N.J. Admin. Code § 11:7-1.3

Current through Register Vol. 57, No. 1, January 6, 2025

Section 11:7-1.3 - Capital, surplus and contingency reserve requirements

(a) An insurer shall not issue a contract insuring municipal bonds, asset-backed securities, or consumer debt obligations, unless it is authorized to write the kinds of insurance defined at paragraph (g) of N.J.S.A. 17:17-1, and unless the insurer's license has been amended to indicate that the insurer is authorized to write municipal bond, asset-backed securities, or consumer debt obligations insurance pursuant to paragraph (g), and further provided that:

1. If it is a stock insurance company, it has a paid-in capital and surplus, or if it is a mutual insurance company, it has a minimum initial surplus, in an amount deemed by the Commissioner to be reasonable in relation to the insurer's outstanding liabilities and adequate to its financial needs, but in no case shall such amount be less than that prescribed by applicable provisions of the Insurance Law. Such stock or mutual insurer shall at all times maintain a surplus to policyholders or minimum surplus, as the case may be, in an amount at least equal to the minimum prescribed by the stated provisions for the aforementioned class of business and for such other kinds of insurance defined in N.J.S.A. 17:17-1, as it may be authorized to transact;

2. It shall establish a contingency reserve, which shall consist of allocations of sums representing 50 percent of the earned premiums on policies insuring municipal bonds. Allocations to such reserve made during each calendar year shall be maintained for a period of at least 120 months, except that withdrawals may be made by the company in any year in which the actual paid losses on the said type of policy exceeded 35 percent of the earned premiums thereon, but no such releases shall be made without the prior written approval of the Commissioner of Banking and Insurance. The Commissioner shall disapprove any withdrawal if he or she determines that the insurer's surplus as regards policyholders is not reasonable in relation to its outstanding liabilities and adequate to its financial needs pursuant to N.J.S.A. 17:27A-4b, or if the insurer is otherwise found to be in a hazardous financial condition pursuant to N.J.A.C. 11:2-27;

3. It shall establish a contingency reserve which shall consist of sums allocated with respect to policies insuring other obligations, representing the greater of 50 percent of premiums written for each category in (a)3i through v listed below or the following amount prescribed for each such category:

i. Investment grade obligations, secured by collateral or having a term of seven years or less, 1.0 percent of principal guaranteed;

ii. Other investment grade obligations, 1.5 percent of principal guaranteed;

iii. Non-investment grade consumer debt obligations, 2.0 percent of principal guaranteed;

iv. Non-investment grade asset-backed securities, 2.0 percent of principal guaranteed; and

v. Other non-investment grade obligations, 2.5 percent of principal guaranteed;

4. Allocations to a contingency reserve as set forth in (a)3 above, equal to 1/60th of the total reserve required, shall be made each quarter for 15 years and shall be maintained for a period of at least 90 months, provided, however, that allocations may be discontinued so long as the total reserve for all categories listed in (a)3i through v above exceeds the percentages contained in such items when applied against unpaid principal, and except that withdrawals may be made by the company in any year in which the actual paid losses on the said type of policy exceeded 65 percent of the earned premiums thereon, but no such releases shall be made without the prior written approval of the Commissioner. The Commissioner shall disapprove any withdrawal if he or she determines that the insurer's surplus as regards policyholders is not reasonable in relation to its outstanding liabilities and adequate to its financial needs pursuant to N.J.S.A. 17:27A-4b, or if the insurer is otherwise found to be in a hazardous financial condition pursuant to N.J.A.C. 11:2-27;

5. Contingency reserves required in (a)2 and 3 above may be established and maintained net of collateral and reinsurance, provided that, in the case of reinsurance, the reinsurance agreement requires that the reinsurer shall, on or after the effective date of the reinsurance, establish and maintain a reserve in an amount equal to the amount by which the insurer reduces its contingency reserve. The contingency reserves required in (a)2 and 3 above may be maintained:

i. Net of refundings and refinancings to the extent the refunded or refinanced issue is paid off or secured by obligations which are directly payable or guaranteed by the United States government (or in the case of an obligation issued outside the United States, net of refundings and refinancings to the extent the refunded or refinanced issue is paid off or secured by obligations which are directly payable or guaranteed by the national government or central bank of the country where the obligation was issued); and

ii. Net of insured securities in a unit investment trust or mutual fund that have been sold from the trust or fund without insurance; and

6. The insurer shall establish and maintain loss reserves, net of collateral, for claims reported and unpaid, in a manner consistent with N.J.S.A. 17:17-18. A deduction from loss reserves shall be allowed for the time value of money by application of a discount rate equal to the average rate of return on the admitted assets of the insurer as of the date of computation of any such reserves. The discount rate shall be adjusted at the end of each calendar year. The aggregate amount of such deduction from loss reserves shall not exceed the amount of the contingency reserves required to be held by an insurer pursuant to this section, without the prior approval of the Commissioner. The Commissioner shall disapprove any withdrawal if he or she determines that the insurer's surplus as regards policyholders is not reasonable in relation to its outstanding liabilities and adequate to its financial needs pursuant to N.J.S.A. 17:27A-4b, or if the insurer is otherwise found to be in a hazardous financial condition pursuant to N.J.A.C. 11:2-27.

(b) In no event shall an insurer have outstanding a cumulative net liability, under policies in force insuring municipal bonds, in an amount which exceeds the sum of its capital and surplus, plus the contingent reserve as defined in (a)2 above. For the purpose of this subsection, the term cumulative net liability shall mean one third of one percent of the insured unpaid principal and insured unpaid interest covered by policies in force insuring municipal bonds. In the event that any such insurer has outstanding a cumulative net liability in excess of the amount as so computed, it shall not transact any new insurance of municipal bonds unless and until its cumulative net liability no longer exceeds such amount.

(c) An insurer transacting the insurance of municipal bonds, asset-backed securities or consumer debt obligations may invest the contingency reserve in tax and loss bonds purchased pursuant to Section 832(c) of the Internal Revenue Code, only to the extent of the tax savings resulting from the deduction for Federal income tax purposes of a sum equal to the annual contributions to the contingency reserve. The contingency reserve shall otherwise be invested only in classes of securities or types of investments specified in paragraphs (a), (c), (d) and (f) of N.J.S.A. 17:24-1.

N.J. Admin. Code § 11:7-1.3

Amended by R.1987 d.426, effective 10/19/1987.
See: 19 N.J.R. 1409(a), 19 N.J.R. 1908(a).
Added text in (b) "For the purpose ... insuring municipal bonds." Recodified (b)2 to (c).
Recodified from N.J.A.C. 11:7-1.2 and amended by R.2008 d.37, effective 2/19/2008.
See: 39 N.J.R. 1985(a), 40 N.J.R. 881(a).
Rewrote the introductory paragraph of (a); in (a)1, deleted "and" from the end; in (a)2, inserted the last sentence; added (a)3 through (a)6; and in (c), inserted ", asset-backed securities or consumer debt obligations".
Former N.J.A.C. 11:7-1.3, Limitations and restrictions, recodified to N.J.A.C. 11:7-1.4.

Amended by 54 N.J.R. 780(b), effective 5/2/2022