New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki
Governor

Gregory V. Serio
Superintendent

The Office of General Counsel issued the following opinion on July 30, 2004, representing the position of the New York State Insurance Department.

RE: Credit For Reinsurance Ceded To Alien Assuming Insurer

Question Presented:

Must a trust account that is set up and maintained in accordance with all the requirements of N.Y. Comp. Codes R. & Regs. tit. 11, Part 126 (Regulation 114) contain a trusteed surplus, which is required for a trust account set up in accordance with N.Y. Comp. Codes R. & Regs. tit. 11, Part 125 (Regulation 20), particularly N.Y. Comp. Codes R. & Regs. tit. 11, § 125.4(c)?

Conclusion:

No, there is no requirement under the New York Insurance Law, or the regulations promulgated thereunder, that a trust account that is set up and maintained in accordance with all the requirements of N.Y. Comp. Codes R. & Regs. tit. 11, Part 126 (Regulation 114) contain a trusteed surplus, which is required for a trust account set up in accordance with N.Y. Comp. Codes R. & Regs. tit. 11, Part 125 (Regulation 20), particularly N.Y. Comp. Codes R. & Regs. tit. 11, § 125.4(c).

Facts:

The following was stated in an inquiry received by the Department:

An authorized domestic property/casualty insurer enters into a reinsurance contract with an alien assuming insurer, which is not entered as a United States branch, where such assuming insurer meets the requirements of the foreign regulatory body in which it writes its business. The reinsurance agreement is effected by mail from outside of New York and, pursuant to N.Y. Ins. Law §1101(b)(2) (McKinney 2000), the alien assuming insurer is not "doing business" within the State, no license is required. The amount of the insurance ceded to the alien assuming insurer is $100,000,000. The alien assuming insurer deposits and continues to maintain in a member of the Federal Reserve System located in New York state, a trust fund constituting a trusteed surplus in cash and readily marketable securities in the amount of the liabilities ceded by the domestic insurer ($100,000,000) which is subject to withdrawal by, and under the control of, the ceding insurer as required under Regulation 114 Trust Account and the regulations.

Several inquiries regarding the application of Regulations 20 and 114 were made.

Analysis:

N.Y. Ins. Law § 1301(a)(14) (McKinney Supp. 2004) states in relevant part:

(a) In determining the financial condition of a domestic or foreign insurer or the United States branch of an alien insurer for the purposes of this chapter, there may be allowed as admitted assets of such insurer, unless otherwise specifically provided in this chapter, only the following assets owned by such insurer:

* * * *

(14) Reinsurance recoverable by a ceding insurer: (i) from an insurer authorized to transact such business in this state, except from a captive insurance company licensed pursuant to the provisions of article seventy of this chapter, in the full amount thereof; (ii) from an accredited reinsurer, as defined in subsection (a) of section one hundred seven of this chapter, to the extent allowed by the superintendent on the basis of the insurer's compliance with the conditions of any applicable regulation; or (iii) from an insurer not so authorized or accredited or from a captive insurance company licensed pursuant to the provisions of article seventy of this chapter, in an amount not exceeding the liabilities carried by the ceding insurer for amounts withheld under a reinsurance treaty with such unauthorized insurer or captive insurance company licensed pursuant to the provisions of article seventy of this chapter as security for the payment of obligations thereunder if such funds are held subject to withdrawal by, and under the control of, the ceding insurer. Notwithstanding any other provision of this chapter, the superintendent may by regulation prescribe the conditions under which a ceding insurer may be allowed credit, as an asset or as a deduction from loss and unearned premium reserves, for reinsurance recoverable from an accredited reinsurer, an insurer not authorized in this state or a captive insurance company licensed pursuant to the provisions of article seventy of this chapter. (emphasis added)

N.Y. Comp. Codes R. & Regs. tit. 11, Parts 125 (Regulation 20) and 126 (Regulation 114) derive their authority, in part, from N.Y. Ins. Law § 1301(a)(14).

These regulations provide two separate and distinct methods by which a ceding insurer may take credit for amounts ceded to a reinsurer. N.Y. Comp. Codes R. & Regs. tit. 11, § 125.4(c) (Regulation 20) applies in the situation where the alien assuming insurer is an accredited reinsurer, as such term is defined in N.Y. Ins. Law § 107(a)(2) (McKinney Supp. 2004), which states:

"Accredited reinsurer" means an assuming insurer not authorized to do an insurance business in this state but which (i) presents satisfactory evidence to the superintendent that it meets the applicable standards of solvency required in this state, (ii) is in compliance with the conditions prescribed by regulation under which a ceding insurer may be allowed credit for reinsurance recoverable from an insurer not authorized in this state, and (iii) has received a certificate of recognition as an accredited reinsurer issued by the superintendent pursuant to such regulation; provided that no insurer shall be an accredited reinsurer with respect to any kind of insurance not provided for in such certificate.

N.Y. Comp. Codes R. & Regs. tit. 11, § 125.4(c)(1) (Regulation 20) requires that in addition to a trusteed amount, which is at least equal to the liabilities attributable to United States insurers and United States beneficiaries under reinsurance policies (contracts) issued by the alien assuming insurer, a trusteed surplus of $20,000,000 must be maintained. N.Y. Comp. Codes R. & Regs. tit. 11, § 125.4(c)(1) states:

(c)(1) In the case of an alien assuming insurer, not otherwise entered as a United States branch in another state, such assuming insurer meets the standards of solvency required of license insurers of like character, such terms and conditions as prescribed by the superintendent, andotherwise complies substantially with related requirements, and such assuming insurer has deposited and continues to maintain in one or more New York state banks and/or members of the Federal Reserve System located in New York state, a trust fund or trust funds, constituting a trusteed surplus, in cash, readily marketable securities, or letters of credit, in an amount of not less than $ 20,000,000 for the protection of the United States insurers, and United States beneficiaries under reinsurance policies (contracts) issued by such alien assuming insurers. Such trusteed amount shall be in addition to any other trust fund required by this department, including, but not limited to, a trusteed amount at least equal to the liabilities attributable to United States insurers and United States beneficiaries under reinsurance policies (contracts) issued by such alien assuming insurers. As used in this subdivision, surplus means the balance remaining after subtracting the liabilities, attributable to reinsurance policies (contracts) issued in the name of such alien assuming insurer from the total assets deposited in the trust fund or trust funds. (emphasis added)

N.Y. Comp. Codes R. & Regs. tit. 11, Part 126 (Regulation 114) sets forth the requirements for trust agreements generally, including, but not limited to, contracts of reinsurance. N.Y. Comp. Codes R. & Regs. tit. 11, § 126.2 (Regulation 114) states:

As used in this Part, the following terms shall have the following meanings:

(a) Beneficiary means the entity for whose sole benefit the trust has been established. The trust agreement shall contain a provision that includes within the term beneficiary any successor of the beneficiary by operation of law, including, without limitation, any liquidator, rehabilitator, receiver or conservator. When established in conjunction with a reinsurance agreement, the beneficiary is the licensed ceding insurer.

(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 unlicensed, unaccredited reinsurer. (emphasis added)

Regulation 114 does not apply where the alien assuming insurer is an accredited reinsurer. N.Y. Comp. Codes R. & Regs tit. 11, § 126.8(b)(2) (Regulation 114) states:

The required conditions contained in this Part shall not apply to trust agreements:

(b) entered into by unauthorized insurers pursuant to the provisions of:

(2) section 125.4 of the Title (Regulation No. 20)

Under Regulation 114, a trust agreement "must stipulate that 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[.]" N.Y. Comp. Codes R. & Regs. tit. 11, § 126.3(d)(1). There is no similar provision contained in N.Y. Comp. Codes R. & Regs. tit. 11, Part 125 (Regulation 20).

It was stated in the facts that the trust fund is subject to withdrawal by, and under the control of, the ceding insurer. Thus, Regulation 114, and not Regulation 20, applies.

N.Y. Comp. Codes R. & Regs., Part 126 (Regulation 114) does not require the inclusion of a trusteed surplus within, or in addition to, a trust account set up under this regulation. Hence, a trust account that is set up and maintained in accordance with the requirements of N.Y. Comp. Codes R. & Regs. tit. 11, Part 126 (Regulation 114) does not have to contain a trusteed surplus, which is required for a trust account set up in accordance with N.Y. Comp. Codes R. & Regs. tit. 11, Part 125 (Regulation 20), particularly N.Y. Comp. Codes R. & Regs. tit. 11, § 125.4(c).

For further information you may contact Associate Attorney Sally Geisel at the New York City Office.