California Code of Regulations
Title 10 - Investment
Chapter 5 - Insurance Commissioner
Subchapter 3 - Insurers
Article 3 - Annual Statements
Premiums in Course of Collection
Section 2303.15 - Oversight of Reinsurance Transactions

Universal Citation: 10 CA Code of Regs 2303.15

Current through Register 2024 Notice Reg. No. 38, September 20, 2024

(a) It is a condition to the issuance of a Certificate of Authority that the policyholder surplus of a licensed insurer shall at the time of admission and at all times subsequent be reasonable in relation to the insurer's outstanding liabilities and adequate to its financial needs, as determined by applying the following factors, among others:

1. The size of the insurer, as measured by its assets, capital and surplus, reserves, premium writings, insurance in force, and other appropriate criteria.

2. The extent to which the insurer's business is diversified among the several lines of insurance.

3. The number and size of risks insured in each line of business.

4. The extent of the geographical dispersion of the insurer's insured risks.

5. The nature and extent of the insurer's reinsurance program.

6. The quality, diversification, and liquidity of the insurer's investment portfolio.

7. The recent past and projected future trend in the size of the insurer's investment portfolio.

8. The recent past and projected future trend in the size of the insurer's surplus, and the policyholder surplus maintained by other comparable insurers.

9. The adequacy of the insurer's reserves.

10. The quality and liquidity of investments in subsidiaries made under Code Section 1215.1. The Commissioner may treat any such investment as a disallowed asset for purposes of determining the adequacy of the policyholder's surplus whenever, in the Commissioner's judgment, the investment so warrants.

11. The quality of the company's earnings and the extent to which the reported earnings include extraordinary accounting items.

(b) Except for cessions to affiliates, the failure of a domestic insurer to retain at least 10% of direct premium written per line of business may be grounds for a finding that the insurer's reinsurance arrangements are materially deficient for purposes of Code Section 717(d). The Commissioner may consent to a lesser percentage of retained risk upon demonstrated business necessity. If the consent permitted by this subdivision is not obtained during the review of a filing made pursuant to Code Section 1215.5(b)(3) or subdivision (e) of this section, an application for such consent may be made in the manner provided in Section 2303.21(f) of this article.

(c) As used in this section:

1. "One party" includes a pool of affiliated insurers, or two or more insurers within the same group of affiliated insurers.

2. "Assumption" means assuming risk by indemnity reinsurance.

3. "Sale" or "purchase" includes the transaction commonly referred to as "assumption reinsurance."

(d) As used in Code Section 1011(c), the term "substantially its entire property or business" means an amount of business such that the sale, cession, assumption or purchase thereof has the potential to render a company insolvent or create a hazard to its policyholders or creditors. A sale, cession, assumption or purchase that equals or exceeds either 75% of an insurer's total premium or 75% of its total liabilities, calculated before the subject transaction, shall constitute "substantially its entire property or business" for purposes of Code Section 1011(c). This subdivision shall not be construed as limiting the type of transactions within the scope of Code Section 1011(c).

(e) A domestic insurer that enters a transaction, under one or more agreements with one party, that is within the scope of subdivision (d) of this section without obtaining the prior written consent of the Commissioner as provided in this article is subject to a proceeding initiated pursuant to Code Section 1011. All licensed insurers, including foreign insurers, entering into sale or purchase transactions, as defined in subdivision (c)3. of this section, that are within the scope of subdivision (d) must obtain the prior written consent of the Commissioner. An application for the Commissioner's consent to a transaction within the scope of subdivision (d) of this section may be submitted as provided in Section 2303.21(g) of this article, and shall satisfy any filing requirement of Code Section 1215.5(b)(3) for the transaction.

(f) A domestic insurer that enters into an affiliated reinsurance transaction that is not within the scope of subdivision (d) of this section but still meets the statutory threshold set forth in Code Section 1215.5(b)(3) shall remain subject to the filing requirements of the Holding Company Act.

(g) The Commissioner's consent to a cession of 100% of direct written premium on prospective business to an affiliate or an inter-company pool shall be conditioned upon the ceding insurer either maintaining surplus at a level sufficient to cover its direct writings, or including within the reinsurance agreement provisions that protect the ceding insurer in a manner satisfactory to the Commissioner.

(h) For purposes of the calculations required by subdivision (d) of this section:

1. "Total premium" and "total liabilities" include both direct and assumed business.

2. "Total liabilities" shall mean:
A. In the case of property and casualty business, the aggregate of the following items:
(i) Reserves for losses reported and outstanding;

(ii) Reserves for losses incurred but not reported;

(iii) Reserves for allocated loss expenses; and

(iv) Unearned premiums.

B. In the case of life and health business, the aggregate of the following items:
(i) Aggregate reserves for life policies and contracts net of policy loans and net due and deferred premiums;

(ii) Aggregate reserves for accident and health policies;

(iii) Deposit funds and other liabilities without life or disability contingencies; and

(iv) Liabilities for policy and contract claims.

(i) Where security for a cession is not provided because the reinsurer is a licensed insurer or an accredited reinsurer, the Commissioner may condition consent or non-objection to a transaction filed with the Department by a domestic insurer pursuant to subdivision (e) of this section upon including within the reinsurance agreement provisions that protect the ceding insurer in a manner satisfactory to the Commissioner.

(j) If the ceding insurer is a domestic insurer, and the reinsurance agreement provides for the transmission of payments between the parties through an intermediary, then the following provisions shall apply:

1. Consent, approval or non-objection to the transmission of payments through the intermediary in a transaction filed with the Department pursuant to subdivision (e) of this section may be conditioned upon the intermediary providing the following documents, authenticated as required by Section 2303.16(c) of this article:
A. A copy of the intermediary's most recent financial statement provided to its client insurer;

B. A copy of the intermediary's most recent independent audit report, if any;

C. If the intermediary is not independently audited, an un-audited balance sheet, income statement, and statement of cash flow, each with an "as of" date of not more than 90 days prior to the date of filing of the reinsurance agreement under review by the Department;

D. A statement of funds the intermediary holds in fiduciary accounts; and

E. A description of any professional liability or fidelity insurance policies or bonds naming the intermediary as an insured or principal.

2. A satisfactory examination report of the intermediary issued by the Department with an "as of" date of not more than 3 years prior to the date of the filing of the reinsurance agreement under review by the Department may be submitted by the intermediary in lieu of the items listed in paragraph (1) above.

3. At the Commissioner's discretion, the Commissioner may initiate an examination of the intermediary and condition the Commissioner's consent, approval or non-objection to the transmission of payments through the intermediary upon the subsequent receipt of a satisfactory examination report. In determining whether an examination should be initiated, the Commissioner shall consider the projected aggregate amount of payments to be transmitted quarterly through the intermediary, the relative financial strength of the parties to the agreement, the availability and adequacy of any fidelity bonds or insurance, and the length of time since the last examination of the intermediary, if any. Transmission of payments through the intermediary shall be deemed non-objectionable to the Commissioner for the subject agreement, if the Commissioner has not objected to the payment arrangement on the grounds of an unsatisfactory examination report within 180 days after issuing the conditional consent, approval or non-objection.

(k) The Department may coordinate the examination of a transaction with other interested state regulatory authorities. In the case of an affiliate transaction filed with the Department pursuant to subdivision (e) of this section by a licensed insurer that is a member of an insurance holding company system and is exempt from registration pursuant to Code Section 1215.4(a), the Department shall coordinate its examination of the transaction with the domestic state regulatory authority that is principally responsible for the licensed insurer's holding company system transactions.

(l) Upon denial of an application for consent filed pursuant to subdivision (e) of this section, or disapproval or objection to a transaction filed pursuant to Code Section 1215.5(b)(3), the Department shall issue a finding in the form of a written explanation setting forth the reasons for the determination. The determination may be appealed to the Chief of the Financial Surveillance Branch or to the successor position after a reorganization of the Department, in a manner consistent with making a request for a permitted accounting practice.

(m) If, subsequent to the Commissioner's consent, approval or non-objection to an agreement, the parties desire to amend the agreement, notice of the proposed amendment shall be filed with the Commissioner not less than 30 days prior to its execution for a determination of whether a new application or filing will be required. Notice shall be filed in the manner prescribed in Section 2303.21(k) of this article. A copy of the notice shall also be provided to the Department's financial analyst and attorney who had been assigned review of the initial application or filing. The notice shall include a copy of the amendment and an explanation of the reason therefor, along with a copy of the Commissioner's prior written consent or non-objection, if any. "Consent"includes transactions where consent is deemed pursuant to subdivision (e) of this section. The amendment shall not require a new application or filing if the Commissioner has not advised of the need for such within 30 days of receipt of the notice; however, the failure to timely object shall not be construed to limit the power of the Commissioner to object to the amendment upon a subsequent renewal or amendment of the amended agreement.

(n) The reporting requirements of subdivision (m) of this section shall not apply to a special acceptance. As used in this subdivision, "special acceptance" means the extension of a reinsurance contract to embrace a specific risk not automatically included within its terms, for example, a different class of business, an inordinate size of obligation, or an excluded risk, where, once accepted, all other contract terms apply.

(o) Any consent granted by the Commissioner is conditioned upon the truth and veracity of the documents and information submitted by or on behalf of the licensed insurer making the application or filing. If the Department determines that the documents or information submitted were materially false or misleading, or that material information was not disclosed, the consent granted shall be void ab initio. If the Department determines that a licensed insurer has violated the terms of the consent granted in any manner, the consent granted may be terminated immediately at the discretion of the Commissioner. As used in this subdivision, "consent granted" includes an approval, the issuance of a notice of non-objection, and the failure to timely respond to a notice or filing made pursuant to subdivisions (e) or (m) of this section. Willfully providing false information to the Department for any purpose shall constitute a material deficiency under Code Section 717(e) and (h) and is grounds for revocation of a Certificate of Authority.

(p) This article shall not be construed as limiting the type of reinsurance arrangements that may be determined materially deficient for purposes of Code Section 717(d).

(q) When a licensed insurer is sold as a corporate shell, or when a sale of the insurer or other circumstance results in a significant change in the insurer's operations so that all or a majority of the documents previously submitted to the Department by the insurer concerning its operations are no longer valid:

1. The insurer shall, within 60 days after a sale or other significant change in its' operations, submit for examination by the Department all documents the Department deems necessary to determine compliance with Code Section 700(c); for good cause shown, the time to submit required documents may be extended;

2. A filing for a determination of compliance with Code Section 700(c) may be made in the manner set forth in Section 2303.21(i) of this article;

3. The insurer may continue its operations while the examination is pending;

4. With respect to a licensed insurer not seeking an amendment to its Certificate of Authority or other approval from the Department, the burden of establishing any material deficiency under Code Section 717 shall be on the Department; and

5. Notwithstanding the provisions of this subdivision, a licensed insurer shall not transact insurance, as that term is defined in Code Section 35, without first obtaining the approvals that may be required from the Department, such as prior approvals for rates or policy forms.

(r) When the Department requests a formal commitment from a licensed insurer to undertake a future act, the commitment made on behalf of the insurer shall be in the form of a certified copy of a board resolution or, at the discretion of the Department, a writing signed by (1) the insurer's chairman, president or any vice president and (2) the insurer's corporate secretary, any assistant secretary, chief financial officer or any assistant treasurer. The Department may require that signatures be notarized.

(s) The verified report of examination required by Code Section 734.1 to be issued after a regularly scheduled examination of all the affairs of a licensee shall not routinely be issued in conjunction with the limited examination of a licensee's reinsurance arrangements that is required or permitted by this article. Nor shall a verified report of examination routinely be issued for examinations that are limited in scope and undertaken in the routine oversight of a licensee's financial affairs. Notwithstanding the foregoing, a formal report of examination shall be issued upon the written request of the examined licensed insurer. The written request shall include an acknowledgement that further examination may be necessary in order to prepare the formal report of examination specified in Code Section 734.1.

1. New section filed 10-24-2006; operative 11-23-2006 (Register 2006, No. 43).
2. Amendment section and NOTE filed 11-27-2017; operative 1-1-2018 (Register 2017, No. 48).
3. Change without regulatory effect amending subsections (a)10. and (j)3. filed 7-14-2021 pursuant to section 100, title 1, California Code of Regulations (Register 2021, No. 29). Filing deadline specified in Government Code section 11349.3(a) extended 60 calendar days pursuant to Executive Order N-40-20.

Note: Authority cited: Sections 720, 730, 736, 923, 1011.5, 1215.9, 1781.12 and 12921, Insurance Code; CalFarm Insurance Company v. Deukmejian, 48 Cal. 3d 805 (1989); and 20th Century Insurance Company v. Garamendi, 8 Cal. 4th 216 (1994). Reference: Sections 700, 701, 717, 730, 733, 736, 923, 925, 925.2, 925.4, 1011, 1011.5, 1215.5(b)(3), 1215.5(f), 1781.10 and 12921, Insurance Code.

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