Current through Register 2024 Notice Reg. No. 38, September 20, 2024
(a) Credit on financial statements of a domestic
insurer shall be allowed for reinsurance ceded to an assuming insurer, in an amount
not exceeding the liabilities carried by the ceding insurer, to the extent that
security is provided by a letter of credit satisfactory to the Commissioner, unless
the cession is not in compliance with the applicable provisions of Sections
2303.11 through
2303.13 of this article.
(b) As used in this section:
1. "Beneficiary" means the domestic insurer for
whose sole benefit the letter of credit has been established by an issuing or
confirming bank, and includes any successor by operation of law of the named
beneficiary, including without limitation any liquidator, rehabilitator, receiver or
conservator.
2. "Applicant" means the
reinsurer that applies for and causes the letter of credit to be
issued.
(c) A letter of credit
naming a domestic insurer as beneficiary shall not be satisfactory to the
Commissioner unless it meets the following requirements:
1. The letter of credit shall be issued or
confirmed by a qualified United States financial institution as defined in Code
Section 922.7(a).
2. The letter of
credit shall state that it is irrevocable and unconditional, and shall:
A. Contain no extraneous language or reference to
any other agreements, documents or entities.
B. Provide that, except where the amount of the
letter of credit is increased, the letter cannot be modified without the prior
written consent of the beneficiary.
C.
Provide that the obligation of the issuing or confirming bank is not contingent upon
reimbursement or its ability to perfect a lien or obtain a security
interest.
3. In order to draw
funds, the letter of credit shall require only the presentation of a sight draft
indicating the credit number.
4. The
letter of credit shall contain an issue date and an expiration date.
5. The letter of credit shall be for a term of not
less than one year.
6. The letter of
credit shall contain an "evergreen" clause which provides that the term of the
letter shall extend automatically without amendment for the same term as the
original letter, unless at least sixty (60) days prior to the expiration date, a
notice of non-renewal is sent to the beneficiary by registered or certified mail,
return receipt requested, or by overnight courier service, signature upon delivery
required.
7. The letter of credit shall
state the address of the issuing bank or confirming bank where the letter is issued
or confirmed, where it is payable, and where drafts may be presented for payment.
The letter may also permit the presentation of sight drafts at other designated
offices.
8. If the letter of credit is
made subject to the Uniform Customs and Practice for Documentary Credits of the
International Chamber of Commerce (Publication 600), or any successor publication,
then the letter of credit shall specifically provide for a period of not less than
sixty (60) days after the resumption of business to draw against the letter of
credit in the event that one or more of the occurrences specified in Article 36 of
Publication 600, or any successor publication, occur causing interruption of the
business of the bank or of the beneficiary.
9. If the letter of credit is not made subject to
the publication referenced in paragraph (c)(8) of this section, the letter shall
provide for a period of not less than sixty (60) days after resumption of business
to draw against the letter of credit in the event of an interruption of the business
of the bank or of the beneficiary caused by an Act of God, riot, civil commotion,
insurrection, war, terrorism or any other cause beyond control or by any strike or
lockout.
10. If the letter of credit is
more than one page, each page shall identify the issuing bank and the credit
number.
11. The heading of the letter of
credit may include a boxed section containing the name of the applicant, the
beneficiary's name and state of domicile, 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.
(d) An optional form
that meets the letter of credit requirements of this section is provided in Section
2303.22(d) of this
article. A written determination that an alternate form meets the requirements of
this section may be made in the manner set forth in Section
2303.21(e) of this
article.
(e) A reinsurance agreement
entered in conjunction with a letter of credit naming a domestic insurer as
beneficiary 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 agree that a 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 insurer, to the owners of policies
reinsured under the reinsurance agreement on account of cancellations of such
policies;
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 insurer,
under the terms and provisions of the policies reinsured under the reinsurance
agreement; and
iii. Any other amounts
necessary to secure the credit or reduction from liability for reinsurance taken by
the ceding insurer.
B. To
secure payment of the assuming insurer's obligations 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 obligations under the reinsurance agreement
remain unliquidated and undischarged ten (10) days prior to the expiration date, by
withdrawing 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 depositing
those amounts in a separate account in the name of the ceding insurer in a qualified
United States financial institution as defined in Code Section 922.7(b) apart from
its general assets, in trust for such uses and purposes specified in subparagraph
(e)(2)(A) of this section as may remain after withdrawal.
3. Provide for an interest payment, at a rate not
in excess of the prime rate of interest, on the amounts held pursuant to paragraph
(e)(2) of this section; or the return of any amounts drawn down on the letters of
credit in excess of any amounts that are subsequently determined not to be
due.
(f) A denial of statement
credit under this section shall be made in the manner prescribed in Section
2303.18(c) of this
article.
1. New section
filed 10-24-2006; operative 11-23-2006 (Register 2006, No. 43).
2. Change
without regulatory effect amending subsections (c)8.-9., (e)2.B. and (e)3. and
amending NOTE filed 3-25-2015 pursuant to section
100, title 1, California Code of
Regulations (Register 2015, No. 13).
3. Amendment of subsections (d) and
(f) filed 11-27-2017; operative 1-1-2018 (Register 2017, No.
48).
Note: Authority cited: Sections
922.8,
922.85 and
923, 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
922.2,
922.3,
922.5 and
923, Insurance
Code.
