SB1737 100TH GENERAL ASSEMBLY

LRB100 06758 SMS 16799 b

100TH GENERAL ASSEMBLY
State of Illinois
2017 and 2018
SB1737

Introduced 2/9/2017, by Sen. Antonio Muņoz

SYNOPSIS AS INTRODUCED:

215 ILCS 5/173.1

from Ch. 73, par. 785.1

Amends the Illinois Insurance Code in provisions concerning credit allowed a domestic ceding insurer. Provides that the assuming insurer shall provide or make certain information to be reported to the Director of Insurance available to the ceding insurer and that the assuming insurer may decline to release trade secrets or commercially sensitive information that would qualify as exempt from disclosure under the Freedom of Information Act. With regard to an assuming insurer's trust fund, provides that not later than February 28 of each year, the assuming insurer's chief executive officer or chief financial officer shall certify to the Director that the trust fund contains funds in an amount not less than the assuming insurer's liabilities attributable to reinsurance ceded by U.S. ceding insurers, and in addition, a trusteed surplus of not less than $20,000,000. Permits a reduction in the required trusteed surplus in specified circumstances. Provides that in the event that the provision concerning the reduction in the required trusteed surplus applies to the trust, the assuming insurer's chief executive officer or chief financial officer shall then certify to the Director that the trust fund contains funds in an amount not less than the assuming insurer's liabilities attributable to reinsurance ceded by U.S. ceding insurers, and in addition, a reduced trusteed surplus of not less than the amount that has been authorized by the regulatory authority having principal regulatory oversight of the trust. Makes changes to provisions concerning financial strength ratings. Sets forth provisions concerning downgrades by rating agencies, the Director's authority, upgrading the rating of a certified reinsurer, and the revocation of the certification of a certified reinsurer. Makes other changes.

A BILL FOR

AN ACT concerning regulation.

Be it enacted by the People of the State of Illinois, represented in the General Assembly:

Section 5. The Illinois Insurance Code is amended by changing Section 173.1 as follows:

(215 ILCS 5/173.1) (from Ch. 73, par. 785.1)

Sec. 173.1. Credit allowed a domestic ceding insurer.

(1) Except as otherwise provided under Article VIII 1/2 of this Code and related provisions of the Illinois Administrative Code, credit for reinsurance shall be allowed a domestic ceding insurer as either an admitted asset or a deduction from liability on account of reinsurance ceded only when the reinsurer meets the requirements of paragraph (A) subsection (1)(A) or (B) or (B-5) or (C) or (C-5) or (D) of this subsection (1). Credit shall be allowed under paragraph (A), subsection (1)(A) or (B), or (B-5) of this subsection (1) only as respects cessions of those kinds or classes of business in which the assuming insurer is licensed or otherwise permitted to write or assume in its state of domicile, or in the case of a U.S. branch of an alien assuming insurer, in the state through which it is entered and licensed to transact insurance or reinsurance. Credit shall be allowed under paragraph (B-5) or (C) of this subsection (1) (C) of this Section only if the applicable requirements of paragraph (E) of this subsection (1) subsection (1)(E) have been satisfied.

(A) Credit shall be allowed when the reinsurance is ceded to an assuming insurer that is authorized in this State to transact the types of insurance ceded and has at least $5,000,000 in capital and surplus.

(B) Credit shall be allowed when the reinsurance is ceded to an assuming insurer that is accredited as a reinsurer in this State. An accredited reinsurer is one that:

(1) files with the Director evidence of its submission to this State's jurisdiction;

(2) submits to this State's authority to examine its books and records;

(3) is licensed to transact insurance or reinsurance in at least one state, or in the case of a U.S. branch of an alien assuming insurer is entered through and licensed to transact insurance or reinsurance in at least one state;

(4) files annually with the Director a copy of its annual statement filed with the insurance department of its state of domicile and a copy of its most recent audited financial statement; and

(5) maintains a surplus as regards policyholders in an amount that is not less than $20,000,000 and whose accreditation has been approved by the Director. No credit shall be allowed a domestic ceding insurer, if the assuming insurers' accreditation has been revoked by the Director after notice and hearing.

(B-5)(1) Credit shall be allowed when the reinsurance is ceded to an assuming insurer that is domiciled in, or in the case of a U.S. branch of an alien assuming insurer is entered through, a state that employs standards regarding credit for reinsurance substantially similar to those applicable under this Code and the assuming insurer or U.S. branch of an alien assuming insurer:

(a) maintains a surplus as regards policyholders in an amount not less than $20,000,000; and

(b) submits to the authority of this State to examine its books and records.

(2) The requirement of item (a) of subparagraph (1) of paragraph (B-5) of this subsection (1) does not apply to reinsurance ceded and assumed pursuant to pooling arrangements among insurers in the same holding company system.

(C)(1) Credit shall be allowed when the reinsurance is ceded to an assuming insurer that maintains a trust fund in a qualified United States financial institution, as defined in paragraph (B) of subsection (3) of this Section subsection 3(B), 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 to the Director information substantially the same as that required to be reported on the NAIC annual and quarterly financial statement by authorized insurers and any other financial information that the Director deems necessary to determine the financial condition of the assuming insurer and the sufficiency of the trust fund. The assuming insurer shall provide or make the information available to the ceding insurer. The assuming insurer may decline to release trade secrets or commercially sensitive information that would qualify as exempt from disclosure under the Freedom of Information Act. The Director shall also make the information publicly available, subject only to such reasonable objections as might be raised to a request pursuant to the Freedom of Information Act, as determined by the Director. The assuming insurer shall submit to examination of its books and records by the Director and bear the expense of examination.

(2)(a) Credit for reinsurance shall not be granted under this subsection unless the form of the trust and any amendments to the trust have been approved by:

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

(ii) the regulatory official of another state who, pursuant to the terms of the trust instrument, has accepted principal regulatory oversight of the trust.

(b) The form of the trust and any trust amendments also shall be filed with the regulatory official of every state in which the ceding insurer beneficiaries of the trust are domiciled. The trust instrument shall provide that contested claims shall be valid and enforceable upon the final order of any court of competent jurisdiction in the United States. The trust shall vest legal title to its assets in its trustees for the benefit of the assuming insurer's United States policyholders and ceding insurees and their assigns and successors in interest. The trust and the assuming insurer shall be subject to examination as determined by the Director.

(c) The trust shall remain in effect for as long as the assuming insurer has outstanding obligations due under the reinsurance agreements subject to the trust. No later than February 28 of each year the trustee of the trust shall report to the Director in writing the balance of the trust and a list of 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 will not expire prior to the next following December 31.

No later than February 28 of each year, the assuming insurer's chief executive officer or chief financial officer shall certify to the Director that the trust fund contains funds in an amount not less than the assuming insurer's liabilities (as reported to the assuming insurer by its cedent) attributable to reinsurance ceded by U.S. ceding insurers, and in addition, a trusteed surplus of no less than $20,000,000. In the event that item (a-5) of subparagraph (3) of this paragraph (C) applies to the trust, the assuming insurer's chief executive officer or chief financial officer shall then certify to the Director that the trust fund contains funds in an amount not less than the assuming insurer's liabilities (as reported to the assuming insurer by its cedent) attributable to reinsurance ceded by U.S. ceding insurers and, in addition, a reduced trusteed surplus of not less than the amount that has been authorized by the regulatory authority having principal regulatory oversight of the trust.

(d) No later than February 28 of each year, an assuming insurer that maintains a trust fund in accordance with this paragraph (C) shall provide or make available, if requested by a beneficiary under the trust fund, the following information to the assuming insurer's U.S. ceding insurers or their assigns and successors in interest:

(i) a copy of the form of the trust agreement and any trust amendments to the trust agreement pertaining to the trust fund;

(ii) a copy of the annual and quarterly financial information, and its most recent audited financial statement provided to the Director by the assuming insurer, including any exhibits and schedules thereto;

(iii) any financial information provided to the Director by the assuming insurer that the Director has deemed necessary to determine the financial condition of the assuming insurer and the sufficiency of the trust fund;

(iv) a copy of any annual and quarterly financial information provided to the Director by the trustee of the trust fund maintained by the assuming insurer, including any exhibits and schedules thereto;

(v) a copy of the information required to be reported by the trustee of the trust to the Director under the provisions of this paragraph (C); and

(vi) a written certification that the trust fund consists of funds in trust in an amount not less than the assuming insurer's liabilities attributable to reinsurance liabilities (as reported to the assuming insurer by its cedent) attributable to reinsurance ceded by U.S. ceding insurers and, in addition, a trusteed surplus of not less than $20,000,000.

(3) The following requirements apply to the following categories of assuming insurer:

(a) The trust fund for a single assuming insurer shall consist of funds in trust in an amount not less than the assuming insurer's liabilities attributable to reinsurance ceded by U.S. ceding insurers, and in addition, the assuming insurer shall maintain a trusteed surplus of not less than $20,000,000, except as provided in item (a-5) of this subparagraph (3).

(a-5) At any time after the assuming insurer has permanently discontinued underwriting new business secured by the trust for at least 3 full years, the Director with principal regulatory oversight of the trust may authorize a reduction in the required trusteed surplus, but only after a finding, based on an assessment of the risk, that the new required surplus level is adequate for the protection of U.S. ceding insurers, policyholders, and claimants in light of reasonably foreseeable adverse loss development. The risk assessment may involve an actuarial review, including an independent analysis of reserves and cash flows, and shall consider all material risk factors, including, when applicable, the lines of business involved, the stability of the incurred loss estimates, and the effect of the surplus requirements on the assuming insurer's liquidity or solvency. The minimum required trusteed surplus may not be reduced to an amount less than 30% of the assuming insurer's liabilities attributable to reinsurance ceded by U.S. ceding insurers covered by the trust.

(b)(i) In the case of a group including incorporated and individual unincorporated underwriters:

(I) for reinsurance ceded under reinsurance agreements with an inception, amendment, or renewal date on or after January 1, 1993 August 1, 1995, the trust shall consist of a trusteed account in an amount not less than the respective underwriters' group's several liabilities attributable to business ceded by U.S. domiciled ceding insurers to any member of the group;

(II) for reinsurance ceded under reinsurance agreements with an inception date on or before December 31, 1992 July 31, 1995 and not amended or renewed after that date, notwithstanding the other provisions of this Act, the trust shall consist of a trusteed account in an amount not less than the group's several insurance and reinsurance liabilities attributable to business written in the United States; and

(III) in addition to these trusts, the group shall maintain in trust a trusteed surplus of which not less than $100,000,000 shall be held jointly for the benefit of the U.S. domiciled ceding insurers of any member of the group for all years of account.

(ii) The incorporated members of the group shall not be engaged in any business other than underwriting as a member of the group and shall be subject to the same level of solvency regulation and control by the group's domiciliary regulator as are the unincorporated members.

(iii) Within 90 days after its financial statements are due to be filed with the group's domiciliary regulator, the group shall provide to the Director an annual certification by the group's domiciliary regulator of the solvency of each underwriter member, or if a certification is unavailable, financial statements prepared by independent public accountants of each underwriter member of the group.

(c) In the case of a group of incorporated insurers under common administration, the group shall:

(i) have continuously transacted an insurance business outside the United States for at least 3 years immediately before making application for accreditation;

(ii) maintain aggregate policyholders' surplus of not less than $10,000,000,000;

(iii) maintain a trust in an amount not less than the group's several liabilities attributable to business ceded by United States domiciled ceding insurers to any member of the group pursuant to reinsurance contracts issued in the name of the group;

(iv) in addition, maintain a joint trusteed surplus of which not less than $100,000,000 shall be held jointly for the benefit of the United States ceding insurers of any member of the group as additional security for these liabilities; and

(v) within 90 days after its financial statements are due to be filed with the group's domiciliary regulator, make available to the Director an annual certification of each underwriter member's solvency by the member's domiciliary regulator and financial statements of each underwriter member of the group prepared by its independent public accountant.

(C-5) Credit shall be allowed when the reinsurance is ceded to an assuming insurer that has been certified by the Director as a reinsurer in this State and secures its obligations in accordance with the requirements of this paragraph (C-5).

(1) In order to be eligible for certification, the assuming insurer shall meet the following requirements:

(a) the assuming insurer must be domiciled and licensed to transact insurance or reinsurance in a qualified jurisdiction, as determined by the Director pursuant to subparagraph (3) of this paragraph (C-5);

(b) the assuming insurer must maintain minimum capital and surplus, or its equivalent, in an amount not less than $250,000,000 or such greater amount as determined by the Director pursuant to regulation; this requirement may also be satisfied by an association, including incorporated and individual unincorporated underwriters, having minimum capital and surplus equivalents (net of liabilities) of at least $250,000,000 and a central fund containing a balance of at least $250,000,000;

(c) the assuming insurer must maintain financial strength ratings from 2 or more rating agencies deemed acceptable by the Director; these ratings shall be based on interactive communication between the rating agency and the assuming insurer and shall not be based solely on publicly available information; each certified reinsurer shall be rated on a legal entity basis, with due consideration being given to the group rating where appropriate, except that an association, including incorporated and individual unincorporated underwriters, that has been approved to do business as a single certified reinsurer may be evaluated on the basis of its group rating; these financial strength ratings shall be one factor used by the Director in determining the rating that is assigned to the assuming insurer; acceptable rating agencies include the following:

(i) Standard & Poor's;

(ii) Moody's Investors Service;

(iii) Fitch Ratings;

(iv) A.M. Best Company; or

(v) any other nationally recognized statistical rating organization;

(d) the assuming insurer must agree to submit to the jurisdiction of this State, appoint the Director as its agent for service of process in this State, and agree to provide security for 100% of the assuming insurer's liabilities attributable to reinsurance ceded by U.S. ceding insurers if it resists enforcement of a final U.S. judgment; and

(e) the assuming insurer must agree to meet applicable information filing requirements as determined by the Director, both with respect to an initial application for certification and on an ongoing basis.

(2) An association, including incorporated and individual unincorporated underwriters, may be a certified reinsurer. In order to be eligible for certification, in addition to satisfying the requirements of subparagraph (1) of this paragraph (C-5):

(a) the association shall satisfy its minimum capital and surplus requirements through the capital and surplus equivalents (net of liabilities) of the association and its members, which shall include a joint central fund that may be applied to any unsatisfied obligation of the association or any of its members, in the amounts specified in item (b) of subparagraph (1) of this paragraph (c-5);

(b) the incorporated members of the association shall not be engaged in any business other than underwriting as a member of the association and shall be subject to the same level of regulation and solvency control by the association's domiciliary regulator as are the unincorporated members; and

(c) within 90 days after its financial statements are due to be filed with the association's domiciliary regulator, the association shall provide to the Director an annual certification by the association's domiciliary regulator of the solvency of each underwriter member; or if a certification is unavailable, financial statements, prepared by independent public accountants, of each underwriter member of the association.

(3) The Director shall create and publish a list of qualified jurisdictions, under which an assuming insurer licensed and domiciled in such jurisdiction is eligible to be considered for certification by the Director as a certified reinsurer.

(a) In order to determine whether the domiciliary jurisdiction of a non-U.S. assuming insurer is eligible to be recognized as a qualified jurisdiction, the Director shall evaluate the appropriateness and effectiveness of the reinsurance supervisory system of the jurisdiction, both initially and on an ongoing basis, and consider the rights, benefits, and extent of reciprocal recognition afforded by the non-U.S. jurisdiction to reinsurers licensed and domiciled in the U.S. A qualified jurisdiction must agree in writing to share information and cooperate with the Director with respect to all certified reinsurers domiciled within that jurisdiction. A jurisdiction may not be recognized as a qualified jurisdiction if the Director has determined that the jurisdiction does not adequately and promptly enforce final U.S. judgments and arbitration awards. The costs and expenses associated with the Director's review and evaluation of the domiciliary jurisdictions of non-U.S. assuming insurers shall be borne by the certified reinsurer or reinsurers domiciled in such jurisdiction.

(b) Additional factors to be considered in determining whether to recognize a qualified jurisdiction include, but are not limited to, the following:

(i) the framework under which the assuming insurer is regulated;

(ii) the structure and authority of the domiciliary regulator with regard to solvency regulation requirements and financial surveillance;

(iii) the substance of financial and operating standards for assuming insurers in the domiciliary jurisdiction;

(iv) the form and substance of financial reports required to be filed or made publicly available by reinsurers in the domiciliary jurisdiction and the accounting principles used;

(v) the domiciliary regulator's willingness to cooperate with U.S. regulators in general and the Director in particular;

(vi) the history of performance by assuming insurers in the domiciliary jurisdiction;

(vii) any documented evidence of substantial problems with the enforcement of final U.S. judgments in the domiciliary jurisdiction; and

(viii) any relevant international standards or guidance with respect to mutual recognition of reinsurance supervision adopted by the International Association of Insurance Supervisors or its successor organization.

(c) If, upon conducting an evaluation under this paragraph with respect to the reinsurance supervisory system of any non-U.S. assuming insurer, the Director determines that the jurisdiction qualifies to be recognized as a qualified jurisdiction, the Director shall publish notice and evidence of such recognition in an appropriate manner. The Director may establish a procedure to withdraw recognition of those jurisdictions that are no longer qualified.

(d) The Director shall consider the list of qualified jurisdictions through the NAIC committee process in determining qualified jurisdictions. If the Director approves a jurisdiction as qualified that does not appear on the list of qualified jurisdictions, then the Director shall provide thoroughly documented justification in accordance with criteria to be developed under regulations.

(e) U.S. jurisdictions that meet the requirement for accreditation under the NAIC financial standards and accreditation program shall be recognized as qualified jurisdictions.

(f) If a certified reinsurer's domiciliary jurisdiction ceases to be a qualified jurisdiction, then the Director may suspend the reinsurer's certification indefinitely, in lieu of revocation.

(4) If an applicant for certification has been certified as a reinsurer in an NAIC accredited jurisdiction, then the Director may defer to that jurisdiction's certification and to the rating assigned by that jurisdiction if the assuming insurer submits a properly executed Form CR-1 and such additional information as the Director requires. Such assuming insurer shall be considered to be a certified reinsurer in this State but only upon the Director's assignment of an Illinois rating, which shall be made based on the requirements of subparagraph (5) of this paragraph (C-5). The following shall apply:

(a) Any change in the certified reinsurer's status or rating in the other jurisdiction shall apply automatically in Illinois as of the date it takes effect in the other jurisdiction. The certified reinsurer shall notify the Director of any change in its status or rating within 10 days after receiving notice of the change.

(b) The Director may withdraw recognition of the other jurisdiction's rating at any time and assign a new rating in accordance with subparagraph (5) of this paragraph (C-5).

(c) The Director may withdraw recognition of the other jurisdiction's certification at any time with written notice to the certified reinsurer. Unless the Director suspends or revokes the certified reinsurer's certification in accordance with item (c) of subparagraph (9) of this paragraph (C-5), the certified reinsurer's certification shall remain in good standing in Illinois for a period of 3 months, which shall be extended if additional time is necessary to consider the assuming insurer's application for certification in Illinois.

(5) The Director shall assign a rating to each certified reinsurer pursuant to rules adopted by the Department. Factors that shall be considered as part of the evaluation process include the following:

(a) The certified reinsurer's financial strength rating from an acceptable rating agency. Financial strength ratings shall be classified according to the following ratings categories:

(i) Ratings Category "Secure - 1" corresponds to the highest level of rating given by a rating agency, including, but not limited to, A.M. Best Company rating A++; Standard & Poor's rating AAA; Moody's Investors Service rating Aaa; and Fitch Ratings rating AAA.

(ii) Ratings Category "Secure - 2" corresponds to the second-highest level of rating or group of ratings given by a rating agency, including, but not limited to, A.M. Best Company rating A+; Standard & Poor's rating AA+, AA, or AA-; Moody's Investors Service ratings Aa1, Aa2, or Aa3; and Fitch Ratings ratings AA+, AA, or AA-.

(iii) Ratings Category "Secure - 3" corresponds to the third-highest level of rating or group of ratings given by a rating agency, including, but not limited to, A.M. Best Company rating A; Standard & Poor's ratings A+ or A; Moody's Investors Service ratings A1 or A2; and Fitch Ratings ratings A+ or A.

(iv) Ratings Category "Secure - 4" corresponds to the fourth-highest level of rating or group of ratings given by a rating agency, including, but not limited to, A.M. Best Company rating A-; Standard & Poor's rating A-; Moody's Investors Service rating A3; and Fitch Ratings rating A-.

(v) Ratings Category "Secure - 5" corresponds to the fifth-highest level of rating or group of ratings given by a rating agency, including, but not limited to, A.M. Best Company ratings B++ or B+; Standard & Poor's ratings BBB+, BBB, or BBB-; Moody's Investors Service ratings Baa1, Baa2, or Baa3; and Fitch Ratings ratings BBB+, BBB, or BBB-.

(vi) Ratings Category "Vulnerable - 6" corresponds to a level of rating given by a rating agency, other than those described in subitems (i) through (v) of this item (a), including, but not limited to, A.M. Best Company rating B, B-, C++, C+, C, C-, D, E, or F; Standard & Poor's ratings BB+, BB, BB-, B+, B, B-, CCC, CC, C, D, or R; Moody's Investors Service ratings Ba1, Ba2, Ba3, B1, B2, B3, Caa, Ca, or C; and Fitch Ratings ratings BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, or D.

A failure to obtain or maintain at least 2 financial strength ratings from acceptable rating agencies shall result in loss of eligibility for certification.

(b) The business practices of the certified reinsurer in dealing with its ceding insurers, including its record of compliance with reinsurance contractual terms and obligations.

(c) For certified reinsurers domiciled in the U.S., a review of the most recent applicable NAIC Annual Statement Blank, either Schedule F (for property and casualty reinsurers) or Schedule S (for life and health reinsurers).

(d) For certified reinsurers not domiciled in the U.S., a review annually of Form CR-F (for property and casualty reinsurers) or Form CR-S (for life and health reinsurers).

(e) The reputation of the certified reinsurer for prompt payment of claims under reinsurance agreements, based on an analysis of ceding insurers' Schedule F reporting of overdue reinsurance recoverables, including the proportion of obligations that are more than 90 days past due or are in dispute, with specific attention given to obligations payable to companies that are in administrative supervision or receivership.

(f) Regulatory actions against the certified reinsurer.

(g) The report of the independent auditor on the financial statements of the insurance enterprise, on the basis described in item (h) of this subparagraph (5).

(h) For certified reinsurers not domiciled in the U.S., audited financial statements (audited Generally Accepted Accounting Principles (U.S. GAAP) basis statement if available, audited International Financial Reporting Standards (IFRS) basis statements are allowed but must include an audited footnote reconciling equity and net income to U.S. GAAP basis or, with the permission of the Director, audited IFRS basis statements with reconciliation to U.S. GAAP basis certified by an officer of the company), regulatory filings, and actuarial opinion (as filed with the non-U.S. jurisdiction supervisor). Upon the initial application for certification, the Director shall consider the audited financial statements filed with its non-U.S. jurisdiction supervisor for the 3 years immediately preceding the date of the initial application for certification.

(i) The liquidation priority of obligations to a ceding insurer in the certified reinsurer's domiciliary jurisdiction in the context of an insolvency proceeding.

(j) A certified reinsurer's participation in any solvent scheme of arrangement, or similar procedure, that involves U.S. ceding insurers. The Director shall receive prior notice from a certified reinsurer that proposes participation by the certified reinsurer in a solvent scheme of arrangement.

The maximum rating that a certified reinsurer may be assigned shall correspond to its financial strength rating, which shall be determined according to subitems (i) through (vi) of item (a) of this subparagraph (5). The Director shall use the lowest financial strength rating received from an acceptable rating agency in establishing the maximum rating of a certified reinsurer.

(6) Based on the analysis conducted under item (e) of subparagraph (5) of this paragraph (C-5) of a certified reinsurer's reputation for prompt payment of claims, the Director may make appropriate adjustments in the security the certified reinsurer is required to post to protect its liabilities to U.S. ceding insurers, provided that the Director shall, at a minimum, increase the security the certified reinsurer is required to post by one rating level under item (a) of subparagraph (8) of this paragraph (C-5) if the Director finds that:

(a) more than 15% of the certified reinsurer's ceding insurance clients have overdue reinsurance recoverables on paid losses of 90 days or more that are not in dispute and that exceed $100,000 for each cedent; or

(b) the aggregate amount of reinsurance recoverables on paid losses that are not in dispute that are overdue by 90 days or more exceeds $50,000,000.

(7) The Director shall post notice on the Department's website promptly upon receipt of any application for certification, including instructions on how members of the public may respond to the application. The Director may not take final action on the application until at least 30 days after posting the notice required by this subparagraph. The Director shall publish a list of all certified reinsurers and their ratings.

(8) A certified reinsurer shall secure obligations assumed from U.S. ceding insurers under this subsection (1) at a level consistent with its rating.

(a) The amount of security required in order for full credit to be allowed shall correspond with the applicable ratings category:

Secure - 1: 0%.

Secure - 2: 10%.

Secure - 3: 20%.

Secure - 4: 50%.

Secure - 5: 75%.

Vulnerable - 6: 100%.

(b) Nothing in this subparagraph (8) shall prohibit the parties to a reinsurance agreement from agreeing to provisions establishing security requirements that exceed the minimum security requirements established for certified reinsurers under this Section.

(c) In order for a domestic ceding insurer to qualify for full financial statement credit for reinsurance ceded to a certified reinsurer, the certified reinsurer shall maintain security in a form acceptable to the Director and consistent with the provisions of subsection (2) of this Section, or in a multibeneficiary trust in accordance with paragraph (C) of this subsection (1), except as otherwise provided in this subparagraph (8).

(d) If a certified reinsurer maintains a trust to fully secure its obligations subject to paragraph (C) of this subsection (1), and chooses to secure its obligations incurred as a certified reinsurer in the form of a multibeneficiary trust, then the certified reinsurer shall maintain separate trust accounts for its obligations incurred under reinsurance agreements issued or renewed as a certified reinsurer with reduced security as permitted by this subsection or comparable laws of other U.S. jurisdictions and for its obligations subject to paragraph (C) of this subsection (1). It shall be a condition to the grant of certification under this paragraph (C-5) that the certified reinsurer shall have bound itself, by the language of the trust and agreement with the Director with principal regulatory oversight of each such trust account, to fund, upon termination of any such trust account, out of the remaining surplus of such trust any deficiency of any other such trust account. The certified reinsurer shall also provide or make available, if requested by a beneficiary under a trust, all the information that is required to be provided under the requirements of item (d) of subparagraph (2) of paragraph (C) of this subsection (1) to the certified reinsurer's U.S. ceding insurers or their assigns and successors in interest. The assuming insurer may decline to release trade secrets or commercially sensitive information that would qualify as exempt from disclosure under the Freedom of Information Act.

(e) The minimum trusteed surplus requirements provided in paragraph (C) of this subsection (1) are not applicable with respect to a multibeneficiary trust maintained by a certified reinsurer for the purpose of securing obligations incurred under this subsection, except that such trust shall maintain a minimum trusteed surplus of $10,000,000.

(f) With respect to obligations incurred by a certified reinsurer under this subsection (1), if the security is insufficient, then the Director may reduce the allowable credit by an amount proportionate to the deficiency and may impose further reductions in allowable credit upon finding that there is a material risk that the certified reinsurer's obligations will not be paid in full when due.

(9)(a) In the case of a downgrade by a rating agency or other disqualifying circumstance, the Director shall by written notice assign a new rating to the certified reinsurer in accordance with the requirements of subparagraph (5) of this paragraph (C-5).

(b) If the rating of a certified reinsurer is upgraded by the Director, then the certified reinsurer may meet the security requirements applicable to its new rating on a prospective basis, but the Director shall require the certified reinsurer to post security under the previously applicable security requirements as to all contracts in force on or before the effective date of the upgraded rating. If the rating of a certified reinsurer is downgraded by the Director, then the Director shall require the certified reinsurer to meet the security requirements applicable to its new rating for all business it has assumed as a certified reinsurer.

(c) The Director may suspend, revoke, or otherwise modify a certified reinsurer's certification at any time if the certified reinsurer fails to meet its obligations or security requirements under this Section or if other financial or operating results of the certified reinsurer, or documented significant delays in payment by the certified reinsurer, lead the Director to reconsider the certified reinsurer's ability or willingness to meet its contractual obligations. In seeking to suspend, revoke, or otherwise modify a certified reinsurer's certification, the Director shall follow the procedures provided in paragraph (G) of this subsection (1).

(d) For purposes of this subsection (1), a certified reinsurer whose certification has been terminated for any reason shall be treated as a certified reinsurer required to secure 100% of its obligations.

(i) As used in this item (d), the term "terminated" refers to revocation, suspension, voluntary surrender and inactive status.

(ii) If the Director continues to assign a higher rating as permitted by other provisions of this Section, then this requirement does not apply to a certified reinsurer in inactive status or to a reinsurer whose certification has been suspended.

(e) Upon revocation of the certification of a certified reinsurer by the Director, the assuming insurer shall be required to post security in accordance with subsection (2) of this Section in order for the ceding insurer to continue to take credit for reinsurance ceded to the assuming insurer. If funds continue to be held in trust, then the Director may allow additional credit equal to the ceding insurer's pro rata share of the funds, discounted to reflect the risk of uncollectibility and anticipated expenses of trust administration.

(f) Notwithstanding the change of a certified reinsurer's rating or revocation of its certification, a domestic insurer that has ceded reinsurance to that certified reinsurer may not be denied credit for reinsurance for a period of 3 months for all reinsurance ceded to that certified reinsurer, unless the reinsurance is found by the Director to be at high risk of uncollectibility.

(10) A certified reinsurer that ceases to assume new business in this State may request to maintain its certification in inactive status in order to continue to qualify for a reduction in security for its in-force business. An inactive certified reinsurer shall continue to comply with all applicable requirements of this subsection (1), and the Director shall assign a rating that takes into account, if relevant, the reasons why the reinsurer is not assuming new business.

(11) Credit for reinsurance under this paragraph (C-5) shall apply only to reinsurance contracts entered into or renewed on or after the effective date of the certification of the assuming insurer.

(12) The Director shall comply with all reporting and notification requirements that may be established by the NAIC with respect to certified reinsurers and qualified jurisdictions.

(D) Credit shall be allowed when the reinsurance is ceded to an assuming insurer not meeting the requirements of paragraph subsection (1) (A), (B), or (C) of this subsection (1) but only with respect to the insurance of risks located in jurisdictions where that reinsurance is required by applicable law or regulation of that jurisdiction.

(E) If the assuming insurer is not licensed to transact insurance in this State or an accredited or certified reinsurer in this State, the credit permitted by paragraphs (B-5) and subsection (1) (C) of this subsection (1) shall not be allowed unless the assuming insurer agrees in the reinsurance agreements:

(1) that in the event of the failure of the assuming insurer to perform its obligations under the terms of the reinsurance agreement, the assuming insurer, at the request of the ceding insurer, shall submit to the jurisdiction of any court of competent jurisdiction in any state of the United States, will comply with all requirements necessary to give the court jurisdiction, and will abide by the final decision of the court or of any appellate court in the event of an appeal; and

(2) to designate the Director or a designated attorney as its true and lawful attorney upon whom may be served any lawful process in any action, suit, or proceeding instituted by or on behalf of the ceding company.

This provision is not intended to conflict with or override the obligation of the parties to a reinsurance agreement to arbitrate their disputes, if an obligation to arbitrate is created in the agreement.

(F) If the assuming insurer does not meet the requirements of paragraph (A) or (B) of this subsection (1) (1)(A) or (B), the credit permitted by paragraph (C) of this subsection (1) (1)(C) shall not be allowed unless the assuming insurer agrees in the trust agreements to the following conditions:

(1) 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 subparagraph (3) of paragraph (C) subsection (C)(3) of this subsection (1) Section or if the grantor 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 state official with regulatory oversight over the trust or with an order of a court of competent jurisdiction directing the trustee to transfer to the state official with regulatory oversight all of the assets of the trust fund.

(2) The assets shall be distributed by and claims shall be filed with and valued by the state official with regulatory oversight in accordance with the laws of the state in which the trust is domiciled that are applicable to the liquidation of domestic insurance companies.

(3) If the state official with regulatory oversight determines that the assets of the trust fund or any part thereof are not necessary to satisfy the claims of the U.S. ceding insurers of the grantor of the trust, the assets or part thereof shall be returned by the state official with regulatory oversight to the trustee for distribution in accordance with the trust agreement.

(4) The grantor shall waive any rights otherwise available to it under U.S. law that are inconsistent with the provision.

(G) If an accredited or certified reinsurer ceases to meet the requirements for accreditation or certification, then the Director may suspend or revoke the reinsurer's accreditation or certification.

(1) The Director must give the reinsurer notice and opportunity for hearing. The suspension or revocation may not take effect until after the Director's order on hearing, unless:

(a) the reinsurer waives its right to hearing;

(b) the Director's order is based on regulatory action by the reinsurer's domiciliary jurisdiction or the voluntary surrender or termination of the reinsurer's eligibility to transact insurance or reinsurance business in its domiciliary jurisdiction or in the primary certifying state of the reinsurer under subparagraph (4) of paragraph (C-5) of this subsection (1); or

(c) the Director finds that an emergency requires immediate action and a court of competent jurisdiction has not stayed the Director's action.

(2) While a reinsurer's accreditation or certification is suspended, no reinsurance contract issued or renewed after the effective date of the suspension qualifies for credit except to the extent that the reinsurer's obligations under the contract are secured in accordance with subsection (2) of this Section. If a reinsurer's accreditation or certification is revoked, no credit for reinsurance may be granted after the effective date of the revocation, except to the extent that the reinsurer's obligations under the contract are secured in accordance with subsection (2) of this Section.

(H) The following provisions shall apply concerning concentration of risk:

(1) A ceding insurer shall take steps to manage its reinsurance recoverable proportionate to its own book of business. A domestic ceding insurer shall notify the Director within 30 days after reinsurance recoverables from any single assuming insurer, or group of affiliated assuming insurers, exceeds 50% of the domestic ceding insurer's last reported surplus to policyholders, or after it is determined that reinsurance recoverables from any single assuming insurer, or group of affiliated assuming insurers, is likely to exceed this limit. The notification shall demonstrate that the exposure is safely managed by the domestic ceding insurer.

(2) A ceding insurer shall take steps to diversify its reinsurance program. A domestic ceding insurer shall notify the Director within 30 days after ceding to any single assuming insurer, or group of affiliated assuming insurers, more than 20% of the ceding insurer's gross written premium in the prior calendar year, or after it has determined that the reinsurance ceded to any single assuming insurer, or group of affiliated assuming insurers, is likely to exceed this limit. The notification shall demonstrate that the exposure is safely managed by the domestic ceding insurer.

(2) Credit for the reinsurance ceded by a domestic insurer to an assuming insurer not meeting the requirements of subsection (1) of this Section shall be allowed in an amount not exceeding the assets or liabilities carried by the ceding insurer. The credit shall not exceed the amount of funds held by or held in trust for the ceding insurer under a reinsurance contract with the assuming insurer as security for the payment of obligations thereunder, if the security is held in the United States 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 paragraph (B) of subsection (3) of this Section (3)(B). This security may be in the form of:

(A) Cash.

(B) Securities listed by the Securities Valuation Office of the National Association of Insurance Commissioners, including those deemed exempt from filing as defined by the Purposes and Procedures Manual of the Securities Valuation Office that conform to the requirements of Article VIII of this Code that are not issued by an affiliate of either the assuming or ceding company.

(C) Clean, irrevocable, unconditional, letters of credit issued or confirmed by a qualified United States financial institution, as defined in paragraph (A) of subsection (3) of this Section (3)(A). The letters of credit shall be effective no later than December 31 of the year for which filing is being made, and in the possession of, or in trust for, 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 (or confirming) 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.

(D) Any other form of security acceptable to the Director.

(3)(A) For purposes of paragraph (C) of subsection (2) of this Section subsection 2(C), 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 either the Director or the Securities Valuation Office of the National Association of Insurance Commissioners as meeting such standards of financial condition and standing as are considered necessary and appropriate to regulate the quality of financial institutions whose letters of credit will be acceptable to the Director; and

(4) is not affiliated with the assuming company.

(B) A "qualified United States financial institution" means, for purposes of those provisions of this law specifying those institutions that are eligible to act as a fiduciary of a trust, an institution that:

(1) is organized or, in the case of the U.S. branch or agency office of a foreign banking organization, licensed under the laws of the United States or any state thereof and has been granted authority to operate with fiduciary powers;

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

(3) is not affiliated with the assuming company, however, if the subject of the reinsurance contract is insurance written pursuant to Section 155.51 of this Code, the financial institution may be affiliated with the assuming company with the prior approval of the Director.

(C) Except as set forth in subparagraph (11) of paragraph (C-5) of subsection (1) of this Section as to cessions by certified reinsurers, this amendatory Act of the 100th General Assembly shall apply to all cessions after the effective date of this amendatory Act of the 100th General Assembly under reinsurance agreements that have an inception, anniversary, or renewal date not less than 6 months after the effective date of this amendatory Act of the 100th General Assembly.

(D) The Department shall adopt rules implementing the provisions of this Article.

(Source: P.A. 90-381, eff. 8-14-97.)