340 Requirements for funds held as security for the payment of obligations of unlicensed, unqualified reinsurers

INSURANCE DEPARTMENT

[31 PA. CODE CH. 163]

Requirements for Funds Held as Security for the Payment of Obligations of Unlicensed, Unqualified Reinsurers

[26 Pa.B. 996]

   The Insurance Department (Department) proposes to adopt Chapter 163 (relating to requirements for funds held as security for the payment of obligations of unlicensed, unqualified reinsurers) to read as set forth in Annex A. These regulations are proposed under the authority of sections 319--319.2 of The Insurance Company Law of 1921 (act) (40 P. S. §§ 442--442.2).

Purpose

   Reinsurance is an agreement whereby all or part of the risk of loss assumed by one of the parties (the ceding insurer) in issuing policies is transferred to the other party (the assuming insurer or reinsurer). By allowing insurers to transfer or share the risk of loss, reinsurance protects ceding insurers against operating losses and increases their underwriting capacity.

   Under statutory insurance accounting principles, a ceding insurer is permitted to establish an asset for losses that it is entitled to recover from a reinsurer or to reduce its liability or reserves for losses that are reinsured. In particular, section 319.1 of the act sets forth conditions for the allowance of credit for reinsurance in financial statements filed with the Department and provides that the Department may promulgate regulations to limit, prohibit or authorize reinsurance credit taken by domestic insurers.

   When a reinsurer is neither licensed by the Department to transact insurance business in this Commonwealth nor included on the Department's list of qualified reinsurers, the obligations of the reinsurer must be secured in order for the ceding insurer to be permitted to take credit for the reinsurance in its financial statements. The form of collateral held for purposes of credit for reinsurance, such as securities, letters of credit and funds held in trust, must be acceptable to the Department.

   These proposed regulations establish minimum requirements for trust agreements, letters of credit and other forms of security acceptable to the Department for credit for reinsurance ceded to unlicensed, unqualified reinsurers. These regulatory requirements are needed to assure that collateral held for purposes of credit for reinsurance meets minimum standards for quality and collectibility of reinsurance recoverables. The proposed regulations will also provide both ceding insurers and reinsurers with formal guidelines for what constitutes forms of security acceptable to the Department.

Explanation of Regulatory Requirements

   Section 163.1 (relating to definitions) contains definitions of ''domestic,'' ''insurer'' and ''unlicensed, unqualified reinsurer'' as key terms used in identifying the types of entities to which the proposed regulations apply. Section 163.3 (relating to scope) further specifies that the proposed regulations apply to licensed domestic insurers subject to section 319.1(b) of the act for purposes of credit for collateralized reinsurance.

   Section 163.4 (relating to funds held in trust) identifies underlying statutory requirements for trust agreements and defines ''beneficiary,'' ''grantor'' and ''trustee'' as terms used to identify the parties of a trust agreement. Section 163.5 (relating to general requirements for trust agreements) lists requirements primarily intended to establish clearly and preserve the rights of the domestic ceding insurer as the beneficiary of the agreement. Section 163.6 (relating to requirements for assets held in trust accounts) builds on existing statutory requirements by protecting the assets from substitution or withdrawal except on written instructions from the beneficiary. Section 163.6 also clearly establishes the beneficiary's right to withdraw assets from the trust account at any time.

   Section 163.7 (relating to duties and responsibilities of trustees) imposes requirements on the trustee relating to the form, safekeeping and withdrawal of the assets. Reporting requirements in this section establish the trustee's duty to provide the beneficiary and the grantor with timely notice of deposits or withdrawals from the account and at least quarterly statements of trust account assets. Section 163.8 (relating to resignation or removal of trustee) provides for prior written notice to all parties in the event of the resignation or removal of the trustee. This section also establishes requirements intended to prevent the resignation or removal of the trustee unless all necessary steps have been taken to secure a successor. Section 163.9 (relating to termination of trust agreements) establishes requirements intended to assure that the beneficiary is provided with advance written notice and the right to withdraw any remaining assets when a trust agreement is terminated.

   Section 163.10 (relating to permitted provision in trust agreements) clarifies that, notwithstanding other requirements in the chapter, the grantor may be permitted to have voting rights on shares of stock in the trust account and may be permitted to receive dividends or interest upon stock or other obligations in the trust account.

   Section 163.11 (relating to requirements for provisions in reinsurance agreements entered into in conjunction with trust agreements) provides for an essential degree of specificity in the language of reinsurance agreements entered into in conjunction with trust agreements. The reinsurance agreement is required to contain provisions that obligate the reinsurer to establish a trust account; provide for the clear transfer of the right to negotiate the assets in the trust account to the ceding insurer; and require all settlements of account between the ceding insurer and the reinsurer to be made in cash or its equivalent. These provisions are needed to establish clearly the legal position of the ceding insurer and eliminate any impediments to the ceding insurer's ability to take possession of the assets.

   Section 163.12 (relating to accounting in statutory financial statements for credit for reinsurance secured by trust agreements) prohibits a ceding insurer from taking credit for reinsurance in a financial statement filed with the Department unless the trust agreement has been executed and the trust account has been established and funded on or before the date on which the financial statement is filed. This section also limits the amount of permissible credit for reinsurance to the lesser of the current fair market value of assets available to be withdrawn from the trust account or the specific obligations under the reinsurance agreement that the trust account was established to secure. These requirements are intended to assure that the ceding insurer does not take credit for reinsurance until the agreements and trust account have been properly executed and funded and that financial statements filed by ceding insurers are an accurate reflection of the impact of reinsurance agreements on their financial condition.

   Section 163.13 (relating to existing trust agreements and underlying reinsurance agreements) gives ceding insurers 1 year from the effective date of the adoption of these regulations to bring existing reinsurance agreements and underlying trust agreements into compliance with the regulations.

   Section 163.14 (relating to letters of credit) identifies underlying statutory requirements for letters of credit and defines ''beneficiary'' as that term is used in the proposed regulations with respect to letters of credit.

   Section 163.15 (relating to requirements for letters of credit) includes requirements relating to the form of letters of credit, the rights of beneficiaries to draw on letters of credit, and the qualifications of financial institutions that issue or confirm letters of credit. Section 163.16 (relating to provisions in reinsurance agreements entered into in conjunction with letters of credit) provides for an essential degree of specificity in the language of reinsurance agreements entered into in conjunction with letters of credit, most importantly with respect to the rights of the ceding insurer in the event of nonrenewal of the letter of credit.

   Section 163.17 (relating to accounting in statutory financial statements for credit for reinsurance secured by letters of credit) and § 163.18 (relating to existing letters of credit) contain provisions comparable to §§ 163.12 and 163.13 with respect to trust agreements. The amount of permissible credit is limited to the lesser of the amount of the letter of credit or the specific obligations under the reinsurance agreement that the letter of credit was issued to secure. Ceding insurers are given 1 year from the effective date of the adoption of these regulations to bring existing reinsurance agreements and letters of credit into compliance with the regulations.

   Section 163.19 (relating to actions or rights of the Commissioner) provides that the failure of a trust agreement or letter of credit to identify the beneficiary as defined in the proposed regulations may not affect the rights of the Commissioner under the laws of the Commonwealth, particularly as the successor of the beneficiary in a court appointed receivership.

   Section 163.20 (relating to other security acceptable to the Commissioner) describes other forms of security for which credit is permitted, consistent with existing statutes. In general, these other forms of acceptable security consist of funds or letters of credit provided by a noninsurer parent corporation and unencumbered funds withheld by and under the exclusive control of the ceding insurer.

Fiscal Impact

   State Government

   The proposed regulations will not have a measurable impact on Department costs associated with the analyses of financial statements filed by domestic insurers.

   General Public

   The proposed regulations will have no immediate fiscal impact on the general public. However, the general public will benefit to the extent that adoption of the regulations enhances the financial solvency of domestic insurers.

   Political Subdivisions

   The proposed regulations will have no impact on costs to political subdivisions.

   Private Sector

   The requirements in these proposed regulations will impose no significant costs on domestic insurers or reinsurers. Costs required to bring existing reinsurance agreements, trust agreements and letters of credit into compliance with the regulations will be mitigated by the 1 year grace period provided in the regulations for existing agreements and letters of credit. In addition, the proposed regulations will not have a measurable impact on Department costs associated with the conduct of onsite financial examinations of domestic insurers, which costs are borne by the examinees.

Paperwork

   The proposed regulations impose no additional paperwork requirements on the Department or domestic insurers.

Effectiveness/Sunshine Date

   The proposed regulations will become effective upon publication as a final rulemaking in the Pennsylvania Bulletin. The regulations will be monitored annually. No sunset date has been assigned.

Contact Person

   Questions or comments regarding the proposed rulemaking may be addressed in writing to Elaine M. Leitzel, Administrative Officer, Office of Regulation of Companies, 1345 Strawberry Square, Harrisburg, PA 17120, [phone], within 30 days following publication of this notice in the Pennsylvania Bulletin.

Regulatory Review

   Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), the Department submitted a copy of these proposed regulations on February 27, 1996, to the Independent Regulatory Review Commission (IRRC) and to the Chairpersons of the House Committee on Insurance and the Senate Committee on Banking and Insurance. In addition to submitting these proposed regulations, the Department has provided IRRC and the Committees with a copy of a detailed Regulatory Analysis Form prepared by the Department in compliance with Executive Order 1982-2, ''Improving Government Regulations.'' A copy of this material is available to the public upon request.

   If IRRC has objections to any portion of the proposed regulations, it will notify the Department within 30 days of the close of the public comment period. The notification shall specify the regulatory review criteria which have not been met by that portion. The Regulatory Review Act specifies detailed procedures for review, prior to final publication of the regulations, by the Department, the General Assembly and the Governor of objections raised.

LINDA S. KAISER,   
Insurance Commissioner

   Fiscal Note: 11-135. No fiscal impact; (8) recommends adoption.

Annex A

TITLE 31.  INSURANCE

PART VIII.  MISCELLANEOUS PROVISIONS

CHAPTER 163.  REQUIREMENTS FOR FUNDS HELD AS SECURITY FOR THE PAYMENT OF OBLIGATIONS OF UNLICENSED, UNQUALIFIED REINSURERS

Sec.

163.1.	Definitions.
163.2.	Purpose.
163.3.	Scope.
163.4.	Funds held in trust; definitions.
163.5.	General requirements for trust agreements.
163.6.	Requirements for assets held in trust accounts.
163.7.	Duties and responsibilities of trustees.
163.8.	Resignation or removal of trustee.
163.9.	Termination of trust agreements.
163.10.	Permitted provision in trust agreements.
163.11.	Requirements for provisions in reinsurance agreements entered into in conjunction with trust agreements.
163.12.	Accounting in statutory financial statements for credit for reinsurance secured by trust agreements.
163.13.	Existing trust agreements and underlying reinsurance agreements.
163.14.	Letters of credit.
163.15.	Requirements for letters of credit.
163.16.	Provisions in reinsurance agreements entered into in conjunction with letters of credit.
163.17.	Accounting in statutory financial statements for credit for reinsurance secured by letters of credit.
163.18.	Existing letters of credit.
163.19.	Actions or rights of the Commissioner.
163.20.	Other security acceptable to the Commissioner.

§ 163.1. Definitions.

   The following words and terms, when used in this chapter, have the following meanings, unless the context clearly indicates otherwise:

   Act--The Insurance Company Law of 1921 (40 P. S. §§ 341--991.1718).

   Commissioner--The Insurance Commissioner of the Commonwealth.

   Credit for reinsurance or reinsurance credit--An increase in assets or reduction in liabilities for reinsurance in financial statements filed with the Department by domestic insurers in accordance with statutory insurance accounting principles.

   Department--The Insurance Department of the Commonwealth.

   Domestic--Incorporated or organized under the laws of the Commonwealth.

   Insurer--A company, association or exchange as defined in section 101 of the act (40 P. S. § 361).

   Unlicensed, unqualified reinsurer--An assuming insurer which is neither:

   (i)  Licensed by the Department to transact insurance business in this Commonwealth.

   (ii)  Included on a list of qualified reinsurers published and periodically reviewed by the Commissioner under section 319.1(a) of the act (40 P. S. § 442.1(a)).

§ 163.2. Purpose.

   Section 319.1(b) of the act (40 P. S. § 442.1(b)) establishes conditions whereby a domestic ceding insurer may be allowed to take credit for reinsurance when the assuming reinsurer is an unlicensed, unqualified reinsurer. The reinsurance credit may be taken in the amount of funds held as security for the payment of the unlicensed, unqualified reinsurer's obligations but may not exceed the amount of liability carried on the domestic ceding insurer's books. The form of security held for purposes of credit for reinsurance, such as securities, letters of credit and funds held in trust, must be acceptable to the Commissioner. This chapter establishes minimum requirements for trust agreements, letters of credit and other forms of acceptable security for which credit will be allowed for reinsurance ceded to unlicensed, unqualified reinsurers.

§ 163.3. Scope.

   This chapter applies to licensed domestic insurers subject to section 319.1(b) of the act (40 P. S. § 442.1(b)) relating to credit for collateralized reinsurance with unlicensed, unqualified reinsurers.

§ 163.4. Funds held in trust; definitions.

   (a)  Trust agreements established for funds held on behalf of a domestic ceding insurer as security for the payment of the obligations of an unlicensed, unqualified reinsurer shall comply with section 319.1(b)--(e) of the act (40 P. S. § 442.1(b)--(e)) and this chapter.

   (b)  The following words and terms, when used in this chapter with respect to trust agreements, have the following meanings, unless the context clearly indicates otherwise:

   Beneficiary--The domestic ceding insurer for whose benefit a trust has been established and any successor of the beneficiary by operation of law. If a successor in interest to the named beneficiary is effectuated by the issuance of an order by a court of law, the successor beneficiary shall include and be limited to the court appointed domiciliary receiver, including a liquidator, rehabilitator or conservator.

   Grantor--An unlicensed, unqualified reinsurer that has established a trust for the sole benefit of the beneficiary.

   Trustee--A qualified United States financial institution as defined in section 319.1(g) of the act (40 P. S. § 442.1(g)).

§ 163.5. General requirements for trust agreements.

   (a)  A trust agreement shall be entered into between the beneficiary, the grantor and a trustee.

   (b)  A trust agreement shall be established for the sole benefit of the beneficiary.

   (c)  A trust agreement shall be made subject to and governed by the laws of the state in which the trust is established.

   (d)  A trust agreement may not be subject to any conditions or qualifications outside of the trust agreement.

   (e)  A trust agreement may not be conditioned upon any other agreements or documents, except for the reinsurance agreement for which the trust agreement is established.

   (f)  A trust agreement may not transfer liability from the trustee for the trustee's own negligence, willful misconduct or lack of good faith.

   (g)  A trust agreement shall create a trust account into which the assets shall be deposited.

   (h)  A trust agreement shall prohibit invasion of the trust corpus for the purpose of paying compensation to or reimbursing the expenses of the trustee.

   (i)  A trust agreement shall prohibit the grantor from terminating the trust agreement on the basis of the insolvency of the beneficiary.

§ 163.6. Requirements for assets held in trust accounts.

   (a)  Assets in the trust account shall be in the form of security permitted by section 319.1(b) of the act (40 P. S. § 442.1(b)) and shall be valued at current fair market value.

   (b)  A trust agreement shall permit substitution or withdrawal of assets from the trust account only as provided by the following:

   (1)  Within 6 months of the date the trust account is funded, no substitution or withdrawal of assets may occur except on written instructions from the beneficiary for each individual substitution or withdrawal at the time the substitution or withdrawal is executed.

   (2)  After 6 months from the date the trust account is funded, no substitution or withdrawal of assets may occur that, together with other substitutions or withdrawals made within the preceding 12 months, exceeds 50% of the total fair market value of the assets except on written instructions from the beneficiary for each individual substitution or withdrawal at the time the substitution or withdrawal is executed.

   (3)  Other than a substitution or withdrawal under paragraph (2), after 6 months from the date the trust account is funded, no substitution or withdrawal of assets may occur except in accordance with prior written instructions from the beneficiary listing specific types of permitted substitutions or withdrawals of assets that the trustee determines are at least equal in market value to the assets withdrawn and that are in the form permitted by section 319.1(b) of the act (40 P. S. § 442.1(b)) and subsection (a).

   (c)  Notwithstanding subsection (b), upon call or maturity of a trust asset, the trustee may withdraw the asset without the consent of the beneficiary, if the trustee provides notice to the beneficiary, liquidates or redeems the assets, and the proceeds are paid into the trust account no later than 5 days after the liquidation or redemption of the assets.

   (d)  A trust agreement shall permit the beneficiary to have the right to withdraw assets from the trust account at any time, without notice to the grantor, subject only to written notice of the withdrawal from the beneficiary to the trustee.

   (e)  No statement or document other than the written notice by the beneficiary to the trustee under subsection (c) shall be required to be presented by the beneficiary to withdraw assets, except that the beneficiary may be required to acknowledge receipt of withdrawn assets.

§ 163.7. Duties and responsibilities of trustees.

   A trust agreement shall require the trustee to:

   (1)  Receive and hold the assets in a safe place at an office of the trustee in the United States.

   (2)  Determine that the assets are in a form that the beneficiary, or the trustee upon direction by the beneficiary, may negotiate the assets without consent or signature from the grantor or any other person.

   (3)  Furnish to the grantor and the beneficiary a statement of the assets in the trust account upon the inception of the account and at subsequent intervals no less frequent than the end of each calendar quarter.

   (4)  Notify the grantor and the beneficiary within 10 days of deposits to or withdrawals from the trust account, except as provided in § 163.3(b) (relating to requirements for assets held in trust accounts).

   (5)  Upon written demand of the beneficiary, immediately take the 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.

§ 163.8. Resignation or removal of trustee.

   This section applies if the resignation or removal of a trustee does not result in the termination of the trust agreement under § 163.9 (relating to termination of trust agreements).

   (1)  The trustee may resign upon delivery of a written notice of resignation, effective no later than 90 days after notice to the beneficiary and grantor.

   (2)  The trustee may be removed by the grantor by delivery to the trustee and the beneficiary of a written notice of removal, effective no later than 90 days after notice to the trustee and the beneficiary.

   (3)  Notwithstanding the provisions of paragraphs (1) and (2), the resignation or removal of the trustee may not be effective until the following requirements have been met:

   (i)  A successor trustee has been appointed and approved by the beneficiary and the grantor.

   (ii)  A trust agreement has been executed by the successor trustee which complies with section 319.1(b)--(e) of the act (40 P. S. § 442.1(b)--(e)) and this chapter.

   (iii)  The possession of, and title to, all assets in the trust have been transferred to the new trustee.

§ 163.9. Termination of trust agreements.

   (a)  The trustee shall deliver written notification of termination to the beneficiary at least 30 days, but not more than 45 days, prior to termination of the trust account.

   (b)  Upon termination of the trust account, assets not previously withdrawn by the beneficiary may not be delivered to the grantor except with the written approval of the beneficiary.

§ 163.10. Permitted provision in trust agreements.

   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.

§ 163.11. Requirements for provisions in reinsurance agreements entered into in conjunction with trust agreements.

   A reinsurance agreement, which is entered into in conjunction with a trust agreement and the establishment of a trust account, shall contain provisions that:

   (1)  Require the reinsurer to enter into a trust agreement and to establish a trust account for the benefit of the reinsured.

   (2)  Specify what recoverables and reserves, or both, the agreement is to cover.

   (3)  Require the reinsurer, prior to depositing assets with the trustee, to execute assignments or endorsements in blank, or transfer legal title to the trustee of all shares, obligations or other assets requiring assignments so that the ceding insurer, or the trustee upon the direction of the ceding insurer, may negotiate these assets without consent or signature from the reinsurer or any other entity.

   (4)  Require that all settlements of account between the ceding insurer and the reinsurer be made in cash or its equivalent.

§ 163.12. Accounting in statutory financial statements for credit for reinsurance secured by trust agreements.

   (a)  A trust agreement established in compliance with this chapter may be used by a domestic ceding insurer to take credit for reinsurance ceded to an unlicensed, unqualified reinsurer in a financial statement required to be filed with the Department if the trust agreement is executed and the trust account is established and funded on or before the date on which the domestic ceding insurer files the financial statement.

   (b)  Reinsurance credit shall be allowed for reinsurance ceded to an unlicensed, unqualified reinsurer only if the trust account is established in compliance with this chapter. The credit may not exceed the lesser of the current fair market value of assets available to be withdrawn from the trust account or the specific obligations under the reinsurance agreement that the trust account was established to secure.

§ 163.13. Existing trust agreements and underlying reinsurance agreements.

   Domestic ceding insurers may continue to take credit for reinsurance ceded to unlicensed, unqualified reinsurers under reinsurance agreements with underlying trust agreements when both the reinsurance agreements and the underlying trust agreements were executed prior to ____ (Editor's Note: The blank refers to the effective date of adoption of this proposal), if the reinsurance agreements and trust agreements were executed in compliance with applicable State laws and regulations in existence immediately preceding ____ (Editor's Note: The blank refers to the effective date of adoption of this proposal), until ____ (Editor's Note: The blank refers to a date 1 year after the effective date of adoption of this proposal) after which no credit may be allowed until the reinsurance agreements and underlying trust agreements are brought into compliance with this chapter.

§ 163.14. Letters of credit.

   (a)  Letters of credit held by or on behalf of a domestic ceding insurer as security for the payment of the obligations of an unlicensed, unqualified reinsurer under a reinsurance agreement shall meet the requirements of section 319.1(b)--(e) of the act (40 P. S. § 442.1(b)--(e)) and this chapter.

   (b)  As used in this chapter with respect to letters of credit, the term ''beneficiary'' means the domestic ceding insurer for whose benefit the letter of credit has been established and any successor of the beneficiary by operation of law. If a successor in interest to the named beneficiary is effectuated by the issuance of an order by a court of law, the successor beneficiary shall include and be limited to the court appointed domiciliary receiver, including a liquidator, rehabilitator or conservator.

§ 163.15. Requirements for letters of credit.

   (a)  A letter of credit shall:

   (1)  Be clean, irrevocable, unconditional and evergreen as provided under section 319.1(b)(3)(i) of the act (40 P. S. § 442.1(b)(3)(i)).

   (2)  Contain an issue date and date of expiration with a term of at least 1 year.

   (3)  Contain an evergreen clause which prevents the expiration of the letter of credit without due notice from the issuer and provides for at least 30 days notice prior to expiration date or nonrenewal.

   (4)  Stipulate that the beneficiary need only draw a sight draft under the letter of credit and present it to obtain funds and that no other document need be presented.

   (5)  Indicate that it is not subject to any condition or qualifications outside of the letter of credit.

   (6)  Be conditioned upon no other agreement, document or entity, except for the reinsurance agreement for which the letter of credit is issued.

   (7)  Include a clearly marked section which indicates that it contains information for internal identification purposes only and which contains the name of the applicant and other appropriate notations to provide a reference for the letter of credit.

   (8)  Contain a statement to the effect that the obligation of the qualified United States financial institution, as defined in section 319.1(g) of the act, under the letter of credit is in no way contingent upon reimbursement of the issuer by the applicant with respect thereto.

   (9)  Contain a statement that the letter of credit is subject to and governed by the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce (Publication 500 or subsequent updates) and the laws of the Commonwealth, and drafts drawn thereunder shall be presentable at an office of a qualified United States financial institution.

   (10)  Contain a provision for an extension of time to draw against the letter of credit in the event that one or more of the occurrences specified in Article 17 of Publication 500 (or subsequent updates) occur.

   (b)  A letter of credit shall be issued or confirmed by a qualified United States financial institution authorized to issue letters of credit under section 319.1(g)(1) of the act.

   (c)  Notwithstanding subsection (b), a letter of credit may be issued by a qualified United States financial institution authorized to issue letters of credit under section 319.1(g)(2) of the act if the following conditions are met:

   (1)  The letter of credit is confirmed by a qualified United States financial institution authorized to issue letters of credit under section 319.1(g)(1) of the act.

   (2)  The issuing qualified United States financial institution formally designates the confirming qualified United States financial institution as its agent for the receipt and payment of the drafts.

   (3)  The letter of credit meets other requirements of this chapter relating to letters of credit.

§ 163.16. Provisions in reinsurance agreements entered into in conjunction with letters of credit.

   A reinsurance agreement, which is entered into in conjunction with a letter of credit, shall contain provisions that:

   (1)  Require the reinsurer to be identified as the provider of letters of credit to the ceding insurer.

   (2)  Specify what recoverables and reserves are covered by the letter of credit.

   (3)  Specify that nonrenewal of the letter of credit is an event of default that allows the ceding insurer to draw down the full amount of the letter of credit.

§ 163.17. Accounting in statutory financial statements for credit for reinsurance secured by letters of credit.

   (a)  A letter of credit may not be used by a domestic ceding insurer to take credit for reinsurance ceded to an unlicensed, unqualified reinsurer unless the letter of credit has been issued with the domestic ceding insurer as beneficiary and is in compliance with section 319.1 of the act (40 P. S. § 442.1) and this chapter.

   (b)  Credit for reinsurance secured by a letter of credit shall be allowed in an amount not exceeding the lesser of the amount of the letter of credit or the specific obligations under the reinsurance agreement which the letter of credit was issued to secure.

§ 163.18. Existing letters of credit.

   Domestic ceding insurers may continue to take credit for reinsurance secured by letters of credit when both the reinsurance agreements and underlying letters of credit were executed prior to ____ (Editor's Note: The blank refers to the effective date of adoption of this proposal), if the reinsurance agreements and letters of credit were in compliance with applicable State laws and regulations in existence immediately preceding ____ (Editor's Note: The blank refers to the effective date of adoption of this proposal), until ____ (Editor's Note: The blank refers to a date 1 year from the effective date of adoption of this rulemaking) or the renewal date of the letter of credit, whichever time is less, after which no credit will be allowed until the reinsurance agreements and letters of credit are brought into compliance with this chapter.

§ 163.19. Actions or rights of the Commissioner.

   The failure of a trust agreement or letter of credit to specifically identify the beneficiary as defined in § 163.4(b) or § 163.14(b) (relating to funds held in trust; definitions; and letters of credit) to include a court appointed domiciliary receiver may not be construed to prevent the Commissioner from becoming the successor of the beneficiary as a court appointed domiciliary receiver or to otherwise affect any rights which the Commissioner may possess under the laws and regulations of the Commonwealth.

§ 163.20. Other security acceptable to the Commissioner.

   (a)  A domestic ceding insurer may take reinsurance credit for funds or letters of credit provided by a noninsurer parent corporation of the ceding insurer if the requirements of section 319.1(b)(4) of the act (40 P. S. § 442.1(b)(4)) are met.

   (b)  A domestic ceding insurer may take credit for unencumbered funds deposited with or withheld by the ceding insurer in the United States if the funds are subject to withdrawal, transfer or substitution solely by the domestic ceding insurer, are under the exclusive control of the domestic ceding insurer, and are in the forms as permitted under section 319.1(b)(1) and (2) of the act.

[Pa.B. Doc. No. 96-340. Filed for public inspection March 8, 1996, 9:00 a.m.]