Section 2303.7 - Credit for Reinsurance Secured by a Single Beneficiary Trust(a) Credit on financial statements of a domestic insurer shall be allowed for reinsurance ceded to an assuming insurer to the extent of funds held in a trust acceptable to the Commissioner for the exclusive benefit of the ceding insurer as security for the payment of obligations under the reinsurance contract, unless the cession is not in compliance with this section and the applicable provisions of Sections 2303.11 through 2303.13 of this article. The amount of the credit shall not exceed the liabilities carried by the ceding insurer.(b) As used in this subdivision: 1. "Beneficiary" means the domestic insurer for whose sole benefit the trust has been established, and includes any successor by operation of law of the named beneficiary, including without limitation any liquidator, rehabilitator, receiver or conservator.2. "Grantor" means the insurer that has established the trust for the sole benefit of the beneficiary.3. "Trustee" means a qualified United States financial institution as defined in Section 922.7(b) of the Code.(c) A trust naming a domestic insurer as beneficiary shall not be acceptable to the Commissioner unless it meets all of the following requirements: 1. The trust agreement shall be entered into between the beneficiary, the grantor and a trustee.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 United States, except those assets held in book-entry form;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 prior 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to be presented in order to withdraw assets, except that the beneficiary may be required to acknowledge receipt of withdrawn assets; andC. It is not subject to any conditions or qualifications outside of the trust agreement.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 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 ten (10) business 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 custody of the assets to the beneficiary; andF. 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 such asset upon condition that the proceeds are paid into the trust account.7. The trust agreement shall provide that at least thirty (30) days, but not more than forty-five (45) days, prior to termination of the trust account, written notification of termination shall be delivered by the trustee to the beneficiary by registered or certified mail, return receipt requested, or by overnight courier service, signature upon delivery required.8. The trust agreement shall prohibit invasion of the trust corpus for the purpose of paying compensation to, or reimbursing the expenses of, the trustee.9. The trust agreement shall provide that the trustee shall be liable for its own negligence or willful misconduct.10. The trust agreement shall not contain references to any other agreements or documents.(d) An acceptable trust agreement naming a domestic insurer as beneficiary may contain the following provisions: 1. The trust agreement may provide that the trustee may resign upon delivery of a written notice of resignation, effective not less than ninety (90) days after the beneficiary and grantor receive 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 ninety (90) days after the trustee and the beneficiary receive the notice, provided that no such 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 trust agreement may provide that assets deposited in the trust account shall be valued according to their current fair market value and shall consist only of cash in United States dollars, certificates of deposit issued by a United States bank and payable in United States dollars, and investments permitted by the Code or any combination of the above; and may further provide that 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 five percent (5%) of total investments.4. 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 which the trustee determines are at least equal in market value to the assets withdrawn and that are consistent with the restrictions in paragraph (d)(3) of this section.5. 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. Such transfer may be conditioned upon the trustee receiving, prior to or simultaneously, other specified assets.6. The trust agreement may provide that, upon termination of the trust account, all assets not previously withdrawn by the beneficiary shall, with written approval by the beneficiary, be delivered over to the grantor.7. The trust agreement may be made subject to and governed by the laws of the state in which the trust is domiciled.(e) The trust securing the reinsurance agreement of a domestic ceding insurer shall not be acceptable unless the reinsurance agreement: 1. Provides that assets deposited in the trust account shall be valued according to their current fair market value and shall consist only of cash in United States dollars, certificates of deposit issued by a United States financial institution as defined in Code Section 922.7(a) and payable in United States dollars, and investments permitted by the California Insurance Code, or any combination of the above.2. Provides that 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 five percent (5%) of total investments.3. Requires 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.4. Provides that assets in the trust account shall be withdrawn only as permitted in the reinsurance agreement, without diminution because of the insolvency of the ceding insurer or the assuming insurer.(f) A reinsurance agreement of a domestic ceding insurer secured by the trust permitted under this section may: 1. Require the assuming insurer to enter into a trust agreement to establish a trust account for the benefit of the ceding insurer, and specify what the trust agreement is to cover.2. Require, when the trust is established in conjunction with a reinsurance agreement covering risks other than life, annuities and accident and health, 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 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 one hundred and two percent (102%) of the actual amount required to fund the assuming insurer's obligations under the specific reinsurance agreement;C. To pay any other amounts necessary to secure the credit or deduction from liability for reinsurance taken by the ceding insurer; orD. Where the ceding insurer has received notification of termination of the trust and where any of the assuming insurer's obligations under the specific reinsurance agreement remain unliquidated and undischarged ten (10) days prior to the termination date, to withdraw amounts equal to the obligations and deposit those amounts in a separate account in the name of the ceding insurer in any 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 subparagraphs (f)(3)(A) and (f)(3)(B) of this section as may remain executory after such withdrawal and for any period after the termination date.E. "Obligations" as used in this paragraph means: i. Reinsured losses and allocated loss expenses paid by the ceding company, but not recovered from the assuming insurer;ii. Reserves for reinsured losses reported and outstanding;iii. Reserves for reinsured losses incurred but not reported; andiv. Reserves for reinsured allocated loss adjustment expenses and unearned premiums.3. Require, when a trust is established to meet the requirements of Code Section 922. 5 in conjunction with a reinsurance agreement covering life, annuities or accident and health risks, 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, andii. 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 to the assuming insurer amounts held in the trust account in excess of the amount necessary to secure the credit or deduction from liability for reinsurance taken by the ceding insurer;C. To pay any other amounts necessary to secure the credit or deduction from liability for reinsurance taken by the ceding insurer; orD. Where the ceding insurer has received notification of termination of the trust and where any of the assuming insurer's obligations under the specific reinsurance agreement remain unliquidated and undischarged ten (10) days prior to the termination date, to 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 deposit those amounts in a separate account, in the name of the ceding insurer in any qualified United States financial institution apart from its general assets, in trust for such uses and purposes specified in subparagraphs (f)(4)(A) and (f)(4)(B) of this section as may remain executory after withdrawal and for any period after the termination date.4. Give the assuming insurer the right to seek approval from the ceding insurer to withdraw from the trust account all or any part of the trust assets and transfer those assets to the assuming insurer, provided:A. The assuming insurer shall, at the time of withdrawal, replace the withdrawn assets with other qualified assets having a market value equal to the market value of the assets withdrawn so as to maintain at all times the deposit in the required amount, orB. After withdrawal and transfer, the market value of the trust account is no less than one hundred and two percent (102%) of the required amount. The ceding insurer shall not unreasonably withhold its approval.
5. Provide for the return of any amount withdrawn in excess of the actual amounts required for paragraphs (f)(2) or (f)(3) of this section, and for interest payments at a rate not in excess of the prime rate of interest on the amounts held pursuant to paragraphs (f)(2) or (f)(3) of this section.6. Require that all settlements of account between the ceding insurer and the assuming insurer be made in cash or its equivalent.7. Permit the award by any arbitration panel or court of competent jurisdiction of: A. Interest at a rate different from that provided in paragraph (f)(5) of this section,B. Court or arbitration costs,D. Other reasonable expenses.(g) A trust in compliance with the provisions of this section may be used by a domestic insurer to reduce any liability for reinsurance ceded to an unauthorized reinsurer in financial statements required to be filed with this Department, 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 may be up to the current fair market value of acceptable assets available to be withdrawn from the trust account at that time, but such reduction shall be no greater than the specific obligations under the reinsurance agreement that the trust was established to secure.(h) The failure of any trust agreement or trust account established for the benefit of a domestic insurer to specifically identify the beneficiary as defined in Section 2303.7(b) of this article shall not be construed to affect any actions or rights which the Commissioner may take or possess pursuant to the provisions of the laws of this state.(i) A denial of statement credit under this section shall be made in the manner prescribed in Section 2303.19(c) of this article.Cal. Code Regs. Tit. 10, § 2303.7
1. New section filed 10-24-2006; operative 11-23-2006 (Register 2006, No. 43).
2. Change without regulatory effect amending NOTE filed 3-25-2015 pursuant to section 100, title 1, California Code of Regulations (Register 2015, No. 13). 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.
1. New section filed 10-24-2006; operative 11-23-2006 (Register 2006, No. 43).2. Change without regulatory effect amending Note filed 3-25-2015 pursuant to section 100, title 1, California Code of Regulations (Register 2015, No. 13).