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ARIZONA STATE SENATE
Fifty-Fifth Legislature, First Regular Session
credit for reinsurance
Purpose
Repeals and replaces requirements of insurers relating to credit for reinsurance and reinsurance agreements.
Background
Statute prohibits a credit from being allowed as an admitted asset or as a deduction from liability to any ceding insurer for reinsurance unless the reinsurance is payable by the reinsurer on the basis of the liability of the ceding insurer, if certain conditions are met in the reinsurance agreement (A.R.S. § 20-261).
A domestic ceding insurer must be allowed a credit for reinsurance as either an asset or a reduction from liability on account of reinsurance ceded only when the reinsurer meets the statutorily outlined requirements. A credit must be allowed when the reinsurance is ceded to an assuming insurer that is licensed or accredited as a reinsurer by the Director of the Department of Insurance and Financial Institutions (Director) (A.R.S. §§ 20-261.01 and 20-261.05).
The Director may adopt rules to implement statutes relating to credit for reinsurance (A.R.S. § 20-261.08).
There is no anticipated fiscal impact to the state General Fund associated with this legislation.
Provisions
Credit for Reinsurance
1. Requires credit to be allowed when the reinsurance is ceded to an assuming insurer who:
a) is domiciled or has its head office in, and is licensed in, a reciprocal jurisdiction;
b) has and maintains minimum capital and surplus calculated according to the methodology of its domiciliary jurisdiction;
c) has and maintains a minimum solvency or capital ratio, as applicable;
d) has agreed to and provides the following adequate assurance to the Director:
i. a prompt written notice and explanation if it falls below the minimum financial requirements or if any regulatory action is taken against it for serious noncompliance with applicable law;
ii. written consent to the jurisdiction of Arizona's courts and to the appointment of the Director as agent for service or process;
iii. written consent to pay all final judgements obtained by a ceding insurer or its legal successor that have been declared enforceable;
iv. a provision in the reinsurance agreement requiring the assuming insurer to provide security in an amount equal to 100 percent of liabilities attributable to reinsurance ceded pursuant to the agreement, if the assuming insurer resists enforcement of a final judgement enforceable under the law of the jurisdiction or a properly enforceable arbitration award; and
v. confirmation that it is not presently participating in any solvent scheme of arrangement that involves Arizona's ceding insurers with an agreement to notify the ceding insurer and the Director and provide security equal to 100 percent of their liabilities should a scheme be entered.
e) provides on behalf of itself and any legal predecessors, if requested by the Director, certain documentation to the Director as specified in rule;
f) maintains a practice of prompt payment of claims under reinsurance agreements, pursuant to rule;
g) confirms to the Director on an annual basis, as of the preceding December 31 or at the annual date otherwise statutorily reported to the reciprocal jurisdiction, that the assuming insurer complies with the prescribed requirements; and
h) may provide the Director with additional information on a voluntary basis.
2. Allows, if subject to a legal process of rehabilitation, liquidation or conservation, a ceding insurer, or its representative, to seek and obtain an order requiring the assuming insurer to post security for all outstanding ceded liabilities, if determined appropriate by the court.
3. Requires, when reinsurance is ceded to an assuming insurer, credit to be allowed only for cessions of those kinds or classes of business that the assuming insurer is licensed or otherwise allowed to write or assume.
4. Requires, when credit is allowed when reinsurance is ceded to an assuming insurer that maintains a trust fund for the payments of claims, the form of the trust and any trust amendments to be filed with the Insurance Commissioner, rather than the Director.
5. Specifies that the requirements to be met for credit to be allowed when reinsurance is ceded to an assuming insurer does not:
a) limit or in any way alter the capacity of parties to a reinsurance agreement to agree on requirements for security or other terms, except as expressly prohibited;
b) authorize an assuming insurer to withdraw or reduce the security provided under any reinsurance agreement; and
c) limit or in any way alter the capacity of parties to any reinsurance agreement to renegotiate the agreement.
6. Allows credit to be taken by an assuming insurer who meets outlined eligibility requirements only for reinsurance agreements entered into, amended or renewed on or after the effective date of this legislation and only with respect to losses incurred and reserves reported on or after the later of the date on which the assuming insurer has met the eligibility requirements and the date of the new reinsurance agreement, amendment or renewal.
7. Requires an assuming insurer, if the assuming insurer is an association, to have and maintain:
a) minimum capital and surplus equivalents, net of liabilities, calculated according to the methodology applicable in its domiciliary jurisdiction and a central fund containing a balance in amounts prescribed in rule; and
b) a minimum solvency or capital ratio in the reciprocal jurisdiction where the assuming insurer is licensed and has its head office or is domiciled.
8. Specifies that a reinsurance agreement issued, amended or renewed after the effective date of the suspension does not qualify for credit, except that the assuming insurer's obligations under the contract are secured.
9. Requires credit for reinsurance ceded to an assuming insurer that has its home office or is domiciled in that jurisdiction, on removal of a reciprocal jurisdiction from the list, to be allowed, if otherwise allowed by law.
10. Prohibits, if an assuming insurer's eligibility is revoked, credit for reinsurance from being granted after the effective date of the revocation with respect to any reinsurance agreements entered into by the assuming insurer, except that the assuming insurer's obligations under the contract are secured in a form acceptable to the Director.
Responsibilities of the Director
11. Allows, rather than requires, the Director to suspend a reinsurer's certification indefinitely, in lieu of revocation, if a certified reinsurer's domiciliary jurisdiction ceases to be a qualified jurisdiction.
12. Allows the Director to require that consent for service of process be provided to the Director and included in each reinsurance agreement and specifies that this requirement does not limit or alter the capacity of parties to a reinsurance agreement to agree to alternative legal dispute resolution mechanisms.
13. Requires the Director to timely create and publish a list of:
a) reciprocal jurisdictions and consider including any other reciprocal jurisdiction included on the published National Association of Insurance Commissioners (NAIC) list of reciprocal jurisdictions; and
b) assuming insurers that have satisfied the prescribed conditions and to which cessions must be granted credit.
14. Allows the Director to:
a) approve a jurisdiction that does not appear on the NAIC list of reciprocal jurisdictions in accordance with criteria developed by rule;
b) remove a jurisdiction from the list of reciprocal jurisdictions on a determination that the jurisdiction no longer meets the requirements of a reciprocal jurisdiction, except certain non-United States and United Stated reciprocal jurisdictions;
c) add an assuming insurer to the list of assuming insurers, if an NAIC accredited jurisdiction has added the assuming insurer to a list of assuming insurers or if the assuming insurer submits required information to the Director and complies with any additional requirements; and
d) revoke or suspend the eligibility of an assuming insurer for recognition on the list of assuming insurers, if the Director determines that the assuming insurer no longer meets one or more requirements.
Rules
15. Allows the rules adopted by the Director to include regulation of reinsurance arrangements relating to:
a) life insurance policies with guaranteed nonlevel gross premiums or guaranteed nonlevel benefits;
b) universal life insurance policies with provisions resulting in the ability of a policyholder to keep a policy in force over a secondary guarantee period;
c) variable annuities with guaranteed death or living benefits;
d) long-term care insurance policies; and
e) any other life and health insurance and annuity products that the NAIC adopts model regulatory requirements with respect to credit for reinsurance.
16. Allows any rule adopted by the Director relating to the regulation of reinsurance arrangements of life and health insurance to require the ceding insurer, in calculating the required amounts or forms of security to be held, to use the valuation manual adopted by the NAIC in effect on the date the calculation is made, to the extent applicable.
17. Specifies that any rule adopted by the Director relating to the regulation of reinsurance arrangements of life and health insurance does not apply to cessions to an assuming insurer licensed in at least:
a) 26 states; or
b) 10 states and licensed or accredited in a total of at least 35 states and:
i. meets the prescribed conditions in Arizona;
ii. is certified in Arizona; or
iii. maintains at least $250 million in capital and surplus as determined in accordance with the accounting practices and procedures manual and amendments adopted by the NAIC.
18. Allows the Director to adopt rules that specify additional requirements for the:
a) valuation of assets or reserve credits;
b) amount and forms of security supporting reinsurance arrangements; and
c) circumstances pursuant to which credit will be reduced or eliminated.
19. Specifies that the authority to adopt rules relating to the regulation of reinsurance arrangements of life and health insurance does not limit the Department of Insurance and Financial Institution's general authority to adopt administrative rules.
Miscellaneous
20. Applies the credit for reinsurance statutes to all cessions after the effective date of this legislation under reinsurance agreements that have an inception, anniversary or renewal date not less than six months after the effective date of this legislation.
21. Specifies that a reduction may be in the form of securities listed by the securities valuation office of the NAIC, including securities deemed exempt from filing as defined by the purposes and procedures manual of the securities valuation office.
22. Defines a reciprocal jurisdiction as a jurisdiction that is a:
a) non-United States jurisdiction subject to an in-force covered agreement with the United States or, in the case of a covered agreement between the United States and the European Union, a member state of the European Union;
b) United States jurisdiction that meets the requirements for accreditation under the NAIC financial standards and accreditation program; or
c) qualified jurisdiction as determined by the Director that meets certain additional requirements, consistent with the terms and conditions of in-force covered agreements.
23. Defines terms.
24. Contains a statement of legislative purpose, intent and declaration.
25. Makes technical and conforming changes.
26. Becomes effective on the general effective date.
Prepared by Senate Research
January 19, 2021
MG/gs