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The Oregon Administrative Rules contain OARs filed through November 15, 2014
 
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DEPARTMENT OF CONSUMER AND BUSINESS SERVICES,
INSURANCE DIVISION

 

DIVISION 12

CREDIT FOR REINSURANCE

836-012-0000

Authority

(1) OAR 836-012-0000 to 836-012-0110 are adopted pursuant to ORS 731.508 to 731.511, and general rulemaking authority under 731.244.

(2) OAR 836-012-0000 to 836-012-0110 are adopted for the purpose of establishing standards and procedural requirements that the Director determines to be necessary and appropriate in the public interest for carrying out ORS 731.508 to 731.511, relating to credit for reinsurance, for the protection of the insurance-buying public and the ceding insurers in this state.

(3) Form AR-1, Certificate of Assuming Insurer, Exhibit 1 to this rule, is adopted for purposes of OAR 836-012-0000 to 836-012-0110, when the use of the form is required by such rules.

[ED. NOTE: Exhibits referenced in this rule are available from the agency.]

Stat. Auth.: ORS 731.508 - 731.511 & 731.244
Stats. Implemented: ORS 731.508 - 731.511
Hist.: ID 8-1993, f. & cert. ef. 9-23-93; ID 15-1996, f. & cert. ef. 11-12-96; ID 22-2002, f. & cert. ef. 11-27-02

Registration of Insurance Holding Company Systems

836-012-0011

Credit for Reinsurance -- Reinsurer Authorized in this State

Pursuant to ORS 731.509(3), the Director shall allow credit for reinsurance ceded by a domestic insurer to an assuming insurer that was authorized in this state as of any date on which statutory financial statement credit for reinsurance is claimed.

Stat. Auth.: ORS 731.508 - 731.511 & 731.244
Stats. Implemented: ORS 731.508 - 731.511
Hist.: ID 8-1993, f. & cert. ef. 9-23-93; ID 15-1996, f. & cert. ef. 11-12-96; ID 22-2002, f. & cert. ef. 11-27-02

836-012-0021

Credit for Reinsurance -- Accredited Reinsurers

(1) Pursuant to ORS 731.509(4) and 731.511, the Director shall allow credit for reinsurance ceded by a domestic insurer to an assuming insurer that is accredited as a reinsurer in this state as of any date on which statutory financial statement credit for reinsurance is claimed. To obtain and maintain its accreditation, an accredited reinsurer must:

(a) File a properly executed Form AR-1 (Exhibit 1, OAR 836-012-0000) as evidence of its submission to this state's jurisdiction and to this state's authority to examine its books and records;

(b) File with the Director a certified copy of a certificate of authority or other acceptable evidence that it is licensed or authorized to transact insurance or reinsurance in at least one state, or, in the case of a United States branch of an alien assuming insurer, is entered through and licensed or authorized to transact insurance or reinsurance in at least one state;

(c) File annually with the Director a copy of its annual statement filed with the insurance department of its state of domicile or, in the case of an alien assuming insurer, with the state through which it is entered and in which it is licensed or authorized to transact insurance or reinsurance, and a copy of its most recent audited financial statement; and:

(A) Maintain capital and surplus in an amount not less than $20,000,000 and whose accreditation has not been denied by the Director on or before the 90th day after its submission; or

(B) In the case of a reinsurer with capital and surplus of less than $20,000,000, whose accreditation has been approved by the Director.

(2) If the Director determines that the assuming insurer has failed to meet or maintain any of the qualifications stated in section (1) of this rule, the Director, upon written notice and opportunity for hearing, may revoke the accreditation. Credit shall not be allowed a domestic ceding insurer if the assuming insurer's accreditation has been revoked by the Director.

[ED. NOTE: Exhibits referenced are available from the agency.]

Stat. Auth.: ORS 731.508 - 731.511 & 731.244
Stats. Implemented: ORS 731.508 - 731.511
Hist.: ID 8-1993, f. & cert. ef. 9-23-93; ID 15-1996, f. & cert. ef. 11-12-96; ID 22-2002, f. & cert. ef. 11-27-02

836-012-0031

Credit for Reinsurance -- Reinsurer Domiciled and Licensed in Another State

(1) Pursuant to ORS 731.509(5), the Director shall allow credit for reinsurance ceded by a domestic insurer to an assuming insurer that as of any date on which statutory financial statement credit for reinsurance is claimed:

(a) Is domiciled in a state employing standards regarding credit for reinsurance that equal or exceed those applicable under ORS 731.509 to 731.511 and OAR 836-012-0000 to 836-012-0110 or, in the case of a United States branch of an alien assuming insurer, is entered through a state employing such standards;

(b) Maintains capital and surplus in an amount not less than $20,000,000; and

(c) Files a properly executed Form AR-1 (Exhibit 1, OAR 836-012-0000) with the Director as evidence of its submission to this state's authority to examine its books and records.

(2) The provisions of this rule relating to capital and surplus do not apply to reinsurance ceded and assumed pursuant to pooling arrangements among insurers in the same holding company system.

[ED. NOTE: Exhibits referenced are available from the agency.]

Stat. Auth.: ORS 731.508 - 731.511 & 731.244
Stats. Implemented: ORS 731.508 - 731.511
Hist.: ID 8-1993, f. & cert. ef. 9-23-93; ID 15-1996, f. & cert. ef. 11-12-96; ID 22-2002, f. & cert. ef. 11-27-02

836-012-0041

Credit for Reinsurance -- Reinsurers Maintaining Trust Funds

(1) Pursuant to ORS 731.509(6), the Director shall allow credit for reinsurance ceded by a domestic insurer to an assuming insurer that, as of any date on which statutory financial statement credit for reinsurance is claimed, and thereafter for so long as credit for reinsurance is claimed, maintains a trust fund in an amount prescribed in this rule in a qualified United States financial institution as defined in 731.510(1), for the payment of the valid claims of its United States domiciled ceding insurers and their assigns and successors in interest. The assuming insurer shall report annually to the Director substantially the same information as that required to be reported on the National Association of Insurance Commissioners annual statement form by authorized insurers, to enable the Director to determine the sufficiency of the trust fund.

(2) The following requirements apply to the following categories of assuming insurer:

(a) The trust fund for a single assuming insurer shall consist of funds in trust in an amount not less than the assuming insurer's liabilities attributable to reinsurance ceded by United States domiciled insurers, and in addition, the assuming insurer shall maintain a trusteed surplus of not less than $20,000,000.

(b)(A) The trust fund for a group that includes incorporated and individual unincorporated underwriters shall consist of:

(i) For reinsurance ceded, under reinsurance agreements with an inception, amendment or renewal date on or after August 1, 1995, funds in trust in an amount not less than the group's several liabilities attributable to business ceded by U.S. domiciled ceding insurers to any member of the group;

(ii) For reinsurance ceded under reinsurance agreements with an inception date on or before July 31, 1995, and not amended or renewed after that date, notwithstanding the other provisions of OAR 836-012-0000 to 836-012-0110, funds in trust in an amount not less than the group's several insurance and reinsurance liabilities attributable to business written in the United States; and

(iii) In addition to the trusts described in subparagraphs (i) and (ii) of this paragraph, the group shall maintain a trusteed surplus of which $100,000,000 shall be held jointly for the benefit of the U.S. domiciled ceding insurers of any member of the group for all the years of account.

(B) The incorporated members of the group shall not be engaged in any business other than underwriting as a member of the group and shall be subject to the same level of regulation and solvency control by the group's domiciliary regulator as are the unincorporated members. The group shall, within 90 days after its financial statements are due to be filed with the group's domiciliary regulator, provide to the Director:

(i) An annual certification by the group's domiciliary regulator of the solvency of each underwriter member of the group; or

(ii) If a certification is unavailable, a financial statement prepared by independent public accountants, of each underwriter member of the group.

(c)(A) The trust fund for a group of incorporated insurers under common administration, whose members possess aggregate policyholders surplus of $10,000,000,000, calculated and reported in substantially the same manner as prescribed by the annual statement instructions and Accounting Practices and Procedures Manual of the National Association of Insurance Commissioners, and which has continuously transacted an insurance business outside the United States for at least three years immediately prior to making application for accreditation, shall:

(i) Consist of funds in trust in an amount not less than the assuming insurers' several liabilities attributable to business ceded by United States domiciled ceding insurers to any members of the group pursuant to reinsurance contracts issued in the name of such group;

(ii) Maintain a joint trusteed surplus of which $100,000,000 shall be held jointly for the benefit of United States ceding insurers of any member of the group; and

(iii) File a properly executed Form AR-1 (Exhibit 1, OAR 836-012-0000) as evidence of the submission to this state's authority to examine the books and records of any of its members and shall certify that any member examined will bear the expense of any such examination.

(B) Within 90 days after the statements are due to be filed with the group's domiciliary regulator, the group shall file with the Director an annual certification of each underwriter member's solvency by the member's domiciliary regulators, and financial statements, prepared by independent public accountants, of each underwriter member of the group.

(3)(a) Credit for reinsurance shall not be granted unless the form of the trust and any amendments to the trust have been approved by either the commissioner of the state where the trust is domiciled or the commissioner of another state who, pursuant to the terms of the trust instrument, has accepted responsibility for regulatory oversight of the trust. The form of the trust and any trust amendments also shall be filed with the commissioner of every state in which the ceding insurer beneficiaries of the trust are domiciled. The trust instrument shall provide that:

(A) Contested claims shall be valid and enforceable out of funds in trust to the extent remaining unsatisfied 30 days after entry of the final order of any court of competent jurisdiction in the United States;

(B) Legal title to the assets of the trust shall be vested in the trustee for the benefit of the grantor's United States ceding insurers, their assigns and successors in interest;

(C) The trust shall be subject to examination as determined by the Director;

(D) The trust shall remain in effect for as long as the assuming insurer, or any member or former member of a group of insurers, has outstanding obligations under reinsurance agreements subject to the trust; and

(E) Not later than March 1 of each year, the trustees of the trust shall submit to the Director in writing a report setting forth the balance in the trust and listing the trust's investments at the preceding year end, and shall certify the date of termination of the trust, if so planned, or certify that the trust shall not expire prior to the next following December 31

(b)(A) Notwithstanding any other provisions in the trust instrument, if the trust fund is inadequate because it contains an amount less than the amount required by this subsection or if the grantor of the trust has been declared insolvent or placed into receivership, rehabilitation, liquidation or similar proceedings under the laws of its state or country of domicile, the trustee shall comply with an order of the commissioner with regulatory oversight over the trust or with an order of a court of competent jurisdiction directing the trustee to transfer to the commissioner with regulatory oversight over the trust or other designated receiver all of the assets of the trust fund.

(B) The assets shall be distributed by and claims shall be filed with and valued by the commissioner with regulatory oversight over the trust in accordance with the laws of the state in which the trust is domiciled applicable to the liquidation of domestic insurance companies.

(C) If the commissioner with regulatory oversight over the trust determines that the assets of the trust fund or any part thereof are not necessary to satisfy the claims of the U.S. beneficiaries of the trust, the commissioner with regulatory oversight over the trust shall return the assets, or any part thereof, to the trustee for distribution in accordance with the trust agreement.

(D) The grantor shall waive any right otherwise available to it under U.S. law that is inconsistent with this provision.

(4) For purposes of this rule, the term "liabilities" means the assuming insurer's gross liabilities attributable to reinsurance ceded by U. S. domiciled insurers that are not otherwise secured by acceptable means, and, shall include:

(a) For business ceded by domestic insurers authorized to write accident and health insurance and property and casualty insurance:

(A) Losses and allocated loss expenses paid by the ceding insurer, recoverable from the assuming insurer;

(B) Reserves for losses reported and outstanding;

(C) Reserves for losses incurred but not reported;

(D) Reserves for allocated loss expenses; and

(E) Unearned premiums.

(b) For business ceded by domestic insurers authorized to write life, health and annuity insurance:

(A) Aggregate reserves for life policies and contracts net of policy loans and net due and deferred premiums;

(B) Aggregate reserves for accident and health policies.

(C) Deposit funds and other liabilities without life or disability contingencies; and

(D) Liabilities for policy and contract claims.

(5) Assets deposited in trusts established pursuant to ORS 731.509 and this rule shall be valued according to their fair market value and shall consist only of cash in U. S. dollars, certificates of deposit issued by a U. S. financial institution as defined in 731.510(2)(c), clean, irrevocable, unconditional and "evergreen" letters of credit issued or confirmed by a qualified U.S. financial institution as defined in 731.510(2)(c), and investments of the type specified in this section, but investments in or issued by an entity controlling, controlled by or under common control with either the grantor or beneficiary of the trust shall not exceed five percent of total investments. No more than 20 percent of the total of the investments in the trust may be foreign investments authorized under subsections (a)(E), (c), (f)(B) or (g) of this section, and no more than ten percent of the total of the investments in the trust may be securities denominated in foreign currencies. For purposes of applying the preceding sentence, a depository receipt denominated in U. S. dollars and representing rights conferred by a foreign security shall be classified as a foreign investment denominated in a foreign currency. The assets of a trust established to satisfy the requirements of 731.509 shall be invested only as follows:

(a) Government obligations that are not in default as to principal or interest, that are valid and legally authorized and that are issued, assumed or guaranteed by:

(A) The United States or by any agency or instrumentality of the United States;

(B) A state of the United States;

(C) A territory, possession or other governmental unit of the United States;

(D) An agency or instrumentality of a governmental unit referred to in paragraphs (B) and (C) of this subsection if the obligations are by law (statutory of otherwise) payable, as to both principal and interest, from taxes levied or by law required to be levied or from adequate special revenues pledged or otherwise appropriated or by law required to be provided for making these payments, but shall not be obligations eligible for investment under this subsection if payable solely out of special assessments on properties benefited by local improvements; or

(E) The government of any other country that is a member of the Organization for Economic Cooperation and Development and whose government obligations are rated A or higher, or the equivalent, by a rating agency recognized by the Securities Valuation Office of the NAIC;

(b) Obligations that are issued in the United States, or that are dollar denominated and issued in a non-U.S. market, by a solvent U. S. institution (other than an insurance company) or that are assumed or guaranteed by a solvent U. S. institution (other than an insurance company) and that are not in default as to principal or interest if the obligations:

(A) Are rated A or higher (or the equivalent) by a securities rating agency recognized by the Securities Valuation Office of the NAIC, or if not so rated, are similar in structure and other material respects to other obligations of the same institution that are so rated;

(B) Are insured by at least one authorized insurer (other than the investing insurer or a parent, subsidiary or affiliate of the investing insurer) licensed to insure obligations in this state and, after considering the insurance, are rated AAA (or the equivalent) by a securities rating agency recognized by the Securities Valuation Office of the NAIC; or

(C) Have been designated as Class One or Class Two by the Securities Valuation Office of the NAIC;

(c) Obligations issued, assumed or guaranteed by a solvent non-U. S. institution chartered in a country that is a member of the Organization for Economic Cooperation and Development or obligations of U.S. corporations issued in a non-U.S. currency, provided that in either case the obligations are rated A or higher, or the equivalent, by a rating agency recognized by the Securities Valuation Office of the NAIC;

(d) An investment made pursuant to the provisions of subsections (a), (b) or (c) of this section shall be subject to the following additional limitations:

(A) An investment in or loan upon the obligations of an institution other than an institution that issues mortgage-related securities shall not exceed five percent of the assets of the trust;

(B) An investment in any one mortgage-related security shall not exceed five percent of the assets of the trust;

(C) The aggregate total investment in mortgage-related securities shall not exceed 25 percent of the assets of the trust; and

(D) Preferred or guaranteed shares issued or guaranteed by a solvent U. S. institution are permissible investments if all of the institution's obligations are eligible as investments under paragraph (A) or (C) of subsection (b) of this section, but shall not exceed two percent of the assets of the trust.

(e) As used in this rule:

(A) "Mortgage-related security" means an obligation that is rated AA or higher (or the equivalent) by a securities rating agency recognized by the Securities Valuation Office of the NAIC and that either:

(i) Represents ownership of one or more promissory notes or certificates of interest or participation in the notes (including any rights designed to assure servicing of, or the receipt or timeliness of receipt by the holders of the notes, certificates, or participation of amounts payable under, the notes, certificates or participation), that:

(I) Are directly secured by a first lien on a single parcel of real estate, including stock allocated to a dwelling unit in a residential cooperative housing corporation, upon which is located a dwelling or mixed residential and commercial structure, or on a residential manufactured home as defined in 42 U.S.C.A. Section 5402(6), whether the manufactured home is considered real or personal property under the laws of the state in which it is located; and

(II) Were originated by a savings and loan association, savings bank, commercial bank, credit union, insurance company, or similar institution that is supervised and examined by a federal or state housing authority, or by a mortgagee approved by the Secretary of Housing and Urban Development pursuant to 12 U.S.C.A. Sections 1709 and 1715-b, or, where the notes involve a lien on the manufactured home, by an institution or by a financial institution approved for insurance by the Secretary of Housing and Urban Development pursuant to 12 U.S.C.A. Section 1703; or

(ii) Is secured by one or more promissory notes or certificates of deposit or participations in the notes (with or without recourse to the insurer of the notes) and, by its terms, provides for payments of principal in relation to payments, or reasonable projections of payments, or notes meeting the requirements of sub-subparagraphs (i)(I) and (i)(II) of this paragraph;

(B) "Promissory note," when used in connection with a manufactured home, also includes a loan, advance or credit sale as evidenced by a retail installment sales contract or other instrument.

(f) Equity interests are subject to the following provisions:

(A) Investments in common shares or partnership interests of a solvent U. S. institution are permissible if:

(i) Its obligations and preferred shares, if any, are eligible as investments under this section; and

(ii) The equity interests of the institution (except an insurance company) are registered on a national securities exchange as provided in the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a to 78kk or otherwise registered pursuant to that Act, and if otherwise registered, price quotations for them are furnished through a nationwide automated quotations system approved by the National Association of Securities Dealers, Inc. A trust shall not invest in equity interests under this paragraph an amount exceeding one percent of the assets of the trust even though the equity interests are not so registered and are not issued by an insurance company;

(B) Investments in common shares of a solvent institution organized under the laws of a country that is a member of the Organization for Economic Cooperation and Development, if:

(i) All its obligations are rated A or higher, or the equivalent, by a rating agency recognized by the Securities Valuation Office of the NAIC; and

(ii) The equity interests of the institution are registered on a securities exchange regulated by the government of a country that is a member of the Organization for Economic Cooperation and Development;

(iii) An investment in or loan upon any one institution's outstanding equity interests shall not exceed one percent of the assets of the trust. The cost of an investment in equity interests made pursuant to this subsection, when added to the aggregate cost of other investments in equity interests then held pursuant to this subsection, shall not exceed ten percent of the assets in the trust;

(g) Obligations issued, assumed or guaranteed by a multinational development bank, provided the obligations are rated A or higher, or the equivalent, by a rating agency recognized by the Securities Valuation Office of the NAIC.

(h) Investment companies are subject to the following provisions:

(A) Securities of an investment company registered pursuant to the Investment Company Act of 1940, 15 U.S.C. § 802, are permissible investments if the investment company:

(i) Invests at least 90 percent of its assets in the types of securities that qualify as an investment under subsection (a), (b) or (c) of this section or invests in securities that are determined by the commissioner to be substantively similar to the types of securities set forth in subsection (a), (b) or (c) of this section; or

(ii) Invests at least 90 percent of its assets in the types of equity interests that qualify as an investment under subsection (f)(A) of this section;

(B) Investments made by a trust in investment companies under this subsection shall not exceed the following limitations:

(i) An investment in an investment company qualifying under paragraph (A)(i) of this subsection shall not exceed ten percent of the assets in the trust and the aggregate amount of investment in qualifying investment companies shall not exceed 25 percent of the assets in the trust; and

(ii) Investments in an investment company qualifying under paragraph (A)(ii) of this subsection shall not exceed five percent of the assets in the trust and the aggregate amount of investment in qualifying investment companies shall be included when calculating the permissible aggregate value of equity interests pursuant to subsection (f)(A) of this section.

(i) Letters of credit are subject to the following provisions:

(A) In order for a letter of credit to qualify as an asset of the trust, the trustee shall have the right and the obligation pursuant to the deed of trust or some other binding agreement, as duly approved by the Director, to immediately draw down the full amount of the letter of credit and hold the proceeds in trust for the beneficiaries of the trust if the letter of credit will otherwise expire without being renewed or replaced.

(B) The trust agreement shall provide that the trustee shall be liable for its negligence, willful misconduct or lack of good faith. The failure of the trustee to draw against the letter of credit in circumstances where the draw would be required shall be considered to be negligence or willful misconduct, or both.

(6) A specific security provided to a ceding insurer by an assuming insurer pursuant to OAR 836-012-0060 shall be applied, until exhausted, to the payment of liabilities of the assuming insurer to the ceding insurer holding the specific security prior to, and as a condition precedent for, presentation of a claim by the ceding insurer for payment by a trustee of a trust established by the assuming insurer pursuant to this section.

[ED. NOTE: Exhibits referenced are available from the agency.]

Stat. Auth.: ORS 731.244
Stats. Implemented: ORS 731.508 & 731.509
Hist.: ID 8-1993, f. & cert. ef. 9-23-93; ID 7-1995, f. & cert. ef. 11-15-95; ID 22-2002, f. & cert. ef. 11-27-02

836-012-0051

Credit for Reinsurance Required by Law

Pursuant to ORS 731.509 (7), the Director shall allow credit for reinsurance ceded by a domestic insurer to an assuming insurer not meeting the requirements of 731.509 (3), (4), (5) or (6), but only with respect to the insurance of risks located in jurisdictions where the reinsurance is required by the applicable law or regulation of that jurisdiction. As used in this rule, "jurisdiction" means any state, district or territory of the United States and any lawful national government.

Stat. Auth.: ORS 731.508 - 731.511 & 731.244
Stats. Implemented: ORS 731.508 - 731.511
Hist.: ID 8-1993, f. & cert. ef. 9-23-93; ID 15-1996, f. & cert. ef. 11-12-96; ID 22-2002, f. & cert. ef. 11-27-02

836-012-0060

Asset or Reduction from Liability for Reinsurance Ceded to an Unauthorized Assuming Insurer Not Meeting the Requirements of OAR 836-012-0011 to 836-012-0051

(1) Pursuant to ORS 731.510, the Director shall allow a reduction from liability for reinsurance ceded by a domestic insurer to an assuming insurer not meeting the requirements of 731.509 in an amount not exceeding the liabilities carried by the ceding insurer. The reduction shall be in the amount of funds held by or on behalf of the ceding insurer, including funds held in trust for the exclusive benefit of the ceding insurer, under a reinsurance contract with such assuming insurer as security for the payment of obligations under the reinsurance contract. The security must be held in the United States subject to withdrawal solely by and under the exclusive control of the ceding insurer or, in the case of a trust, held in a qualified United States financial institution as defined in 731.510(1). The security may be in the form of any of the following:

(a) Cash;

(b) Securities listed by the Securities Valuation Office of the National Association of Insurance Commissioners and qualifying as allowed assets;

(c) Clean, irrevocable, unconditional and "evergreen" letters of credit issued or confirmed by a qualified United States institution, as defined in ORS 731.510(2), effective no later than December 31 of the year for which filing is being made, and in the possession of, or in trust for, the ceding company on or before the filing date of its annual statement. Letters of credit meeting applicable standards of issuer acceptability as of the dates of their issuance or confirmation shall, notwithstanding the issuing or confirming institution's subsequent failure to meet applicable standards of issuer acceptability, continue to be acceptable as security until their expiration, extension, renewal, modification or amendment, whichever first occurs; or

(d) Any other form of security acceptable to the Director.

(2) An allowed asset or a reduction from liability for reinsurance ceded to an unauthorized assuming insurer pursuant to section (1) of this rule shall be allowed only when the requirements of OAR 836-012-0100 and the applicable provisions of OAR 836-012-0070, 836-012-0080 and 836-012-0090 are met.

Stat. Auth.: ORS 731.508 - 731.511 & 731.244
Stats. Implemented: ORS 731.508 - 731.511
Hist.: ID 8-1993, f. & cert. ef. 9-23-93; ID 15-1996, f. & cert. ef. 11-12-96; ID 22-2002, f. & cert. ef. 11-27-02

836-012-0070

Trust Agreements Qualified under OAR 836-012-0060

(1) As used in this rule:

(a) "Beneficiary" includes any successor by operation of law of the named beneficiary, including without limitation any liquidator, rehabilitator, receiver or conservator.

(b) "Grantor" means the entity that has established a trust for the sole benefit of the beneficiary. When established in conjunction with a reinsurance agreement, the grantor is the unauthorized or unlicensed unaccredited assuming insurer.

(c) "Obligations," as used in section (2)(k) of this rule, means:

(A) Reinsured losses and allocated loss expenses paid by the ceding insurer, but not recovered from the assuming insurer;

(B) Reserves for reinsured losses reported and outstanding;

(C) Reserves for reinsured losses incurred but not reported; and

(D) Reserves for allocated reinsured loss expenses and unearned premiums.

(2) The following are required conditions applicable to the trust agreement:

(a) The trust agreement shall be entered into between the beneficiary, the grantor and a trustee that must be a qualified United States financial institution as defined in ORS 731.510(1).

(b) The trust agreement shall create a trust account into which assets must be deposited.

(c) All assets in the trust account shall be held by the trustee at the trustee's office in the United States.

(d) The trust agreement shall provide that:

(A) The beneficiary shall have the right to withdraw assets from the trust account at any time, without 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;

(C) It is not subject to any conditions or qualifications outside of the trust agreement; and

(D) It shall not contain references to any other agreements or documents except as provided for under subsection (k) of this section.

(e) The trust agreement shall be established for the sole benefit of the beneficiary.

(f) The trust agreement shall require the trustee to:

(A) Receive assets 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 days of any deposits to or withdrawals from the trust account;

(E) Upon written demand of the beneficiary, immediately take 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 physical custody of the assets to the beneficiary; and

(F) 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.

(g) The trust agreement shall provide that at least 30 days but not more than 45 days prior to termination of the trust account, written notification of termination shall be delivered by the trustee to the beneficiary.

(h) The trust agreement shall be made subject to and governed by the laws of the state in which the trust is domiciled.

(i) The trust agreement shall prohibit invasion of the trust corpus for the purpose of paying commission to or reimbursing the expenses of the trustee. In order for a letter of credit to qualify as an asset of the trust, the trustee shall have the right and the obligation pursuant to the deed of trust or some other binding agreement, as duly approved by the Director, to immediately draw down the full amount of the letter of credit and hold the proceeds in trust for the beneficiaries of the trust if the letter of credit will otherwise expire without being renewed or replaced.

(j) The trust agreement shall provide that the trustee shall be liable for its negligence, willful misconduct or lack of good faith. The failure of the trustee to draw against the letter of credit in circumstances in which such a draw would be required shall be deemed to be negligence or willful misconduct, or both.

(k) Notwithstanding other provisions of OAR 836-012-0000 to 836-012-0110, when a trust agreement is established in conjunction with a reinsurance agreement covering risks other than life, annuities and accident and health, when it is customary practice to provide a trust agreement for a specific purpose, the trust agreement may provide 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 pay the assuming insurer any amounts held in the trust account that exceed 102 percent of the actual amount required to fund the assuming insurer's obligations under the specific reinsurance agreement; or

(C) When the ceding insurer has received notification of termination of the trust account and if the assuming insurer's entire obligations under the specific reinsurance agreement remain unliquidated and undischarged ten 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 ORS 731.510(1), apart from its general assets, in trust for such uses and purposes specified in paragraphs (A) and (B) of this subsection as may remain executory after such withdrawal and for any period after the termination date.

(l) Notwithstanding other provisions of OAR 836-012-0000 to 836-012-0110, when a trust agreement is established to meet the requirements of 836-012-0060 in conjunction with a reinsurance agreement covering life, annuities or accident and health risks, if it is customary to provide a trust agreement for a specific purpose, the trust agreement may provide 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; and

(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;

(B) To pay to the assuming insurer amounts held in the trust account in excess of the amount necessary to secure the credit or reduction from liability for reinsurance taken by the ceding insurer; or

(C) When the ceding insurer has received notification of termination of the trust and when the assuming insurer's entire obligations under the specific reinsurance agreement remain unliquidated and undischarged ten 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 U. S. financial institution apart from its general assets, in trust for the uses and purposes specified in paragraphs (A) and (B) of this subsection as may remain executory after withdrawal and for any period after the termination date.

(m) The reinsurance agreement entered into in conjunction with the trust agreement may but need not contain the provisions required by section (4)(a)(B) of this rule, so long as these required conditions are included in the trust agreement.

(n) Notwithstanding any other provisions in the trust instrument, if the grantor of the trust has been declared insolvent or placed into receivership, rehabilitation, liquidation or similar proceedings under the laws of its state or country of domicile, the trustee shall comply with an order of the commissioner with regulatory oversight over the trust or court of competent jurisdiction directing the trustee to transfer to the commissioner with regulatory oversight or other designated receiver all of the assets of the trust fund. The assets shall be applied in accordance with the priority statutes and laws of the state in which the trust is domiciled applicable to the assets of insurance companies in liquidation. If the commissioner with regulatory oversight determines that the assets of the trust fund or any part thereof are not necessary to satisfy claims of the U. S. beneficiaries of the trust, the assets or any part of them shall be returned to the trustee for distribution in accordance with the trust agreement.

(3) The following are permitted conditions applicable to the trust agreement:

(a) The trust agreement may provide that the trustee may resign upon delivery of a written notice of resignation, effective not less than 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 90 days after the trustee and the beneficiary receive the notice, except that such a resignation or removal shall not 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.

(b) 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.

(c) The trustee may be given authority to invest and accept substitutions of any funds in the account, except that an investment or substitution shall not 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 that the trustee determines are at least equal in market value to the assets withdrawn and that are consistent with the restrictions in section (4)(a)(B) of this rule.

(d) 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 a transfer may be conditioned upon the trustee receiving other specified assets prior to or simultaneously with the transfer.

(e) The trust agreement may provide that, upon termination of the trust account, all assets not previously withdrawn by the beneficiary shall be delivered to the grantor with written approval by the beneficiary.

(4) The following are additional conditions applicable to reinsurance agreements:

(a) A reinsurance agreement may contain provisions that:

(A) Require the assuming insurer to enter into a trust agreement and to establish a trust account for the benefit of the ceding insurer, and specify what the agreement is to cover;

(B) Stipulate 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 Insurance Code or any combination thereof, except 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 of total investments. The reinsurance agreement may further specify the types of investments to be deposited. When a trust agreement is entered into in conjunction with a reinsurance agreement covering risks other than life, annuities and accident and health, the trust agreement may contain the provisions required by this paragraph in lieu of including such provisions in the reinsurance agreement;

(C) Require 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;

(D) Require that all settlements of account between the ceding insurer and the assuming insurer be made in cash or its equivalent; and

(E) Stipulate that the assuming insurer and the ceding insurer agree that the assets in the trust account, established pursuant to the provisions of the reinsurance agreement, may be withdrawn by the ceding insurer at any time, notwithstanding any other provisions in the reinsurance agreement, and shall be used and applied by the ceding insurer or its successors in interest by operation of law, including without limitation any liquidator, rehabilitator, receiver or conservator of such insurer, without diminution because of insolvency on the part of the ceding insurer or the assuming insurer, only for the following purposes:

(i) 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 because of cancellations of such policies;

(II) The assuming insurer's share of surrenders and benefits or losses paid by the ceding insurer pursuant to the provisions of the policies reinsured under the reinsurance agreement; and

(III) Any other amounts necessary to secure the credit or reduction from liability for reinsurance taken by the ceding insurer;

(ii) To make payment to the assuming insurer of amounts held in the trust account in excess of the amount necessary to secure the credit or reduction from liability for reinsurance taken by the ceding insurer.

(b) The reinsurance agreement may also contain provisions that:

(A) Give the assuming insurer the right to seek the ceding insurer's approval, which the ceding insurer shall not unnecessarily or arbitrarily withhold, to withdraw from the trust account all or any part of the trust assets and transfer those assets to the assuming insurer. The right to seek approval under this paragraph must be subject to one of the following requirements:

(i) 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; or

(ii) After withdrawal and transfer, the market value of the trust account is no less than 102 percent of the required amount.

(B) Provide for:

(i) The return of any amount withdrawn in excess of the actual amounts required for section (4)(a)(E) of this rule; and

(ii) Interest payments at a rate not in excess of the prime rate of interest on the amounts held pursuant to section (4)(a)(E) of this rule.

(C) Permit the award by any arbitration panel or court of competent jurisdiction of:

(i) Interest at a rate different from that provided in section (4)(b)(B);

(ii) Court or arbitration costs;

(iii) Attorney fees; and

(iv) Any other reasonable expenses.

(c) Financial reporting. A trust agreement may be used to reduce any liability for reinsurance ceded to an unauthorized assuming insurer in financial statements required to be filed with this department in compliance with the provisions of OAR 836-012-0000 to 836-012-0110 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 account 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 account was established to secure.

(d) Existing agreements. Notwithstanding the effective date of OAR 836-012-0000 to 836-012-0110, any trust agreement or underlying reinsurance agreement in existence prior to January 1, 2003, will continue to be acceptable until January 1, 2003, at which time the agreements must be in full compliance with 836-012-0000 to 836-012-0110 for the trust agreement to be acceptable.

(e) The failure of any trust agreement to specifically identify the beneficiary as defined in section (1) of this rule shall not be construed to affect any actions or rights that the Director may take or possess pursuant to the provisions of the laws of this state.

Stat. Auth.: ORS 731.508 - 731.511 & 731.244
Stats. Implemented: ORS 731.508 - 731.511
Hist.: ID 8-1993, f. & cert. ef. 9-23-93; ID 15-1996, f. & cert. ef. 11-12-96; ID 22-2002, f. & cert. ef. 11-27-02

836-012-0080

Letters of Credit Qualified under OAR 836-012-0060

(1) A letter of credit for purposes of OAR 836-012-0060 must be clean, irrevocable, unconditional and issued or confirmed by a qualified United States financial institution as defined in ORS 731.510(2). The letter of credit shall contain an issue date and date of expiration and shall 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. The letter of credit shall also indicate that it is not subject to any condition or qualifications outside of the letter of credit. In addition, the letter of credit itself shall not contain reference to any other agreements, documents or entities, except as provided in section (9)(a) of this rule. As used in this rule, "beneficiary" means the domestic insurer for whose benefit the letter of credit has been established and any successor of the beneficiary by operation of law. If a court of law appoints a successor in interest to the named beneficiary, then the named beneficiary includes and is limited to the court-appointed domiciliary receiver (including conservator, rehabilitator or liquidator).

(2) The heading of the letter of credit may include a boxed section containing the name of the applicant 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.

(3) The letter of credit shall contain a statement to the effect that the obligation of the qualified United States financial institution under the letter of credit is in no way contingent upon reimbursement with respect thereto.

(4) The term of the letter of credit shall be for at least one year and shall contain an "evergreen clause" that prevents the expiration of the letter of credit without due notice from the issuer. The "evergreen clause" shall provide for a period of not less than 30 days' notice prior to expiration date or nonrenewal.

(5) The letter of credit shall state whether it is subject to and governed by the laws of this state or the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce (Publication 500), or any successor publication, and all drafts drawn thereunder shall be presentable at an office in the United States of a qualified United States financial institution.

(6) If the letter of credit is made subject to the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce (Publication 500), or any successor publication, the letter of credit shall specifically address and provide 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 any successor publication, occur.

(7) The letter of credit shall be issued or confirmed by a qualified United States financial institution authorized to issue letters of credit, pursuant to ORS 731.510(2).

(8) If the letter of credit is issued by a qualified United States financial institution authorized to issue letters of credit, other than a qualified United States financial institution as described in section (7) of this rule, the following additional requirements must be met:

(a) The issuing qualified United States financial institution shall formally designate the confirming qualified United States financial institution as its agent for the receipt and payment of the drafts; and

(b) The "evergreen clause" shall provide for 30 days' notice prior to expiration date for nonrenewal.

(9) The following apply to reinsurance agreement provisions:

(a) The reinsurance agreement in conjunction with which the letter of credit is obtained may contain provisions described in this subsection. All of the provisions of this subsection must be applied without diminution because of insolvency on the part of the ceding insurer or assuming insurer. The provisions are as follows:

(A) A provision requiring the assuming insurer to provide letters of credit to the ceding insurer and specify what they are to cover.

(B) A provision stipulating that the assuming insurer and ceding insurer agree that the 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 must be used by the ceding insurer or its successors in interest only for one or more of the following reasons:

(i) 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 insurers, 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 insurers, under the terms and provisions of the policies reinsured under the reinsurance agreement; and

(III) Any other amounts necessary to secure the credit or reduction from liability for reinsurance taken by the ceding insurer.

(ii) When the letter of credit will expire without renewal or be reduced or replaced by a letter of credit for a reduced amount and when the assuming insurer's entire obligations under the specific reinsurance remain unliquidated and undischarged ten days prior to the termination date, to withdraw 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 deposit those amount in a separate account in the name of the ceding insurer in a qualified U.S. financial institution apart from its general assets, in trust for such uses and purposes specified in subparagraph (i) of this paragraph as may remain after withdrawal and for any period after the termination date.

(b) Nothing contained in subsection (a) of this section shall preclude the ceding insurer and assuming insurer from providing for:

(A) An interest payment, at a rate not in excess of the prime rate of interest, on the amounts held pursuant to subsection (a)(B) of this section; or

(B) The return of any amounts drawn down on the letters of credit in excess of the actual amounts required for the above or any amounts that are subsequently determined not to be due.

[Publications: Publications referenced are available from the agency.]

Stat. Auth.: ORS 731.508 - 731.511 & 731.244
Stats. Implemented: ORS 731.508 - 731.511
Hist.: ID 8-1993, f. & cert. ef. 9-23-93; ID 15-1996, f. & cert. ef. 11-12-96; ID 22-2002, f. & cert. ef. 11-27-02

836-012-0090

Other Security

A ceding insurer may take credit for unencumbered funds withheld by the ceding insurer in the United States subject to withdrawal solely by the ceding insurer and under its exclusive control.

Stat. Auth.: ORS 731.244, 731.508 & Sec. 65 - 67, Ch. 447, OL 1993 (Enrolled HB 2119)
Stats. Implemented: ORS 731.508(1), ORS 731.508(3), ORS 731.509 & ORS 731.511
Hist.: ID 8-1993, f. & cert. ef. 9-23-93; ID 22-2002, f. & cert. ef. 11-27-02

836-012-0100

Reinsurance Contract

Credit shall not be granted, nor an asset or reduction from liability allowed, to a ceding insurer for reinsurance effected with assuming insurers meeting the requirements of OAR 836-012-0011, 836-012-0021, 836-012-0031, 836-012-0041 or 836-012-0060 or otherwise in compliance with ORS 731.509 after the adoption of OAR 836-012-0000 to 836-012-0110, unless the reinsurance agreement:

(1) Includes a proper insolvency clause pursuant to ORS 731.508; and

(2) Includes a provision pursuant to ORS 731.509(8), whereby the assuming insurer, if an unauthorized assuming insurer, has submitted to the jurisdiction of an alternative dispute resolution panel or court of competent jurisdiction within the United States, has agreed to comply with all requirements necessary to give such court or panel jurisdiction, has designated an agent upon whom service of process may be effected and has agreed to abide by the final decision of the court or panel.

Stat. Auth.: ORS 731.508 - 731.511 & 731.244
Stats. Implemented: ORS 731.508
Hist.: ID 8-1993, f. & cert. ef. 9-23-93; ID 15-1996, f. & cert. ef. 11-12-96; ID 22-2002, f. & cert. ef. 11-27-02

836-012-0110

Contracts Affected

All new and renewal reinsurance transactions entered into on and after January 1, 1994, shall conform to the requirements of ORS 731.509 to 731.511 and OAR 836-012-0000 to 836-012-0110 if credit is to be given to the ceding insurer for such reinsurance.

Stat. Auth.: ORS 731.508 - ORS 731.511 & ORS 731.244
Stats. Implemented: ORS 731.508 - ORS 731.511
Hist.: ID 8-1993, f. & cert. ef. 9-23-93; ID 15-1996, f. & cert. ef. 11-12-96

Life Reinsurance Agreements

836-012-0300

Authority; Statement of Purpose; Director's Authority

(1) OAR 836-012-0300 to 836-012-0330 are adopted pursuant to the authority of ORS 731.244 and 731.508 for the purpose of implementing ORS 731.508 (6).

(2) OAR 836-012-0300 to 836-012-0330 apply to each domestic insurer transacting life insurance, health insurance or both, to each domestic health care service contractor, and to each other authorized insurer or health care service contractor transacting life insurance, health insurance or both who is not subject to substantially similar rules or regulations in its domiciliary state. 836-012-0300 to 836-012-0330 do not apply with respect to assumption reinsurance, yearly renewable term reinsurance or certain nonproportional reinsurance such as stop loss or catastrophic reinsurance.

(3) The Director recognizes that authorized insurers routinely enter into reinsurance agreements that yield legitimate relief to the ceding insurer from strain to surplus. It is improper for an authorized insurer, however, in the capacity of ceding insurer, to enter into reinsurance agreements for the principal purpose of producing significant surplus aid for the ceding insurer, typically on a temporary basis, while not transferring all of the significant risks inherent in the business being reinsured. In substance and effect, the expected potential liability to the ceding insurer in agreements that do not transfer all of the significant risks remains basically unchanged by the reinsurance transaction, notwithstanding certain risk elements in the reinsurance agreement, such as catastrophic mortality or extraordinary survival.

Stat. Auth.: ORS 731.244 & ORS 731.508
Stats. Implemented: ORS 731.508(6)
Hist.: ID 8-1993, f. & cert. ef. 9-23-93; ID 7-1995, f. & cert. ef. 11-15-95

836-012-0310

Accounting Requirements

(1) An insurer that is subject to OAR 836-012-0300 to 836-012-0330 shall not, for reinsurance ceded, reduce any liability or establish any asset in any financial statement filed with the Director if by the terms of the reinsurance agreement, in substance or effect, one or more of the following conditions exist:

(a) Renewal expense allowances provided or to be provided to the ceding insurer by the reinsurer in any accounting period are not sufficient to cover anticipated allocable renewal expenses of the ceding insurer on the portion of the business reinsured, unless a liability is established for the present value of the shortfall (using assumptions equal to the applicable statutory reserve basis on the business reinsured). Those expenses include commissions, premium taxes and direct expenses, including but not limited to expenses for billing, valuation, claims and maintenance expected by the ceding insurer at the time the business is reinsured;

(b) The ceding insurer is required to reimburse the reinsurer for negative experience under the reinsurance agreement, except that neither offsetting experience refunds against current and prior years' losses under the agreement nor payment by the ceding insurer of an amount equal to current and prior years' losses under the agreement upon voluntary termination of in-force reinsurance by the ceding insurer shall be considered such a reimbursement to the reinsurer for negative experience. Voluntary termination does not include situations in which termination occurs because of unreasonable provisions that allow the reinsurer to reduce its risk under the agreement. An example of such a provision is the right of the reinsurer to increase reinsurance premiums or risk and expense charges to excessive levels, forcing the ceding insurer to prematurely terminate the reinsurance treaty;

(c) The ceding insurer can be deprived of surplus or assets at the reinsurer's option or automatically upon the occurrence of some event, such as the insolvency of the ceding insurer, except that termination of the reinsurance agreement by the reinsurer for non-payment of reinsurance premiums or other amounts due, such as modified coinsurance reserve adjustments, interest and adjustments on funds withheld and tax reimbursements, shall not be considered to be such a deprivation of surplus or assets;

(d) The ceding insurer, at specific points in time scheduled in the agreement, must terminate or automatically recapture all or part of the reinsurance ceded;

(e) The reinsurance agreement involves the possible payment by the ceding insurer to the reinsurer of amounts other than from income realized from the reinsured policies. For example, it is improper for a ceding insurer to pay reinsurance premiums or other fees or charges to a reinsurer that are greater than the direct premiums collected by the ceding insurer;

(f) The treaty does not transfer all of the significant risk inherent in the business being reinsured. The following table in this subsection identifies, for a representative sampling of products or type of business, the risks that are considered to be significant. For products not specifically included, the risks determined to be significant must be consistent with this table. The risk categories are as follows:

(A) Morbidity;

(B) Mortality;

(C) Lapse, which is the risk that a policy will voluntarily terminate prior to the recoupment of a statutory surplus strain experienced at issue of the policy;

(D) Credit Quality (C1), which is the risk that invested assets supporting the reinsured business will decrease in value. The main hazards are that assets will default or that there will be a decrease in earning power. Credit quality excludes market value declines due to changes in interest rate;

(E) Reinvestment (C3), which is the risk that interest rates will fall and funds reinvested (coupon payments or monies received upon asset maturity or call) will therefore earn less than expected. If asset durations are less than liability durations, the mismatch will increase;

(F) Disintermediation (C3), which is the risk that interest rates rise and policy loans and surrenders increase or maturing contracts do not renew at anticipated rates of renewal. If asset durations are greater than the liability durations, the mismatch will increase. Policyholders will move their funds into new products offering higher rates. The insurer may have to sell assets at a loss to provide for these withdrawals.

 

For purposes of the following chart: + - Significant 0 - Insignificant

RISK CATEGORY

A B C D E F

Health Insurance - other than long + 0 + 0 0 0

term care insurance and long term

disability insurance

Health Insurance - long term care + 0 + + + 0

insurance and long term disability

insurance

Immediate Annuities 0 + 0 + + 0

Single Premium Deferred Annuities 0 0 + + + +

Flexible Premium Deferred Annuities 0 0 + + + +

Guaranteed Interest Contracts 0 0 0 + + +

Other Annuity Deposit Business 0 0 + + + +

Single Premium Whole Life 0 + + + + +

Traditional Non-Par Permanent 0 + + + + +

Traditional Non-Par Term 0 + + 0 0 0

Traditional Par Permanent 0 + + + + +

Traditional Par Term 0 + + 0 0 0

Adjustable Premium Permanent 0 + + + + +

Indeterminate Premium Permanent 0 + + + + +

Universal Life Flexible Premium 0 + + + + +

Universal Life Fixed Premium 0 + + + + +

Universal Life Fixed Premium 0 + + + + +

dump-in premiums allowed

 

(g)(A) The credit quality, reinvestment or disintermediation risk is significant for the business reinsured and the ceding insurer does not (other than for the classes of business excepted in paragraph (B) of this subsection (g) either transfer the underlying assets to the reinsurer or legally segregate such assets in a trust or escrow account or otherwise establish a mechanism satisfactory to the Director that legally segregates, by contract or contract provision, the underlying assets;

(B) Notwithstanding the requirements of paragraph (A) of this subsection (g), the assets supporting the reserves for the following classes of business and any classes of business that do not have a significant credit quality, reinvestment or disintermediation risk may be held by the ceding insurer without segregation of such assets:

(i) Health Insurance - long term care insurance and long term disability insurance;

(ii) Traditional Non-Par Permanent;

(iii) Traditional Par Permanent;

(iv) Adjustable Premium Permanent;

(v) Indeterminate Premium Permanent; and

(vi) Universal Life Fixed Premium, (no dump-in premiums allowed).

(C) For assets that are not legally segregated, the associated formula for determining the reserve interest rate adjustment must reflect the ceding insurer's investment earnings and incorporates all realized and unrealized gains and losses reflected in the statutory statement. The following is an acceptable formula:

 

Rate = 2 (I + CG)

X + Y - I - CG

When: I -- is the net investment income;

CG -- is capital gains less capital losses;

X -- is the current year cash and

-- invested assets plus invest-

-- ment income due and accrued

-- less borrowed money; and

Y -- is the same as X but for the

-- prior year.

 

(h) Settlements are made less frequently than quarterly or payments due from the reinsurer are not made in cash within 90 days of the settlement date;

(i) The ceding insurer is required to make representations or warranties not reasonably related to the business being reinsured;

(j) The ceding insurer is required to make representations or warranties about future performance of the business being reinsured; or

(k) The reinsurance agreement is entered into for the principal purpose of producing significant surplus aid for the ceding insurer, typically on a temporary basis, while not transferring all of the significant risks inherent in the business reinsured and, in substance or effect, the expected potential liability to the ceding insurer remains basically unchanged.

(2) Notwithstanding section (1) of this rule, with the prior approval of the Director, an insurer that is subject to OAR 836-012-0300 to 836-012-0330 may take such reserve credit or establish such asset as the Director determines to be consistent with the Insurance Code or rules adopted thereunder, including actuarial interpretations or standards adopted by the Director.

(3)(a) An agreement entered into on or after November 9, 1995, that involves the reinsurance of business issued prior to the effective date of the agreement, along with any subsequent amendments thereto, shall be filed by the ceding insurer with the Director not later than the 30th day after its date of execution. Each filing must include data detailing the financial effect of the transaction. The ceding insurer's actuary who signs the financial statement actuarial opinion with respect to valuation of reserves shall consider OAR 836-012-0300 to 836-012-0330 and any applicable actuarial standards of practice when determining the proper credit in financial statements filed with the Director. The actuary shall maintain adequate documentation and be prepared upon request to describe the actuarial work performed for inclusion in the financial statements and to demonstrate that such work conforms to OAR 836-012-0300 to 836-012-0330.

(b) Any increase in surplus net of federal income tax resulting from arrangements described in subsection (a) of this section shall be identified separately on the insurer's statutory financial statement as a surplus item (aggregate write-ins for gains and losses in surplus in the Capital and Surplus Account) and recognition of the surplus increase as income must be reflected on a net of tax basis in the "Reinsurance ceded" line, as earnings emerge from the business reinsured. The following example applies to this subsection:

(A) On the last day of calendar year N, company XYZ pays a $20 million initial commission and expense allowance to company ABC for reinsuring an existing block of business. Assuming a 34% tax rate, the net increase in surplus at inception is $13.2 million ($20 million - $6.8 million) that is reported on the "Aggregate write-ins for gains and losses in surplus" line in the Capital and Surplus account. $6.8 million (34% of $20 million) is reported as income on the "Commissions and expense allowances on reinsurance ceded" line of the Summary of Operations;

(B) At the end of year N+1 the business has earned $4 million. ABC has paid $.5 million in profit and risk charges in arrears for the year and has received a $1 million experience refund. Company ABC's annual statement would report $1.65 million (66% of ($4 million - $1 million - $.5 million) up to a maximum of $13.2 million) on the "Commissions and expense allowance on reinsurance ceded" line of the Summary of Operations, and -$1.65 million on the "Aggregate write-ins for gains and losses in surplus" line of the Capital and Surplus account. The experience refund would be reported separately as a miscellaneous income item in the Summary of Operations.

Stat. Auth.: ORS 731.244 & ORS 731.508
Stats. Implemented: ORS 731.508(6)
Hist.: ID 8-1993, f. & cert. ef. 9-23-93; ID 7-1995, f. & cert. ef. 11-15-95

836-012-0320

Written Agreements

(1) A reinsurance agreement or amendment to any agreement shall not be used to reduce any liability or to establish any asset in any financial statement filed with the Director unless the agreement or amendment or a letter of intent has been duly executed by both parties no later than the "as of date" of the financial statement.

(2) In the case of a letter of intent, a reinsurance agreement or an amendment to a reinsurance agreement must be executed within a reasonable period of time, not exceeding 90 days from the execution date of the letter of intent, in order for credit to be granted for the reinsurance ceded.

(3) The reinsurance agreement must contain provisions providing that:

(a) The agreement constitutes the entire agreement between the parties with respect to the business being reinsured thereunder and that there are no understandings between the parties other than as expressed in the agreement; and

(b) Any change or modification to the agreement is void unless made by amendment to the agreement and signed by both parties.

Stat. Auth.: ORS 731.244 & ORS 731.508
Stats. Implemented: ORS 731.508(6)
Hist.: ID 8-1993, f. & cert. ef. 9-23-93; ID 7-1995, f. & cert. ef. 11-15-95

836-012-0331

Existing Agreements

For purposes of an insurer’s statutory financial statement filings, each insurer subject to OAR 836-012-0300 to 836-012-330 shall reduce to zero any reserve credits or assets established with respect to reinsurance agreements entered into prior to November 9, 1995 that, under the provisions of 836-012-0300 to 836-012-330 as amended, would not be entitled to recognition of the reserve credits or assets.

Stat. Auth.: ORS 731.244 & ORS 731.508
Stats. Implemented: ORS 731.508(6)
Hist.: ID 4-2009(Temp), f. & cert. ef. 7-9-09 thru 12-24-09

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