(ii) 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;

(iii) 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;

(iv) Notify the grantor and the beneficiary within ten days, of any deposits to or withdrawals from the trust account;

(v) 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

(vi) 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 such asset upon condition that the proceeds are paid into the trust account.

(g) The trust agreement shall provide that at least thirty days, but not more than forty-five days, prior to termination of the trust account, written notification of termination shall be delivered by the trustee to the beneficiary.

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

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

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

(k) Notwithstanding other provisions of this regulation, when a trust agreement is established in conjunction with a reinsurance agreement covering risks other than life, annuities, and disability, where it is customary practice to provide a trust agreement for a specific purpose, such a trust agreement may, notwithstanding any other conditions in this regulation, 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:

(i) 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;

(ii) To make payment to the assuming insurer of any amounts held in the trust account that exceed one hundred two percent of the actual amount required to fund the assuming insurer's obligations under the specific reinsurance agreement; or

(iii) Where the ceding insurer has received notification of termination of the trust account and where the assuming insurer's entire obligations under the specific reinsurance agreement remain unliquidated and undischarged ten days prior to the termination date, to withdraw amounts equal to the obligations and deposit those amounts in a separate account, in the name of the ceding insurer in any qualified United States financial institution as defined in ((RCW 48.12.160(2))) WAC 284-13-515 apart from its general assets, in trust for such uses and purposes specified in (k)(i) and (ii) of this subsection as may remain executory after such withdrawal and for any period after the termination date.

(l) Notwithstanding other provisions of this regulation, when a trust agreement is established in conjunction with a reinsurance agreement covering life, annuities, and disability risks, where it is customary practice to provide a trust agreement for a specific purpose, such a 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 following purposes:

(i) To pay or reimburse the ceding insurer for:

(A) 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

(B) The assuming insurer's share under the specific reinsurance agreement of surrenders and benefits or losses paid by the ceding insurer, under the terms and provisions of the policies reinsured under the reinsurance agreement.

(ii) To make payment to the assuming insurer of 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

(iii) Where the ceding insurer has received notification of termination of the trust account and where the assuming insurer's entire obligations under the specific reinsurance agreement remain unliquidated and undischarged ten days prior to the termination date, to withdraw amounts equal to the assuming insurer's share of liabilities, to the extent that the liabilities have not been funded by the assuming insurer, and deposit those amounts in a separate account, in the name of the ceding insurer in any qualified United States financial institution as defined in WAC 284-13-515 apart from its general assets, in trust for such uses and purposes specified in (l)(i) and (ii) of this subsection as may remain executory after such withdrawal and for any period after the termination date.

(m) The reinsurance agreement entered into in conjunction with the trust agreement may, but need not, contain the provisions required by subsection (4)(a)(ii) of this section, so long as these required conditions are included in the trust agreement.

(n) Notwithstanding any other provision in the trust instrument, if the grantor(s) 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, the trustee shall comply with an order of the commissioner with regulatory oversight over the trust or court of competent jurisdiction directing the trustee to transfer to the commissioner with regulatory oversight or other designated receiver all of the assets of the trust fund. The assets shall be applied in accordance with the priority statutes and laws of the state in which the trust is domiciled applicable to the assets of insurance companies in liquidation. If the commissioner with regulatory oversight determines that the assets of the trust fund or any part thereof are not necessary to satisfy claims of the United States ceding insurers of the grantor(s) of the trust, the assets or any part thereof shall be returned to the trustee for distribution in accordance with the trust agreement.

(3) Permitted conditions.

(a) The trust agreement may provide that the trustee may resign upon delivery of a written notice of resignation, effective not less than ninety 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 ninety days after receipt by the trustee and the beneficiary of the notice, provided that no such 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.

(b) 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.

(c) 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 which the trustee determines are at least equal in market value to the assets withdrawn and that are consistent with the restrictions in subsection (4)(a)(ii) of this section.

(d) 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. Such transfer may be conditioned upon the trustee receiving, prior to or simultaneously, other specified assets.

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

(4) Additional conditions applicable to reinsurance agreements.

(a) A reinsurance agreement, which is entered into in conjunction with a trust agreement and the establishment of a trust account, may contain provisions that:

(i) Require the assuming insurer to enter into a trust agreement and to establish a trust account for the benefit of the ceding insurer, and specifying what the agreement is to cover;

(ii) Stipulate that assets deposited in the trust account shall be valued according to their current fair market value and shall consist only of cash (United States legal tender), certificates of deposit (issued by a United States bank and payable in United States legal tender), and investments of the types permitted by Title 48 RCW or any combination of the above, provided that such investments are issued by an institution that is not the parent, subsidiary, or affiliate of either the grantor or the beneficiary. The reinsurance agreement may further specify the types of investments to be deposited. Where a trust agreement is entered into in conjunction with a reinsurance agreement covering risks other than life, annuities, and disability, then the trust agreement may contain the provisions described by this paragraph in lieu of including such provisions in the reinsurance agreement;

(iii) 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;

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

(v) 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 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 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 because of cancellations of such policies;

(((B) To reimburse the ceding insurer for)) (II) 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.)) (III) Any other amounts necessary to secure the credit or reduction from liability for reinsurance taken by the ceding insurer.

(B) To make payment to the assuming insurer of 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.

(b) The reinsurance agreement may also contain provisions that:

(i) Give the assuming insurer the right to seek approval from the ceding insurer to withdraw from the trust account all or any part of the trust assets and transfer those assets to the assuming insurer, provided:

(A) 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 at all times the deposit in the required amount; or

(B) After withdrawal and transfer, the market value of the trust account is no less than one hundred two percent of the required amount.

The ceding insurer shall not unreasonably or arbitrarily withhold its approval.

(ii) Provide for((:

(A) The)) return of any amount withdrawn in excess of the actual amounts required for (a)(v)(((A), (B), and (C))) of this subsection ((or in the case of (a)(v)(D) of this subsection any amounts that are subsequently determined not to be due;)), and

(((B))) for interest payments((,)) at a rate not in excess of the prime rate of interest((,)) on the amounts held pursuant to (a)(v)(((C))) of this subsection.

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

(A) Interest at a rate different from that provided in (b)(ii)(((B))) of this subsection;

(B) Court or arbitration costs;

(C) Attorney's fees; and

(D) Any other reasonable expenses.

(c) Financial reporting. A trust agreement may be used to reduce any liability for reinsurance ceded to an unauthorized assuming alien insurer in financial statements required to be filed with ((this department)) the insurance commissioner in compliance with the provisions of this regulation 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 such reduction shall be no greater than the specific obligations under the reinsurance agreement that the trust account was established to secure.

(d) Existing agreements. Notwithstanding the effective date of this regulation, any trust agreement or underlying reinsurance agreement in existence prior to December 31, ((1993)) 1996, will continue to be acceptable until December 30, ((1994)) 1997, at which time the agreements will have to be in full compliance with this regulation for the trust agreement to be acceptable.

(e) The failure of any trust agreement to specifically identify the beneficiary as defined in subsection (1)(a) of this section shall not be construed to affect any actions or rights which the commissioner may take or possess pursuant to the provisions of the laws of this state.

[Statutory Authority: RCW 48.02.060 and 48.12.160. 93-19-002 (Order R 93-6), 284-13-550, filed 9/1/93, effective 10/2/93.]

AMENDATORY SECTION (Amending Order R 93-6, filed 9/1/93, effective 10/2/93)

WAC 284-13-560 Letters of credit qualified under WAC 284-13-540.(1) The letter of credit must be clean, irrevocable, and unconditional and issued or confirmed by a qualified United States financial institution as defined in ((RCW 48.12.160 (1)(b)(ii))) WAC 284-13-515. The letter of credit shall contain an issue date and date of expiration and shall stipulate that the beneficiary need only draw a sight draft under the letter of credit and present it to obtain funds and that no other document need be presented. The letter of credit shall also indicate that it is not subject to any condition or qualifications outside of the letter of credit. In addition, the letter of credit itself shall not contain reference to any other agreements, documents, or entities, except as provided in subsection (8)(a)(((ii)(A))) of this section. As used in this section, "beneficiary" means the domestic insurer for whose benefit the letter of credit 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, then the named beneficiary includes and is limited to the court appointed domiciliary receiver (including conservator, rehabilitator, or liquidator).

(2) The heading of the letter of credit may include a boxed section which contains the name of the applicant and other appropriate notations to provide a reference for the letter of credit. The boxed section shall be clearly marked to indicate that such information is for internal identification purposes only.

(3) The letter of credit shall contain a statement to the effect that the obligation of the qualified United States financial institution under the letter of credit is in no way contingent upon reimbursement with respect thereto.

(4) The term of the letter of credit shall be for at least one year and shall contain an "evergreen clause" which prevents the expiration of the letter of credit without due notice from the issuer. The "evergreen clause" shall provide for a period of no less than thirty days' notice prior to expiry date or nonrenewal.

(5) The letter of credit shall state whether it is subject to and governed by the laws of this state or the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce (Publication 400), and all drafts drawn thereunder shall be presentable at an office in the United States of a qualified United States financial institution.

(6) If the letter of credit is made subject to the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce (Publication 400), then the letter of credit shall specifically address and make provision for an extension of time to draw against the letter of credit in the event that one or more of the occurrences specified in Article 19 of Publication 400 occur.

(7) The letter of credit shall be issued by a qualified United States financial institution authorized to issue letters of credit, pursuant to RCW 48.12.160 (1)(b)(ii).

(8) Reinsurance agreement provisions.

(a) The reinsurance agreement in conjunction with which the letter of credit is obtained may contain provisions which:

(i) Require the assuming insurer to provide letters of credit to the ceding insurer and specify what they are to cover.

(ii) Stipulate that the assuming insurer and ceding insurer agree that the letter of credit provided by the assuming insurer pursuant to the provisions of the reinsurance agreement may be drawn upon at any time, notwithstanding any other provisions in the agreement, and shall be utilized by the ceding insurer or its successors in interest only for one or more of the following reasons:

(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 insurers, to the owners of policies reinsured under the reinsurance agreement on account of cancellations of such policies; and

(((B) To reimburse the ceding insurer for)) (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 insurers, 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 (such amount shall include, but not be limited to, amounts for policy reserves, claims and losses incurred, and unearned premium reserves); and

(D) To pay any other amounts the ceding insurer claims are due under the reinsurance agreement.)) (III) Any other amounts necessary to secure the credit or reduction from liability for reinsurance taken by the ceding insurer.

(B) Where the letter of credit will expire without renewal or be reduced or replaced by a letter of credit for a reduced amount and where the assuming insurer's entire obligations under the specific reinsurance remain unliquidated and undischarged ten days prior to the termination date, to withdraw amounts equal to the assuming insurer's share of the liabilities, to the extent that the liabilities have not yet been funded by the assuming insurer and exceed the amount of any reduced or replacement letter of credit, and deposit those amounts in a separate account in the name of the ceding insurer in a qualified United States financial institution as defined in WAC 284-13-515 apart from its general assets, in trust for such purposes specified in (a)(ii)(A) of this subsection as may remain after withdrawal and for any period after the termination date.

(iii) All of the foregoing provisions of (a) of this subsection should be applied without diminution because of insolvency on the part of the ceding insurer or assuming insurer.

(b) Nothing contained in (a) of this subsection shall preclude the ceding insurer and assuming insurer from providing for:

(i) An interest payment, at a rate not in excess of the prime rate of interest, on the amounts held pursuant to (a)(ii)(((C))) of this subsection; and

(ii) 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 (a)(ii)(D) of this subsection,)) any amounts that are subsequently determined not to be due.

(c) When a letter of credit is obtained in conjunction with a reinsurance agreement covering risks other than life, annuities, and disability, where it is customary practice to provide a letter of credit for a specific purpose, then the reinsurance agreement may, in lieu of (a)(ii) of this subsection, require that the parties enter into a "trust agreement" which may be incorporated into the reinsurance agreement or be a separate document.

(((9) A letter of credit may not be used to reduce any liability for reinsurance ceded to an unauthorized assuming insurer in financial statements required to be filed with this 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. Further, the reduction for the letter of credit may be up to the amount available under the letter of credit but no greater than the specific obligation under the reinsurance agreement which the letter of credit was intended to secure.))

[Statutory Authority: RCW 48.02.060 and 48.12.160. 93-19-002 (Order R 93-6), 284-13-560, filed 9/1/93, effective 10/2/93.]

AMENDATORY SECTION (Amending Order R 93-6, filed 9/1/93, effective 10/2/93)

WAC 284-13-570 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. The credit shall not be greater than the funds held.

[Statutory Authority: RCW 48.02.060 and 48.12.160. 93-19-002 (Order R 93-6), 284-13-570, filed 9/1/93, effective 10/2/93.]

AMENDATORY SECTION (Amending Order R 93-6, filed 9/1/93, effective 10/2/93)

WAC 284-13-590 Contracts affected. All new and renewal reinsurance transactions entered into after December 1, ((1993)) 1996, shall conform to the requirements of this regulation if credit is to be given to the ceding insurer for such reinsurance.

[Statutory Authority: RCW 48.02.060 and 48.12.160. 93-19-002 (Order R 93-6), 284-13-590, filed 9/1/93, effective 10/2/93.]

NEW SECTION

WAC 284-13-595 Form AR-1.

FORM AR-1

CERTIFICATE OF ASSUMING ALIEN INSURER

I, ,

(name of officer) (title of officer)

of ,

(name of assuming insurer)

the assuming alien insurer under a reinsurance agreement with one or more insurers domiciled in Washington, hereby certify that

("Assuming Insurer"):

(name of assuming insurer)

1. Submits to the jurisdiction of any court of competent jurisdiction in the State of Washington for the adjudication of any issues arising out of the reinsurance agreement, agrees to comply with all requirements necessary to give such court jurisdiction, and will abide by the final decision of such court or any appellate court in the event of an appeal. Nothing in this paragraph constitutes or should be understood to constitute a waiver of Assuming Insurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. This paragraph is not intended to conflict with or override the obligation of the parties to the reinsurance agreement to arbitrate their disputes if such an obligation is created in the agreement.

2. Designates the Insurance Commissioner of the State of Washington as its lawful attorney upon whom may be served any lawful process in any action, suit or proceeding arising out of the reinsurance agreement instituted by or on behalf of the ceding insurer.

3. Submits to the authority of the Insurance Commissioner of the State of Washington to examine its books and records and agrees to bear the expense of any such examination.

4. Submits with this form a current list of insurers domiciled in the State of Washington reinsured by Assuming Insurer and undertakes to submit additions to or deletions from the list to the Insurance Commissioner at least once per calendar quarter.

Dated:

(name of assuming insurer)

BY:

(name of officer)

(title of officer)

[]

© Washington State Code Reviser's Office