SB1737 Engrossed LRB100 06758 SMS 16799 b
1		AN ACT concerning regulation.
2		Be it enacted by the People of the State of Illinois,
3		represented in the General Assembly:
4		Section 5. The Illinois Insurance Code is amended by
5		changing Section 173.1 as follows:
6		(215 ILCS 5/173.1) (from Ch. 73, par. 785.1)
7		Sec. 173.1. Credit allowed a domestic ceding insurer.
8		(1) Except as otherwise provided under Article VIII 1/2 of
9		this Code and related provisions of the Illinois Administrative
10		Code, credit for reinsurance shall be allowed a domestic ceding
11		insurer as either an admitted asset or a deduction from
12		liability on account of reinsurance ceded only when the
13		reinsurer meets the requirements of paragraph (A) subsection
14		(1)(A) or (B) or (B-5) or (C) or (C-5) or (D) of this
15		subsection (1). Credit shall be allowed under paragraph (A),
16		subsection (1)(A) or (B), or (B-5) of this subsection (1) only
17		as respects cessions of those kinds or classes of business in
18		which the assuming insurer is licensed or otherwise permitted
19		to write or assume in its state of domicile, or in the case of a
20		U.S. branch of an alien assuming insurer, in the state through
21		which it is entered and licensed to transact insurance or
22		reinsurance. Credit shall be allowed under paragraph (B-5) or
23		(C) of this subsection (1) (C) of this Section only if the

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1		applicable requirements of paragraph (E) of this subsection (1)
2		subsection (1)(E) have been satisfied.
3		(A) Credit shall be allowed when the reinsurance is
4		ceded to an assuming insurer that is authorized in this
5		State to transact the types of insurance ceded and has at
6		least $5,000,000 in capital and surplus.
7		(B) Credit shall be allowed when the reinsurance is
8		ceded to an assuming insurer that is accredited as a
9		reinsurer in this State. An accredited reinsurer is one
10		that:
11		(1) files with the Director evidence of its
12		submission to this State's jurisdiction;
13		(2) submits to this State's authority to examine
14		its books and records;
15		(3) is licensed to transact insurance or
16		reinsurance in at least one state, or in the case of a
17		U.S. branch of an alien assuming insurer is entered
18		through and licensed to transact insurance or
19		reinsurance in at least one state;
20		(4) files annually with the Director a copy of its
21		annual statement filed with the insurance department
22		of its state of domicile and a copy of its most recent
23		audited financial statement; and
24		(5) maintains a surplus as regards policyholders
25		in an amount that is not less than $20,000,000 and
26		whose accreditation has been approved by the Director.

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1		No credit shall be allowed a domestic ceding insurer,
2		if the assuming insurers' accreditation has been
3		revoked by the Director after notice and hearing.
4		(B-5)(1) Credit shall be allowed when the reinsurance
5		is ceded to an assuming insurer that is domiciled in, or in
6		the case of a U.S. branch of an alien assuming insurer is
7		entered through, a state that employs standards regarding
8		credit for reinsurance substantially similar to those
9		applicable under this Code and the assuming insurer or U.S.
10		branch of an alien assuming insurer:
11		(a) maintains a surplus as regards policyholders
12		in an amount not less than $20,000,000; and
13		(b) submits to the authority of this State to
14		examine its books and records.
15		(2) The requirement of item (a) of subparagraph (1) of
16		paragraph (B-5) of this subsection (1) does not apply to
17		reinsurance ceded and assumed pursuant to pooling
18		arrangements among insurers in the same holding company
19		system.
20		(C)(1) Credit shall be allowed when the reinsurance is
21		ceded to an assuming insurer that maintains a trust fund in
22		a qualified United States financial institution, as
23		defined in paragraph (B) of subsection (3) of this Section
24		subsection 3(B), for the payment of the valid claims of its
25		United States policyholders and ceding insurers, their
26		assigns and successors in interest. The assuming insurer

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1		shall report to the Director information substantially the
2		same as that required to be reported on the NAIC annual and
3		quarterly financial statement by authorized insurers and
4		any other financial information that the Director deems
5		necessary to determine the financial condition of the
6		assuming insurer and the sufficiency of the trust fund. The
7		assuming insurer shall provide or make the information
8		available to the ceding insurer. The assuming insurer may
9		decline to release trade secrets or commercially sensitive
10		information that would qualify as exempt from disclosure
11		under the Freedom of Information Act. The Director shall
12		also make the information publicly available, subject only
13		to such reasonable objections as might be raised to a
14		request pursuant to the Freedom of Information Act, as
15		determined by the Director. The assuming insurer shall
16		submit to examination of its books and records by the
17		Director and bear the expense of examination.
18		(2)(a) Credit for reinsurance shall not be granted
19		under this subsection unless the form of the trust and any
20		amendments to the trust have been approved by:
21		(i) the regulatory official of the state where the
22		trust is domiciled; or
23		(ii) the regulatory official of another state who,
24		pursuant to the terms of the trust instrument, has
25		accepted principal regulatory oversight of the trust.
26		(b) The form of the trust and any trust amendments also

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1		shall be filed with the regulatory official of every state
2		in which the ceding insurer beneficiaries of the trust are
3		domiciled. The trust instrument shall provide that
4		contested claims shall be valid and enforceable upon the
5		final order of any court of competent jurisdiction in the
6		United States. The trust shall vest legal title to its
7		assets in its trustees for the benefit of the assuming
8		insurer's United States policyholders and ceding insurees
9		and their assigns and successors in interest. The trust and
10		the assuming insurer shall be subject to examination as
11		determined by the Director.
12		(c) The trust shall remain in effect for as long as the
13		assuming insurer has outstanding obligations due under the
14		reinsurance agreements subject to the trust. No later than
15		February 28 of each year the trustee of the trust shall
16		report to the Director in writing the balance of the trust
17		and a list of the trust's investments at the preceding
18		year-end and shall certify the date of termination of the
19		trust, if so planned, or certify that the trust will not
20		expire prior to the next following December 31.
21		No later than February 28 of each year, the assuming
22		insurer's chief executive officer or chief financial
23		officer shall certify to the Director that the trust fund
24		contains funds in an amount not less than the assuming
25		insurer's liabilities (as reported to the assuming insurer
26		by its cedent) attributable to reinsurance ceded by U.S.

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1		ceding insurers, and in addition, a trusteed surplus of no
2		less than $20,000,000. In the event that item (a-5) of
3		subparagraph (3) of this paragraph (C) applies to the
4		trust, the assuming insurer's chief executive officer or
5		chief financial officer shall then certify to the Director
6		that the trust fund contains funds in an amount not less
7		than the assuming insurer's liabilities (as reported to the
8		assuming insurer by its cedent) attributable to
9		reinsurance ceded by U.S. ceding insurers and, in addition,
10		a reduced trusteed surplus of not less than the amount that
11		has been authorized by the regulatory authority having
12		principal regulatory oversight of the trust.
13		(d) No later than February 28 of each year, an assuming
14		insurer that maintains a trust fund in accordance with this
15		paragraph (C) shall provide or make available, if requested
16		by a beneficiary under the trust fund, the following
17		information to the assuming insurer's U.S. ceding insurers
18		or their assigns and successors in interest:
19		(i) a copy of the form of the trust agreement and
20		any trust amendments to the trust agreement pertaining
21		to the trust fund;
22		(ii) a copy of the annual and quarterly financial
23		information, and its most recent audited financial
24		statement provided to the Director by the assuming
25		insurer, including any exhibits and schedules thereto;
26		(iii) any financial information provided to the

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1		Director by the assuming insurer that the Director has
2		deemed necessary to determine the financial condition
3		of the assuming insurer and the sufficiency of the
4		trust fund;
5		(iv) a copy of any annual and quarterly financial
6		information provided to the Director by the trustee of
7		the trust fund maintained by the assuming insurer,
8		including any exhibits and schedules thereto;
9		(v) a copy of the information required to be
10		reported by the trustee of the trust to the Director
11		under the provisions of this paragraph (C); and
12		(vi) a written certification that the trust fund
13		consists of funds in trust in an amount not less than
14		the assuming insurer's liabilities attributable to
15		reinsurance liabilities (as reported to the assuming
16		insurer by its cedent) attributable to reinsurance
17		ceded by U.S. ceding insurers and, in addition, a
18		trusteed surplus of not less than $20,000,000.
19		(3) The following requirements apply to the following
20		categories of assuming insurer:
21		(a) The trust fund for a single assuming insurer
22		shall consist of funds in trust in an amount not less
23		than the assuming insurer's liabilities attributable
24		to reinsurance ceded by U.S. ceding insurers, and in
25		addition, the assuming insurer shall maintain a
26		trusteed surplus of not less than $20,000,000, except

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1		as provided in item (a-5) of this subparagraph (3).
2		(a-5) At any time after the assuming insurer has
3		permanently discontinued underwriting new business
4		secured by the trust for at least 3 full years, the
5		Director with principal regulatory oversight of the
6		trust may authorize a reduction in the required
7		trusteed surplus, but only after a finding, based on an
8		assessment of the risk, that the new required surplus
9		level is adequate for the protection of U.S. ceding
10		insurers, policyholders, and claimants in light of
11		reasonably foreseeable adverse loss development. The
12		risk assessment may involve an actuarial review,
13		including an independent analysis of reserves and cash
14		flows, and shall consider all material risk factors,
15		including, when applicable, the lines of business
16		involved, the stability of the incurred loss
17		estimates, and the effect of the surplus requirements
18		on the assuming insurer's liquidity or solvency. The
19		minimum required trusteed surplus may not be reduced to
20		an amount less than 30% of the assuming insurer's
21		liabilities attributable to reinsurance ceded by U.S.
22		ceding insurers covered by the trust.
23		(b)(i) In the case of a group including
24		incorporated and individual unincorporated
25		underwriters:
26		(I) for reinsurance ceded under reinsurance

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1		agreements with an inception, amendment, or
2		renewal date on or after January 1, 1993 August 1,
3		1995, the trust shall consist of a trusteed account
4		in an amount not less than the respective
5		underwriters' group's several liabilities
6		attributable to business ceded by U.S. domiciled
7		ceding insurers to any member of the group;
8		(II) for reinsurance ceded under reinsurance
9		agreements with an inception date on or before
10		December 31, 1992 July 31, 1995 and not amended or
11		renewed after that date, notwithstanding the other
12		provisions of this Act, the trust shall consist of
13		a trusteed account in an amount not less than the
14		group's several insurance and reinsurance
15		liabilities attributable to business written in
16		the United States; and
17		(III) in addition to these trusts, the group
18		shall maintain in trust a trusteed surplus of which
19		not less than $100,000,000 shall be held jointly
20		for the benefit of the U.S. domiciled ceding
21		insurers of any member of the group for all years
22		of account.
23		(ii) The incorporated members of the group shall
24		not be engaged in any business other than underwriting
25		as a member of the group and shall be subject to the
26		same level of solvency regulation and control by the

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1		group's domiciliary regulator as are the
2		unincorporated members.
3		(iii) Within 90 days after its financial
4		statements are due to be filed with the group's
5		domiciliary regulator, the group shall provide to the
6		Director an annual certification by the group's
7		domiciliary regulator of the solvency of each
8		underwriter member, or if a certification is
9		unavailable, financial statements prepared by
10		independent public accountants of each underwriter
11		member of the group.
12		(c) In the case of a group of incorporated insurers
13		under common administration, the group shall:
14		(i) have continuously transacted an insurance
15		business outside the United States for at least 3
16		years immediately before making application for
17		accreditation;
18		(ii) maintain aggregate policyholders' surplus
19		of not less than $10,000,000,000;
20		(iii) maintain a trust in an amount not less
21		than the group's several liabilities attributable
22		to business ceded by United States domiciled
23		ceding insurers to any member of the group pursuant
24		to reinsurance contracts issued in the name of the
25		group;
26		(iv) in addition, maintain a joint trusteed

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1		surplus of which not less than $100,000,000 shall
2		be held jointly for the benefit of the United
3		States ceding insurers of any member of the group
4		as additional security for these liabilities; and
5		(v) within 90 days after its financial
6		statements are due to be filed with the group's
7		domiciliary regulator, make available to the
8		Director an annual certification of each
9		underwriter member's solvency by the member's
10		domiciliary regulator and financial statements of
11		each underwriter member of the group prepared by
12		its independent public accountant.
13		(C-5) Credit shall be allowed when the reinsurance is
14		ceded to an assuming insurer that has been certified by the
15		Director as a reinsurer in this State and secures its
16		obligations in accordance with the requirements of this
17		paragraph (C-5).
18		(1) In order to be eligible for certification, the
19		assuming insurer shall meet the following
20		requirements:
21		(a) the assuming insurer must be domiciled and
22		licensed to transact insurance or reinsurance in a
23		qualified jurisdiction, as determined by the
24		Director pursuant to subparagraph (3) of this
25		paragraph (C-5);
26		(b) the assuming insurer must maintain minimum

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1		capital and surplus, or its equivalent, in an
2		amount not less than $250,000,000 or such greater
3		amount as determined by the Director pursuant to
4		regulation; this requirement may also be satisfied
5		by an association, including incorporated and
6		individual unincorporated underwriters, having
7		minimum capital and surplus equivalents (net of
8		liabilities) of at least $250,000,000 and a
9		central fund containing a balance of at least
10		$250,000,000;
11		(c) the assuming insurer must maintain
12		financial strength ratings from 2 or more rating
13		agencies deemed acceptable by the Director; these
14		ratings shall be based on interactive
15		communication between the rating agency and the
16		assuming insurer and shall not be based solely on
17		publicly available information; each certified
18		reinsurer shall be rated on a legal entity basis,
19		with due consideration being given to the group
20		rating where appropriate, except that an
21		association, including incorporated and individual
22		unincorporated underwriters, that has been
23		approved to do business as a single certified
24		reinsurer may be evaluated on the basis of its
25		group rating; these financial strength ratings
26		shall be one factor used by the Director in

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1		determining the rating that is assigned to the
2		assuming insurer; acceptable rating agencies
3		include the following:
4		(i) Standard & Poor's;
5		(ii) Moody's Investors Service;
6		(iii) Fitch Ratings;
7		(iv) A.M. Best Company; or
8		(v) any other nationally recognized
9		statistical rating organization;
10		(d) the assuming insurer must agree to submit
11		to the jurisdiction of this State, appoint the
12		Director as its agent for service of process in
13		this State, and agree to provide security for 100%
14		of the assuming insurer's liabilities attributable
15		to reinsurance ceded by U.S. ceding insurers if it
16		resists enforcement of a final U.S. judgment; and
17		(e) the assuming insurer must agree to meet
18		applicable information filing requirements as
19		determined by the Director, both with respect to an
20		initial application for certification and on an
21		ongoing basis.
22		(2) An association, including incorporated and
23		individual unincorporated underwriters, may be a
24		certified reinsurer. In order to be eligible for
25		certification, in addition to satisfying the
26		requirements of subparagraph (1) of this paragraph

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1		(C-5):
2		(a) the association shall satisfy its minimum
3		capital and surplus requirements through the
4		capital and surplus equivalents (net of
5		liabilities) of the association and its members,
6		which shall include a joint central fund that may
7		be applied to any unsatisfied obligation of the
8		association or any of its members, in the amounts
9		specified in item (b) of subparagraph (1) of this
10		paragraph (C-5);
11		(b) the incorporated members of the
12		association shall not be engaged in any business
13		other than underwriting as a member of the
14		association and shall be subject to the same level
15		of regulation and solvency control by the
16		association's domiciliary regulator as are the
17		unincorporated members; and
18		(c) within 90 days after its financial
19		statements are due to be filed with the
20		association's domiciliary regulator, the
21		association shall provide to the Director an
22		annual certification by the association's
23		domiciliary regulator of the solvency of each
24		underwriter member; or if a certification is
25		unavailable, financial statements, prepared by
26		independent public accountants, of each

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1		underwriter member of the association.
2		(3) The Director shall create and publish a list of
3		qualified jurisdictions, under which an assuming
4		insurer licensed and domiciled in such jurisdiction is
5		eligible to be considered for certification by the
6		Director as a certified reinsurer.
7		(a) In order to determine whether the
8		domiciliary jurisdiction of a non-U.S. assuming
9		insurer is eligible to be recognized as a qualified
10		jurisdiction, the Director shall evaluate the
11		appropriateness and effectiveness of the
12		reinsurance supervisory system of the
13		jurisdiction, both initially and on an ongoing
14		basis, and consider the rights, benefits, and
15		extent of reciprocal recognition afforded by the
16		non-U.S. jurisdiction to reinsurers licensed and
17		domiciled in the U.S. A qualified jurisdiction
18		must agree in writing to share information and
19		cooperate with the Director with respect to all
20		certified reinsurers domiciled within that
21		jurisdiction. A jurisdiction may not be recognized
22		as a qualified jurisdiction if the Director has
23		determined that the jurisdiction does not
24		adequately and promptly enforce final U.S.
25		judgments and arbitration awards. The costs and
26		expenses associated with the Director's review and

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1		evaluation of the domiciliary jurisdictions of
2		non-U.S. assuming insurers shall be borne by the
3		certified reinsurer or reinsurers domiciled in
4		such jurisdiction.
5		(b) Additional factors to be considered in
6		determining whether to recognize a qualified
7		jurisdiction include, but are not limited to, the
8		following:
9		(i) the framework under which the assuming
10		insurer is regulated;
11		(ii) the structure and authority of the
12		domiciliary regulator with regard to solvency
13		regulation requirements and financial
14		surveillance;
15		(iii) the substance of financial and
16		operating standards for assuming insurers in
17		the domiciliary jurisdiction;
18		(iv) the form and substance of financial
19		reports required to be filed or made publicly
20		available by reinsurers in the domiciliary
21		jurisdiction and the accounting principles
22		used;
23		(v) the domiciliary regulator's
24		willingness to cooperate with U.S. regulators
25		in general and the Director in particular;
26		(vi) the history of performance by

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1		assuming insurers in the domiciliary
2		jurisdiction;
3		(vii) any documented evidence of
4		substantial problems with the enforcement of
5		final U.S. judgments in the domiciliary
6		jurisdiction; and
7		(viii) any relevant international
8		standards or guidance with respect to mutual
9		recognition of reinsurance supervision adopted
10		by the International Association of Insurance
11		Supervisors or its successor organization.
12		(c) If, upon conducting an evaluation under
13		this paragraph with respect to the reinsurance
14		supervisory system of any non-U.S. assuming
15		insurer, the Director determines that the
16		jurisdiction qualifies to be recognized as a
17		qualified jurisdiction, the Director shall publish
18		notice and evidence of such recognition in an
19		appropriate manner. The Director may establish a
20		procedure to withdraw recognition of those
21		jurisdictions that are no longer qualified.
22		(d) The Director shall consider the list of
23		qualified jurisdictions through the NAIC committee
24		process in determining qualified jurisdictions. If
25		the Director approves a jurisdiction as qualified
26		that does not appear on the list of qualified

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1		jurisdictions, then the Director shall provide
2		thoroughly documented justification in accordance
3		with criteria to be developed under regulations.
4		(e) U.S. jurisdictions that meet the
5		requirement for accreditation under the NAIC
6		financial standards and accreditation program
7		shall be recognized as qualified jurisdictions.
8		(f) If a certified reinsurer's domiciliary
9		jurisdiction ceases to be a qualified
10		jurisdiction, then the Director may suspend the
11		reinsurer's certification indefinitely, in lieu of
12		revocation.
13		(4) If an applicant for certification has been
14		certified as a reinsurer in an NAIC accredited
15		jurisdiction, then the Director may defer to that
16		jurisdiction's certification and to the rating
17		assigned by that jurisdiction if the assuming insurer
18		submits a properly executed Form CR-1 and such
19		additional information as the Director requires. Such
20		assuming insurer shall be considered to be a certified
21		reinsurer in this State but only upon the Director's
22		assignment of an Illinois rating, which shall be made
23		based on the requirements of subparagraph (5) of this
24		paragraph (C-5). The following shall apply:
25		(a) Any change in the certified reinsurer's
26		status or rating in the other jurisdiction shall

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1		apply automatically in Illinois as of the date it
2		takes effect in the other jurisdiction. The
3		certified reinsurer shall notify the Director of
4		any change in its status or rating within 10 days
5		after receiving notice of the change.
6		(b) The Director may withdraw recognition of
7		the other jurisdiction's rating at any time and
8		assign a new rating in accordance with
9		subparagraph (5) of this paragraph (C-5).
10		(c) The Director may withdraw recognition of
11		the other jurisdiction's certification at any time
12		with written notice to the certified reinsurer.
13		Unless the Director suspends or revokes the
14		certified reinsurer's certification in accordance
15		with item (c) of subparagraph (9) of this paragraph
16		(C-5), the certified reinsurer's certification
17		shall remain in good standing in Illinois for a
18		period of 3 months, which shall be extended if
19		additional time is necessary to consider the
20		assuming insurer's application for certification
21		in Illinois.
22		(5) The Director shall assign a rating to each
23		certified reinsurer pursuant to rules adopted by the
24		Department. Factors that shall be considered as part of
25		the evaluation process include the following:
26		(a) The certified reinsurer's financial

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1		strength rating from an acceptable rating agency.
2		Financial strength ratings shall be classified
3		according to the following ratings categories:
4		(i) Ratings Category "Secure - 1"
5		corresponds to the highest level of rating
6		given by a rating agency, including, but not
7		limited to, A.M. Best Company rating A++;
8		Standard & Poor's rating AAA; Moody's
9		Investors Service rating Aaa; and Fitch
10		Ratings rating AAA.
11		(ii) Ratings Category "Secure - 2"
12		corresponds to the second-highest level of
13		rating or group of ratings given by a rating
14		agency, including, but not limited to, A.M.
15		Best Company rating A+; Standard & Poor's
16		rating AA+, AA, or AA-; Moody's Investors
17		Service ratings Aa1, Aa2, or Aa3; and Fitch
18		Ratings ratings AA+, AA, or AA-.
19		(iii) Ratings Category "Secure - 3"
20		corresponds to the third-highest level of
21		rating or group of ratings given by a rating
22		agency, including, but not limited to, A.M.
23		Best Company rating A; Standard & Poor's
24		ratings A+ or A; Moody's Investors Service
25		ratings A1 or A2; and Fitch Ratings ratings A+
26		or A.

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1		(iv) Ratings Category "Secure - 4"
2		corresponds to the fourth-highest level of
3		rating or group of ratings given by a rating
4		agency, including, but not limited to, A.M.
5		Best Company rating A-; Standard & Poor's
6		rating A-; Moody's Investors Service rating
7		A3; and Fitch Ratings rating A-.
8		(v) Ratings Category "Secure - 5"
9		corresponds to the fifth-highest level of
10		rating or group of ratings given by a rating
11		agency, including, but not limited to, A.M.
12		Best Company ratings B++ or B+; Standard &
13		Poor's ratings BBB+, BBB, or BBB-; Moody's
14		Investors Service ratings Baa1, Baa2, or Baa3;
15		and Fitch Ratings ratings BBB+, BBB, or BBB-.
16		(vi) Ratings Category "Vulnerable - 6"
17		corresponds to a level of rating given by a
18		rating agency, other than those described in
19		subitems (i) through (v) of this item (a),
20		including, but not limited to, A.M. Best
21		Company rating B, B-, C++, C+, C, C-, D, E, or
22		F; Standard & Poor's ratings BB+, BB, BB-, B+,
23		B, B-, CCC, CC, C, D, or R; Moody's Investors
24		Service ratings Ba1, Ba2, Ba3, B1, B2, B3, Caa,
25		Ca, or C; and Fitch Ratings ratings BB+, BB,
26		BB-, B+, B, B-, CCC+, CCC, CCC-, or D.

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1		A failure to obtain or maintain at least 2
2		financial strength ratings from acceptable rating
3		agencies shall result in loss of eligibility for
4		certification.
5		(b) The business practices of the certified
6		reinsurer in dealing with its ceding insurers,
7		including its record of compliance with
8		reinsurance contractual terms and obligations.
9		(c) For certified reinsurers domiciled in the
10		U.S., a review of the most recent applicable NAIC
11		Annual Statement Blank, either Schedule F (for
12		property and casualty reinsurers) or Schedule S
13		(for life and health reinsurers).
14		(d) For certified reinsurers not domiciled in
15		the U.S., a review annually of Form CR-F (for
16		property and casualty reinsurers) or Form CR-S
17		(for life and health reinsurers).
18		(e) The reputation of the certified reinsurer
19		for prompt payment of claims under reinsurance
20		agreements, based on an analysis of ceding
21		insurers' Schedule F reporting of overdue
22		reinsurance recoverables, including the proportion
23		of obligations that are more than 90 days past due
24		or are in dispute, with specific attention given to
25		obligations payable to companies that are in
26		administrative supervision or receivership.

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1		(f) Regulatory actions against the certified
2		reinsurer.
3		(g) The report of the independent auditor on
4		the financial statements of the insurance
5		enterprise, on the basis described in item (h) of
6		this subparagraph (5).
7		(h) For certified reinsurers not domiciled in
8		the U.S., audited financial statements (audited
9		Generally Accepted Accounting Principles (U.S.
10		GAAP) basis statement if available, audited
11		International Financial Reporting Standards (IFRS)
12		basis statements are allowed but must include an
13		audited footnote reconciling equity and net income
14		to U.S. GAAP basis or, with the permission of the
15		Director, audited IFRS basis statements with
16		reconciliation to U.S. GAAP basis certified by an
17		officer of the company), regulatory filings, and
18		actuarial opinion (as filed with the non-U.S.
19		jurisdiction supervisor). Upon the initial
20		application for certification, the Director shall
21		consider the audited financial statements filed
22		with its non-U.S. jurisdiction supervisor for the
23		3 years immediately preceding the date of the
24		initial application for certification.
25		(i) The liquidation priority of obligations to
26		a ceding insurer in the certified reinsurer's

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1		domiciliary jurisdiction in the context of an
2		insolvency proceeding.
3		(j) A certified reinsurer's participation in
4		any solvent scheme of arrangement, or similar
5		procedure, that involves U.S. ceding insurers. The
6		Director shall receive prior notice from a
7		certified reinsurer that proposes participation by
8		the certified reinsurer in a solvent scheme of
9		arrangement.
10		The maximum rating that a certified reinsurer may
11		be assigned shall correspond to its financial strength
12		rating, which shall be determined according to
13		subitems (i) through (vi) of item (a) of this
14		subparagraph (5). The Director shall use the lowest
15		financial strength rating received from an acceptable
16		rating agency in establishing the maximum rating of a
17		certified reinsurer.
18		(6) Based on the analysis conducted under item (e)
19		of subparagraph (5) of this paragraph (C-5) of a
20		certified reinsurer's reputation for prompt payment of
21		claims, the Director may make appropriate adjustments
22		in the security the certified reinsurer is required to
23		post to protect its liabilities to U.S. ceding
24		insurers, provided that the Director shall, at a
25		minimum, increase the security the certified reinsurer
26		is required to post by one rating level under item (a)

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1		of subparagraph (8) of this paragraph (C-5) if the
2		Director finds that:
3		(a) more than 15% of the certified reinsurer's
4		ceding insurance clients have overdue reinsurance
5		recoverables on paid losses of 90 days or more that
6		are not in dispute and that exceed $100,000 for
7		each cedent; or
8		(b) the aggregate amount of reinsurance
9		recoverables on paid losses that are not in dispute
10		that are overdue by 90 days or more exceeds
11		$50,000,000.
12		(7) The Director shall post notice on the
13		Department's website promptly upon receipt of any
14		application for certification, including instructions
15		on how members of the public may respond to the
16		application. The Director may not take final action on
17		the application until at least 30 days after posting
18		the notice required by this subparagraph. The Director
19		shall publish a list of all certified reinsurers and
20		their ratings.
21		(8) A certified reinsurer shall secure obligations
22		assumed from U.S. ceding insurers under this
23		subsection (1) at a level consistent with its rating.
24		(a) The amount of security required in order
25		for full credit to be allowed shall correspond with
26		the applicable ratings category:

SB1737 Engrossed - 26 - LRB100 06758 SMS 16799 b
1		Secure - 1: 0%.
2		Secure - 2: 10%.
3		Secure - 3: 20%.
4		Secure - 4: 50%.
5		Secure - 5: 75%.
6		Vulnerable - 6: 100%.
7		(b) Nothing in this subparagraph (8) shall
8		prohibit the parties to a reinsurance agreement
9		from agreeing to provisions establishing security
10		requirements that exceed the minimum security
11		requirements established for certified reinsurers
12		under this Section.
13		(c) In order for a domestic ceding insurer to
14		qualify for full financial statement credit for
15		reinsurance ceded to a certified reinsurer, the
16		certified reinsurer shall maintain security in a
17		form acceptable to the Director and consistent
18		with the provisions of subsection (2) of this
19		Section, or in a multibeneficiary trust in
20		accordance with paragraph (C) of this subsection
21		(1), except as otherwise provided in this
22		subparagraph (8).
23		(d) If a certified reinsurer maintains a trust
24		to fully secure its obligations subject to
25		paragraph (C) of this subsection (1), and chooses
26		to secure its obligations incurred as a certified

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1		reinsurer in the form of a multibeneficiary trust,
2		then the certified reinsurer shall maintain
3		separate trust accounts for its obligations
4		incurred under reinsurance agreements issued or
5		renewed as a certified reinsurer with reduced
6		security as permitted by this subsection or
7		comparable laws of other U.S. jurisdictions and
8		for its obligations subject to paragraph (C) of
9		this subsection (1). It shall be a condition to the
10		grant of certification under this paragraph (C-5)
11		that the certified reinsurer shall have bound
12		itself, by the language of the trust and agreement
13		with the Director with principal regulatory
14		oversight of each such trust account, to fund, upon
15		termination of any such trust account, out of the
16		remaining surplus of such trust any deficiency of
17		any other such trust account. The certified
18		reinsurer shall also provide or make available, if
19		requested by a beneficiary under a trust, all the
20		information that is required to be provided under
21		the requirements of item (d) of subparagraph (2) of
22		paragraph (C) of this subsection (1) to the
23		certified reinsurer's U.S. ceding insurers or
24		their assigns and successors in interest. The
25		assuming insurer may decline to release trade
26		secrets or commercially sensitive information that

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1		would qualify as exempt from disclosure under the
2		Freedom of Information Act.
3		(e) The minimum trusteed surplus requirements
4		provided in paragraph (C) of this subsection (1)
5		are not applicable with respect to a
6		multibeneficiary trust maintained by a certified
7		reinsurer for the purpose of securing obligations
8		incurred under this subsection, except that such
9		trust shall maintain a minimum trusteed surplus of
10		$10,000,000.
11		(f) With respect to obligations incurred by a
12		certified reinsurer under this subsection (1), if
13		the security is insufficient, then the Director
14		may reduce the allowable credit by an amount
15		proportionate to the deficiency and may impose
16		further reductions in allowable credit upon
17		finding that there is a material risk that the
18		certified reinsurer's obligations will not be paid
19		in full when due.
20		(9)(a) In the case of a downgrade by a rating
21		agency or other disqualifying circumstance, the
22		Director shall by written notice assign a new rating to
23		the certified reinsurer in accordance with the
24		requirements of subparagraph (5) of this paragraph
25		(C-5).
26		(b) If the rating of a certified reinsurer is

SB1737 Engrossed - 29 - LRB100 06758 SMS 16799 b
1		upgraded by the Director, then the certified reinsurer
2		may meet the security requirements applicable to its
3		new rating on a prospective basis, but the Director
4		shall require the certified reinsurer to post security
5		under the previously applicable security requirements
6		as to all contracts in force on or before the effective
7		date of the upgraded rating. If the rating of a
8		certified reinsurer is downgraded by the Director,
9		then the Director shall require the certified
10		reinsurer to meet the security requirements applicable
11		to its new rating for all business it has assumed as a
12		certified reinsurer.
13		(c) The Director may suspend, revoke, or otherwise
14		modify a certified reinsurer's certification at any
15		time if the certified reinsurer fails to meet its
16		obligations or security requirements under this
17		Section or if other financial or operating results of
18		the certified reinsurer, or documented significant
19		delays in payment by the certified reinsurer, lead the
20		Director to reconsider the certified reinsurer's
21		ability or willingness to meet its contractual
22		obligations. In seeking to suspend, revoke, or
23		otherwise modify a certified reinsurer's
24		certification, the Director shall follow the
25		procedures provided in paragraph (G) of this
26		subsection (1).

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1		(d) For purposes of this subsection (1), a
2		certified reinsurer whose certification has been
3		terminated for any reason shall be treated as a
4		certified reinsurer required to secure 100% of its
5		obligations.
6		(i) As used in this item (d), the term
7		"terminated" refers to revocation, suspension,
8		voluntary surrender and inactive status.
9		(ii) If the Director continues to assign a
10		higher rating as permitted by other provisions of
11		this Section, then this requirement does not apply
12		to a certified reinsurer in inactive status or to a
13		reinsurer whose certification has been suspended.
14		(e) Upon revocation of the certification of a
15		certified reinsurer by the Director, the assuming
16		insurer shall be required to post security in
17		accordance with subsection (2) of this Section in order
18		for the ceding insurer to continue to take credit for
19		reinsurance ceded to the assuming insurer. If funds
20		continue to be held in trust, then the Director may
21		allow additional credit equal to the ceding insurer's
22		pro rata share of the funds, discounted to reflect the
23		risk of uncollectibility and anticipated expenses of
24		trust administration.
25		(f) Notwithstanding the change of a certified
26		reinsurer's rating or revocation of its certification,

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1		a domestic insurer that has ceded reinsurance to that
2		certified reinsurer may not be denied credit for
3		reinsurance for a period of 3 months for all
4		reinsurance ceded to that certified reinsurer, unless
5		the reinsurance is found by the Director to be at high
6		risk of uncollectibility.
7		(10) A certified reinsurer that ceases to assume
8		new business in this State may request to maintain its
9		certification in inactive status in order to continue
10		to qualify for a reduction in security for its in-force
11		business. An inactive certified reinsurer shall
12		continue to comply with all applicable requirements of
13		this subsection (1), and the Director shall assign a
14		rating that takes into account, if relevant, the
15		reasons why the reinsurer is not assuming new business.
16		(11) Credit for reinsurance under this paragraph
17		(C-5) shall apply only to reinsurance contracts
18		entered into or renewed on or after the effective date
19		of the certification of the assuming insurer.
20		(12) The Director shall comply with all reporting
21		and notification requirements that may be established
22		by the NAIC with respect to certified reinsurers and
23		qualified jurisdictions.
24		(D) Credit shall be allowed when the reinsurance is
25		ceded to an assuming insurer not meeting the requirements
26		of paragraph subsection (1) (A), (B), or (C) of this

SB1737 Engrossed - 32 - LRB100 06758 SMS 16799 b
1		subsection (1) but only with respect to the insurance of
2		risks located in jurisdictions where that reinsurance is
3		required by applicable law or regulation of that
4		jurisdiction.
5		(E) If the assuming insurer is not licensed to transact
6		insurance in this State or an accredited or certified
7		reinsurer in this State, the credit permitted by paragraphs
8		(B-5) and subsection (1) (C) of this subsection (1) shall
9		not be allowed unless the assuming insurer agrees in the
10		reinsurance agreements:
11		(1) that in the event of the failure of the
12		assuming insurer to perform its obligations under the
13		terms of the reinsurance agreement, the assuming
14		insurer, at the request of the ceding insurer, shall
15		submit to the jurisdiction of any court of competent
16		jurisdiction in any state of the United States, will
17		comply with all requirements necessary to give the
18		court jurisdiction, and will abide by the final
19		decision of the court or of any appellate court in the
20		event of an appeal; and
21		(2) to designate the Director or a designated
22		attorney as its true and lawful attorney upon whom may
23		be served any lawful process in any action, suit, or
24		proceeding instituted by or on behalf of the ceding
25		company.
26		This provision is not intended to conflict with or

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1		override the obligation of the parties to a reinsurance
2		agreement to arbitrate their disputes, if an obligation to
3		arbitrate is created in the agreement.
4		(F) If the assuming insurer does not meet the
5		requirements of paragraph (A) or (B) of this subsection (1)
6		(1)(A) or (B), the credit permitted by paragraph (C) of
7		this subsection (1) (1)(C) shall not be allowed unless the
8		assuming insurer agrees in the trust agreements to the
9		following conditions:
10		(1) Notwithstanding any other provisions in the
11		trust instrument, if the trust fund is inadequate
12		because it contains an amount less than the amount
13		required by subparagraph (3) of paragraph (C)
14		subsection (C)(3) of this subsection (1) Section or if
15		the grantor of the trust has been declared insolvent or
16		placed into receivership, rehabilitation, liquidation,
17		or similar proceedings under the laws of its state or
18		country of domicile, the trustee shall comply with an
19		order of the state official with regulatory oversight
20		over the trust or with an order of a court of competent
21		jurisdiction directing the trustee to transfer to the
22		state official with regulatory oversight all of the
23		assets of the trust fund.
24		(2) The assets shall be distributed by and claims
25		shall be filed with and valued by the state official
26		with regulatory oversight in accordance with the laws

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1		of the state in which the trust is domiciled that are
2		applicable to the liquidation of domestic insurance
3		companies.
4		(3) If the state official with regulatory
5		oversight determines that the assets of the trust fund
6		or any part thereof are not necessary to satisfy the
7		claims of the U.S. ceding insurers of the grantor of
8		the trust, the assets or part thereof shall be returned
9		by the state official with regulatory oversight to the
10		trustee for distribution in accordance with the trust
11		agreement.
12		(4) The grantor shall waive any rights otherwise
13		available to it under U.S. law that are inconsistent
14		with the provision.
15		(G) If an accredited or certified reinsurer ceases to
16		meet the requirements for accreditation or certification,
17		then the Director may suspend or revoke the reinsurer's
18		accreditation or certification.
19		(1) The Director must give the reinsurer notice and
20		opportunity for hearing. The suspension or revocation
21		may not take effect until after the Director's order on
22		hearing, unless:
23		(a) the reinsurer waives its right to hearing;
24		(b) the Director's order is based on
25		regulatory action by the reinsurer's domiciliary
26		jurisdiction or the voluntary surrender or

SB1737 Engrossed - 35 - LRB100 06758 SMS 16799 b
1		termination of the reinsurer's eligibility to
2		transact insurance or reinsurance business in its
3		domiciliary jurisdiction or in the primary
4		certifying state of the reinsurer under
5		subparagraph (4) of paragraph (C-5) of this
6		subsection (1); or
7		(c) the Director finds that an emergency
8		requires immediate action and a court of competent
9		jurisdiction has not stayed the Director's action.
10		(2) While a reinsurer's accreditation or
11		certification is suspended, no reinsurance contract
12		issued or renewed after the effective date of the
13		suspension qualifies for credit except to the extent
14		that the reinsurer's obligations under the contract
15		are secured in accordance with subsection (2) of this
16		Section. If a reinsurer's accreditation or
17		certification is revoked, no credit for reinsurance
18		may be granted after the effective date of the
19		revocation, except to the extent that the reinsurer's
20		obligations under the contract are secured in
21		accordance with subsection (2) of this Section.
22		(H) The following provisions shall apply concerning
23		concentration of risk:
24		(1) A ceding insurer shall take steps to manage its
25		reinsurance recoverable proportionate to its own book
26		of business. A domestic ceding insurer shall notify the

SB1737 Engrossed - 36 - LRB100 06758 SMS 16799 b
1		Director within 30 days after reinsurance recoverables
2		from any single assuming insurer, or group of
3		affiliated assuming insurers, exceeds 50% of the
4		domestic ceding insurer's last reported surplus to
5		policyholders, or after it is determined that
6		reinsurance recoverables from any single assuming
7		insurer, or group of affiliated assuming insurers, is
8		likely to exceed this limit. The notification shall
9		demonstrate that the exposure is safely managed by the
10		domestic ceding insurer.
11		(2) A ceding insurer shall take steps to diversify
12		its reinsurance program. A domestic ceding insurer
13		shall notify the Director within 30 days after ceding
14		to any single assuming insurer, or group of affiliated
15		assuming insurers, more than 20% of the ceding
16		insurer's gross written premium in the prior calendar
17		year, or after it has determined that the reinsurance
18		ceded to any single assuming insurer, or group of
19		affiliated assuming insurers, is likely to exceed this
20		limit. The notification shall demonstrate that the
21		exposure is safely managed by the domestic ceding
22		insurer.
23		(2) Credit for the reinsurance ceded by a domestic insurer
24		to an assuming insurer not meeting the requirements of
25		subsection (1) of this Section shall be allowed in an amount
26		not exceeding the assets or liabilities carried by the ceding

SB1737 Engrossed - 37 - LRB100 06758 SMS 16799 b
1		insurer. The credit shall not exceed the amount of funds held
2		by or held in trust for the ceding insurer under a reinsurance
3		contract with the assuming insurer as security for the payment
4		of obligations thereunder, if the security is held in the
5		United States subject to withdrawal solely by, and under the
6		exclusive control of, the ceding insurer; or, in the case of a
7		trust, held in a qualified United States financial institution,
8		as defined in paragraph (B) of subsection (3) of this Section
9		(3)(B). This security may be in the form of:
10		(A) Cash.
11		(B) Securities listed by the Securities Valuation
12		Office of the National Association of Insurance
13		Commissioners, including those deemed exempt from filing
14		as defined by the Purposes and Procedures Manual of the
15		Securities Valuation Office that conform to the
16		requirements of Article VIII of this Code that are not
17		issued by an affiliate of either the assuming or ceding
18		company.
19		(C) Clean, irrevocable, unconditional, letters of
20		credit issued or confirmed by a qualified United States
21		financial institution, as defined in paragraph (A) of
22		subsection (3) of this Section (3)(A). The letters of
23		credit shall be effective no later than December 31 of the
24		year for which filing is being made, and in the possession
25		of, or in trust for, the ceding company on or before the
26		filing date of its annual statement. Letters of credit

SB1737 Engrossed - 38 - LRB100 06758 SMS 16799 b
1		meeting applicable standards of issuer acceptability as of
2		the dates of their issuance (or confirmation) shall,
3		notwithstanding the issuing (or confirming) institution's
4		subsequent failure to meet applicable standards of issuer
5		acceptability, continue to be acceptable as security until
6		their expiration, extension, renewal, modification, or
7		amendment, whichever first occurs.
8		(D) Any other form of security acceptable to the
9		Director.
10		(3)(A) For purposes of paragraph (C) of subsection (2) of
11		this Section subsection 2(C), a "qualified United States
12		financial institution" means an institution that:
13		(1) is organized or, in the case of a U.S. office of a
14		foreign banking organization, licensed under the laws of
15		the United States or any state thereof;
16		(2) is regulated, supervised, and examined by U.S.
17		federal or state authorities having regulatory authority
18		over banks and trust companies;
19		(3) has been designated by either the Director or the
20		Securities Valuation Office of the National Association of
21		Insurance Commissioners as meeting such standards of
22		financial condition and standing as are considered
23		necessary and appropriate to regulate the quality of
24		financial institutions whose letters of credit will be
25		acceptable to the Director; and
26		(4) is not affiliated with the assuming company.

SB1737 Engrossed - 39 - LRB100 06758 SMS 16799 b
1		(B) A "qualified United States financial institution"
2		means, for purposes of those provisions of this law specifying
3		those institutions that are eligible to act as a fiduciary of a
4		trust, an institution that:
5		(1) is organized or, in the case of the U.S. branch or
6		agency office of a foreign banking organization, licensed
7		under the laws of the United States or any state thereof
8		and has been granted authority to operate with fiduciary
9		powers;
10		(2) is regulated, supervised, and examined by federal
11		or state authorities having regulatory authority over
12		banks and trust companies; and
13		(3) is not affiliated with the assuming company,
14		however, if the subject of the reinsurance contract is
15		insurance written pursuant to Section 155.51 of this Code,
16		the financial institution may be affiliated with the
17		assuming company with the prior approval of the Director.
18		(C) Except as set forth in subparagraph (11) of paragraph
19		(C-5) of subsection (1) of this Section as to cessions by
20		certified reinsurers, this amendatory Act of the 100th General
21		Assembly shall apply to all cessions after the effective date
22		of this amendatory Act of the 100th General Assembly under
23		reinsurance agreements that have an inception, anniversary, or
24		renewal date not less than 6 months after the effective date of
25		this amendatory Act of the 100th General Assembly.
26		(D) The Department shall adopt rules implementing the

SB1737 Engrossed - 40 - LRB100 06758 SMS 16799 b
1		provisions of this Article.
2		(Source: P.A. 90-381, eff. 8-14-97.)