Bill Text: IL SB2979 | 2013-2014 | 98th General Assembly | Engrossed

NOTE: There are more recent revisions of this legislation. Read Latest Draft

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Bill Title: Amends the Illinois Insurance Code. 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 the 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.

Spectrum: Moderate Partisan Bill (Democrat 10-2)

Status: (Passed) 2015-01-09 - Public Act . . . . . . . . . 98-1165 [SB2979 Detail]

Download: Illinois-2013-SB2979-Engrossed.html

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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

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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.

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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

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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

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(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

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prior to the next following December 31.
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 (as reported
to the assuming insurer by its cedents) attributable to
reinsurance ceded by U.S. ceding insurers, and in
addition, a trusteed surplus of not 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
cedents) 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 paragraph (C) of this subsection (1)
shall provide or make available, if requested by a
beneficiary under the trust fund, the following

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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 paragraph (C) of
this subsection (1); and
(vi) a written certification that the trust
fund consists of funds in trust in an amount not

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less than the assuming insurer's liabilities
attributable to reinsurance liabilities (as
reported to the assuming insurer by its cedents)
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 subparagraph (3) of this paragraph
(C).
(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,

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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;

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(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

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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

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(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;

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(c) the assuming insurer must maintain
financial strength ratings from 2 or more rating
agencies deemed acceptable by the Director;
(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

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be applied to any unsatisfied obligation of the
association or any of its members, in an amount
determined pursuant to the Department's rules to
provide adequate protection;
(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.

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(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) The Director shall consider the list of
qualified jurisdictions through the NAIC committee

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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.
(c) U.S. jurisdictions that meet the
requirement for accreditation under the NAIC
financial standards and accreditation program
shall be recognized as qualified jurisdictions.
(d) 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 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).
(5) The Director shall assign a rating to each
certified reinsurer pursuant to rules adopted by the

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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 Ratings 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

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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

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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

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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

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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

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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 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%.

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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

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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.
(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

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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

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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

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"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

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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.
(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

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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

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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

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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

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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

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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

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(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

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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

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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 98th General Assembly shall apply to all cessions after
the effective date of this amendatory Act of the 98th
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 98th General Assembly.
(D) The Department shall adopt rules implementing the
provisions of this Article.
(Source: P.A. 90-381, eff. 8-14-97.)