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.)