Current through Register Vol. 48, No. 12, March 22, 2024
a) As used in this Section:
1) Beneficiary means the entity for whose
sole benefit the trust has been established and any successor of the
beneficiary by operation of law. If a court of law appoints a successor in
interest to the named beneficiary, the named beneficiary includes and is
limited to the court appointed domiciliary receiver (including conservator,
rehabilitator or liquidator).
2)
Grantor means the entity that has established a trust for the sole benefit of
the beneficiary. When established in conjunction with a reinsurance agreement,
the grantor is the unlicensed, unaccredited assuming insurer.
3) Obligations, as used in subsection
(b)(11), means:
A) Reinsured losses and
allocated loss adjustment 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
adjustment expenses and unearned premiums.
b) Required Conditions
1) The trust agreement shall be entered into
between the beneficiary, the grantor and a trustee that shall be a qualified
U.S. financial institution as defined in Section 173.1(3)(B) of the
Code.
2) The trust agreement shall
create a trust account into which assets shall be deposited.
3) All assets in the trust account shall be
held by the trustee at the trustee's office in the U.S., except that a bank may
apply for the Director's permission to use a foreign branch office of the bank
as trustee for trust agreements established pursuant to this Section. If the
Director approves the use of the foreign branch office as trustee, then its use
must be approved by the beneficiary in writing and the trust agreement must
provide that the written notice described in subsection (b)(4)(A) must also be
presentable, as a matter of legal right, at the trustee's principal office in
the U.S..
4) The trust agreement
shall provide that:
A) The beneficiary shall
have the right to withdraw assets from the trust account at any time, without
notice to the grantor, subject only to written notice from the beneficiary to
the trustee;
B) No other statement
or document is required to be presented in order to withdraw assets, except
that the beneficiary may be required to acknowledge receipt of withdrawn
assets;
C) It is not subject to any
conditions or qualifications outside of the trust agreement; and
D) It shall not contain references to any
other agreements or documents except as provided for under subsections (b)(11)
and (12).
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
assets 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,
whenever necessary, negotiate any such assets, 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 upon its inception and at
intervals no less frequent than the end of each calendar quarter;
D) Notify the grantor and the beneficiary,
within 10 days, of any deposits to or withdrawals from the trust
account;
E) Upon written demand of
the beneficiary, immediately take any and all steps necessary to transfer
absolutely and unequivocally all right, title and interest in the assets held
in the trust account to the beneficiary and deliver physical custody of the
assets to the beneficiary; and
F)
Allow no substitutions or withdrawals of assets from the trust account, except
on written instructions from the beneficiary, except that the trustee may,
without the consent of but with notice to the beneficiary, upon call or
maturity of any trust asset, withdraw the asset upon condition that the
proceeds are paid into the trust account.
7) The trust agreement shall provide that, at
least 30 days, but not more than 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) Notwithstanding other provisions of this
Part, when a trust agreement is established in conjunction with a reinsurance
agreement covering risks other than life, annuities and accident and health,
when it is customary practice to provide a trust agreement for a specific
purpose, the trust agreement may, notwithstanding any other conditions in this
Part, provide that the ceding insurer shall undertake to use and apply amounts
drawn upon the trust account, without diminution because of the insolvency of
the ceding insurer or the assuming insurer, for the following purposes:
A) To pay or reimburse the ceding insurer for
the assuming insurer's share under the specific reinsurance agreement regarding
any losses and allocated loss expenses paid by the ceding insurer, but not
recovered from the assuming insurer, or for unearned premiums due to the ceding
insurer if not otherwise paid by the assuming insurer;
B) To make payment to the assuming insurer of
any amounts held in the trust account that exceed 102% of the actual amount
required to fund the assuming insurer's obligations under the specific
reinsurance agreement; or
C) When
the ceding insurer has received notification of termination of the trust
account and when the assuming insurer's entire obligations under the specific
reinsurance agreement remain unliquidated and undischarged 10 days prior to the
termination date, to:
i) withdraw amounts
equal to the obligations; and
ii)
deposit those amounts:
* in a separate account;
* in the name of the ceding insurer;
* in any qualified U.S. financial institution as defined in
Section 173.1(3)(B) of the Code;
* a part from its general assets; and
* in trust for the uses and purposes specified in subsections
(b)(11)(A) and (B) as may remain executory after the withdrawal and for any
period after the termination date.
12) Notwithstanding other provisions of this
Part, when a trust agreement is established to meet the requirements of Section
1104.60
in conjunction with a reinsurance agreement covering life, annuities, or
accident and health risks, when it is customary to provide a trust agreement
for a specific purpose, 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, only for the following purposes:
A)
To pay or reimburse the ceding insurer for:
i)
The assuming insurer's share under the specific reinsurance agreement of
premiums returned, but not yet recovered from the assuming insurer, to the
owners of policies reinsured under the reinsurance agreement on account of
cancellations of the policies; and
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;
B) To pay the
assuming insurer amounts held in the trust account in excess of the amount
necessary to secure the credit or reduction from liability for reinsurance
taken by the ceding insurer; or
C)
When the ceding insurer has received notification of termination of the trust
and when the assuming insurer's entire obligations under the specific
reinsurance agreement remain unliquidated and undischarged 10 days prior to the
termination date to:
i) withdraw amounts equal
to the assuming insurer's share of liabilities, to the extent that the
liabilities have not yet been funded by the assuming insurer; and
ii) deposit those amounts:
* in a separate account;
* in the name of the ceding insurer;
* in any qualified U.S. financial institution;
* apart from its general assets; and
* in trust for the uses and purposes specified in subsections
(b)(12)(A) and (B) as may remain executory after withdrawal and for any period
after the termination date.
13) Either the reinsurance agreement or the
trust agreement must stipulate that assets deposited in the trust account shall
be valued according to their current fair market value and shall consist only
of cash in U.S. dollars, certificates of deposit issued by a U.S. bank and
payable in U.S. dollars, and investments permitted by the Code, or any
combination of the above, provided investments in or issued by an entity
controlling, controlled by, or under common control with, either the grantor or
the beneficiary of the trust shall not exceed 5% of total investments. The
agreement may further specify the types of investments to be deposited. If the
reinsurance agreement covers life, annuities, or accident and health risks, the
provisions of this subsection (b)(13) must be included in the reinsurance
agreement.
c) Permitted
Conditions
1) The trust agreement may provide
that the trustee may resign upon delivery of a written notice of resignation,
effective not less than 90 days after receipt by the beneficiary and grantor of
the notice, and that the trustee may be removed by the grantor, by delivery to
the trustee and the beneficiary, of a written notice of removal, effective not
less than 90 days after receipt by the trustee and the beneficiary of the
notice. However, no resignation or removal shall be effective until a successor
trustee has been duly appointed and approved by the beneficiary and the grantor
and all assets in the trust have been duly transferred to the new
trustee.
2) The grantor may have
the full and unqualified right to vote any shares of stock in the trust account
and to receive from time to time payments of any dividends or interest upon any
shares of stock or obligations included in the trust account. Any such interest
or dividends shall be either forwarded promptly upon receipt to the grantor or
deposited in a separate account established in the grantor's name.
3) The trustee may be given authority to
invest, and accept substitutions of, any funds in the account, provided that no
investment or substitution shall be made without prior approval of the
beneficiary, unless the trust agreement specifies categories of investments
acceptable to the beneficiary and authorizes the trustee to invest funds and to
accept substitutions that the trustee determines are at least equal in current
fair market value to the assets withdrawn and that are consistent with the
restrictions in subsection (d)(1)(B).
4) The trust agreement may provide that the
beneficiary may, at any time, designate a party to which all or part of the
trust assets are to be transferred. The transfer may be conditioned upon the
trustee receiving, prior to or simultaneously with, other specified
assets.
5) The trust agreement may
provide that, upon termination of the trust account, all assets not previously
withdrawn by the beneficiary, with written approval by the beneficiary, shall
be delivered over to the grantor.
d) Additional Conditions Applicable to
Reinsurance Agreements
1) A reinsurance
agreement that is entered into in conjunction with a trust agreement and the
establishment of a trust account must contain provisions that:
A) Require the assuming insurer to:
i) enter into a trust agreement, specifying
what the agreement is to cover; and
ii) establish a trust account for the benefit
of the ceding insurer;
B)
Require the assuming insurer, prior to depositing assets with the trustee, to
execute assignments or endorsements in blank, or to transfer legal title to the
trustee of all shares, obligations or any other assets requiring assignments,
in order that the ceding insurer, or the trustee upon the direction of the
ceding insurer, may, whenever necessary, negotiate these assets without consent
or signature from the assuming insurer or any other entity;
C) Require that all settlements of account
between the ceding insurer and the assuming insurer be made in cash or its
equivalent; and
D) Stipulate that
the assuming insurer and the ceding insurer agree that the assets in the trust
account, established pursuant to the provisions of the reinsurance agreement,
may be withdrawn by the ceding insurer at any time, notwithstanding any other
provisions in the reinsurance agreement, and 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
the company, without diminution because of insolvency on the part of the ceding
insurer or the assuming insurer, only for the following purposes:
i) 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 those
policies;
ii) 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;
iii) 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
iv) 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 (the ceding
insurer shall not unreasonably or arbitrarily withhold its approval) to
withdraw from the trust account all or any part of the trust assets and
transfer those assets to the assuming insurer, provided:
i) The assuming insurer shall, at the time of
withdrawal, replace the withdrawn assets with other qualified assets having a
current fair market value equal to the market value of the assets withdrawn so
as to maintain at all times the deposit in the required amount; or
ii) After withdrawal and transfer, the
current fair market value of the trust account is no less than 102% of the
required amount.
B)
Provide for:
i) The return of any amount
withdrawn in excess of the actual amounts required for subsections
(d)(1)(D)(i), (ii) and (iii), or in the case of subsection (d)(1)(D)(iv), any
amounts that are subsequently determined not to be due; and
ii) Interest payments, at a rate not in
excess of the prime rate of interest, on the amounts held pursuant to
subsection (d)(1)(D)(iii).
C) Permit the award by any arbitration panel
or court of competent jurisdiction of:
i)
Interest at a rate different from that provided in subsection
(d)(2)(B)(ii);
ii) Court of
arbitration costs;
iii) Attorney's
fees; and
iv) Any other reasonable
expenses.
e) Financial reporting. A trust agreement may
be used to reduce any liability for reinsurance ceded to an unauthorized
assuming insurer in financial statements required to be filed with the
Department in compliance with the provisions of this Part when established on
or before the date of filing of the financial statement of the ceding insurer.
Further, the reduction for the existence of an acceptable trust account may be
up to the current fair market value of acceptable assets available to be
withdrawn from the trust account at that time, but the reduction shall be no
greater than the specific obligations under the reinsurance agreement that the
trust account was established to secure.
f) The failure of any trust agreement to
specifically identify the beneficiary as defined in subsection (a) shall not be
construed to affect any actions or rights the Director may take or possess
pursuant to the provisions of the laws of this State.