Section 2303.8 - Credit for Reinsurance Secured by Letter of Credit(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; andiii. 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.Cal. Code Regs. Tit. 10, § 2303.8
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.
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).