DEPARTMENT OF INSURANCE AND FINANCIAL SERVICES

INSURANCE

CREDIT FOR REINSURANCE

(By authority conferred on the director of the department of insurance and financial services

by sections 210, 1103, and 1106 of the insurance code of 1956, 1956 PA 218, MCL 500.210,

500.1103, and 500.1106, and Executive Reorganization Order No. 2013-1, MCL 550.991)

R 500.1121 Rescinded.

History: 1996 AC; 2019 AACS.

R 500.1122 Definitions.

Rule 2. (1) As used in these rules:

(a) “Beneficiary” means the entity for whose sole benefit a trust or 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).

(b) “Code” means the insurance code of 1956, 1956 PA 218, MCL 500.100 to 500.8302.

(c) “Department” means the Michigan department of insurance and financial services.

(d) “Director” means the director of the department.

(e) “Grantor” means the entity that has established a trust for the sole benefit of the

beneficiary. When a trust is established in conjunction with a reinsurance agreement, the grantor

is the unlicensed, unaccredited assuming insurer.

(f) “Liabilities” means the assuming insurer’s gross liabilities attributable to reinsurance

ceded by United States domiciled insurers, excluding liabilities that are otherwise secured by

acceptable means, and includes all of the following:

(i) For business ceded by domestic insurers authorized to write accident and health, and

property and casualty insurance all of the following:

(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.

(E) Unearned premiums.

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

insurance all of the following:

(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.

(D) Liabilities for policy and contract claims.

(g) “NAIC” means the National Association of Insurance Commissioners.

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(h) “Obligations” means any of the following:

(i) Reinsured losses and allocated loss expenses paid by the ceding company, but not

recovered from the assuming insurer.

(ii) Reserves for reinsured losses reported and outstanding.

(iii) Reserves for reinsured losses incurred but not reported.

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

(i) “Solvent scheme of arrangement” means a foreign or alien statutory or regulatory

compromise procedure that is subject to requisite majority creditor approval and judicial sanction

in the assuming insurer’s home jurisdiction either to finally commute liabilities of duly noticed

classed members or creditors of a solvent debtor or to reorganize or restructure the debts and

obligations of a solvent debtor on a final basis and that may be subject to judicial recognition and

enforcement of the arrangement by a governing authority outside the ceding insurer’s home

jurisdiction.

(2) A term defined in the code has the same meaning when used in these rules.

History: 1996 AC; 2019 AACS; 2021 MR 10, Eff. May 18, 2021.

R 500.1123 Conditions applicable to a reinsurance agreement in conjunction with a

trust agreement under section 1105 of the code, MCL 500.1105.

Rule 3. (1) A reinsurance agreement that is entered into in conjunction with a trust

agreement under section 1105 of the code, MCL 500.1105, may contain any of the following

provisions:

(a) A requirement that the assuming insurer enter into a trust agreement, establish a trust

account for the benefit of the ceding insurer, and specify what the agreement is to cover.

(b) A stipulation that assets deposited in the trust account must be valued according to their

current fair market value and consist only of cash (United States legal tender), certificates of

deposit issued by a United States bank and payable in United States legal tender, and investments

of the types permitted by chapter 9 of the code, MCL 500.901 to 500.947, or any combination of

cash, certificates of deposit, or investments specified in this subrule, if the investments are issued

by an entity that is not the parent, subsidiary, or affiliate of either the grantor or the beneficiary.

The reinsurance agreement may further specify the types of investments to be deposited. If a

trust agreement is entered into in conjunction with a reinsurance agreement covering risks other

than life, annuities, and accident and health, then the trust agreement may contain the provisions

required by this subdivision instead of including the provisions in the reinsurance agreement.

(c) A requirement that the assuming insurer, before depositing assets with the trustee,

execute assignments or endorsements in blank or transfer legal title to the trustee of all shares,

obligations, or any other assets requiring assignments, so that the ceding insurer, or the trustee

upon the direction of the ceding insurer, may, if necessary, negotiate the assets without the

consent or signature from the assuming insurer or any other entity.

(d) A requirement that all settlements of account between the ceding insurer and the

assuming insurer be made in cash or its equivalent.

(e) A stipulation 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 must be used and applied by the ceding insurer or its successors in

interest by operation of law, including, without limitation, any liquidator, rehabilitator, receiver,

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or conservator of the company, without diminution because of insolvency on the part of the

ceding insurer or the assuming insurer, only for 1 or more of the following purposes:

(i) To pay or reimburse the ceding insurer for 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

cancellation of the policies.

(ii) To pay or reimburse the ceding insurer for 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.

(iii) To pay or reimburse the ceding insurer for any other amounts necessary to secure the

credit or reduction from liability for reinsurance taken by the ceding insurer.

(iv) 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.

(2) The reinsurance agreement may also do any of the following:

(a) Give the assuming insurer the right to seek approval from the ceding insurer, which

must not be unreasonably or arbitrarily withheld, to withdraw from the trust account all or any

part of the trust assets and transfer the assets to the assuming insurer, if either of the following

provisions is satisfied:

(i) The assuming insurer shall, at the time of withdrawal, replace the withdrawn assets with

other qualified assets that have a current fair market value equal to the market value of the assets

withdrawn so as to maintain, at all times, the deposit in the required amount.

(ii) After withdrawal and transfer, the current fair market value of the trust account is not

less than 102% of the required amount.

(b) Provide for the return of any amount withdrawn in excess of the actual amounts

required under subrule (1)(e) of this rule.

(c) Provide for interest payments, at a rate that is not more than the prime rate of interest,

on the amounts held pursuant to subrule (1)(e) of this rule.

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

the following:

(i) Interest at a rate different from that provided in subdivision (c) of this subrule.

(ii) Court or arbitration costs.

(iii) Attorney fees.

(iv) Any other reasonable expenses.

(3) A trust agreement that complies with these rules may be used to reduce any liability for

reinsurance ceded to an unauthorized assuming insurer in financial statements required to be

filed with the director if established on or before the date of filing of the financial statement of

the ceding insurer. Further, the amount of 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 the reduction must not be more than the specific

obligations under the reinsurance agreement that the trust account was established to secure.

(4) Notwithstanding the effective date of this rule, any trust agreement or underlying

reinsurance agreement in existence before July 1, 1996, is acceptable until June 30, 1997, at

which time the agreements must be in full compliance with this rule for the trust agreement to be

acceptable.

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(5) The failure of any trust agreement to specifically identify the beneficiary must not be

construed to affect any actions or rights that the director may take or possess pursuant to the laws

of this state.

History: 1996 AC; 2019 AACS; 2021 MR 10, Eff. May 18, 2021.

R 500.1124 Letters of credit under section 1105 of the code, MCL 500.1105.

Rule 4. (1) A letter of credit used to reduce any liability for reinsurance ceded to an

unauthorized reinsurer under section 1105 of the code, MCL 500.1105, must be clean,

irrevocable, unconditional, and issued or confirmed by a qualified United States financial

institution. The letter of credit must contain an issue date and date of expiration and 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 needs to be presented. The letter of credit must 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 must not contain reference to any other agreements, documents, or

entities, except as provided in R 500.1125(1).

(2) The heading of the letter of credit may include a boxed section that contains the name of

the applicant and other appropriate notations to provide a reference for the letter of credit. The

boxed section must be clearly marked to indicate that the information is for internal identification

purposes only.

(3) The letter of credit must contain a statement to the effect that the obligation of the

qualified United States financial institution under the letter of credit is not contingent upon

reimbursement with respect thereto.

(4) The term of the letter of credit must be for at least 1 year and contain an “evergreen

clause” that prevents the expiration of the letter of credit without due notice from the issuer. The

“evergreen clause” must provide for a period of not less than 30 days’ notice before the

expiration date or nonrenewal of the letter of credit.

(5) The letter of credit must state whether it is subject to and governed by the laws of this

state, publication 600 of the International Chamber of Commerce entitled the Uniform Customs

and Practice for Documentary Credits (UCP 600), or publication 590 of the International

Chamber of Commerce entitled International Standby Practices (ISP 98), or any successor

publication, and all drafts drawn thereunder must 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 publication 600 of the International Chamber of

Commerce entitled the Uniform Customs and Practice for Documentary Credits (UCP 600), or

publication 590 of the International Chamber of Commerce entitled International Standby

Practices (ISP 98), or any successor publication, then the letter of credit must specifically address

and make provision for an extension of time to draw against the letter of credit if 1 or more of

the occurrences specified in article 36 of publication 600, or any successor publication, occur.

(7) If the letter of credit is issued by a financial institution authorized to issue letters of

credit, other than a qualified United States financial institution as described in subrule (1) of this

rule, then both of the following additional requirements must be met:

(a) The issuing financial institution shall formally designate the confirming qualified

United States financial institution as its agent for the receipt and payment of the drafts.

(b) The “evergreen clause” must provide for 30 days’ notice before the expiration date or

nonrenewal of the letter of credit.

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History: 1996 AC; 2011 AACS; 2019 AACS; 2021 MR 10, Eff. May 18, 2021.

R 500.1125 Conditions applicable to reinsurance agreement in conjunction with letter

of credit under section 1105 of the code, MCL 500.1105.

Rule 5. (1) A reinsurance agreement in conjunction with which a letter of credit is obtained

under section 1105 of the code, MCL 500.1105, may contain any of the following provisions:

(a) A requirement that the assuming insurer provide letters of credit to the ceding insurer

and specify what they are to cover.

(b) A stipulation 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

utilized by the ceding insurer or its successors in interest only for 1 or more of the following

reasons:

(i) To pay or reimburse the ceding insurer for 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 the policies.

(ii) To pay or reimburse the ceding insurer for 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.

(iii) To pay or reimburse the ceding insurer in an amount necessary to secure the credit or

reduction from liability for reinsurance taken by the ceding insurer.

(iv) Where the letter of credit will expire without renewal or be reduced or replaced by a

letter of credit for a reduced amount and where the assuming insurer’s entire obligations under

the reinsurance agreement remain unliquidated and undischarged 10 days before 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 amounts in a separate account in

the name of the ceding insurer in a qualified United States financial institution apart from its

general assets, in trust for those uses and purposes specified in paragraphs (i) to (iii) of this

subdivision as may remain after withdrawal and for any period after the termination date.

(c) A requirement that all of the provisions of this subrule must be applied without

diminution because of insolvency on the part of the ceding insurer or assuming insurer.

(2) Nothing contained in subrule (1) of this rule precludes the ceding insurer and assuming

insurer from providing for either or both of the following:

(a) An interest payment, at a rate not more than the prime rate of interest, on the amounts

held pursuant to subrule (1)(b) of this rule.

(b) The return of any amounts drawn down on the letters of credit in excess of the actual

amounts required for subrule (1)(b) of this rule, or any amounts that are subsequently determined

not to be due.

History: 1996 AC; 2019 AACS; 2021 MR 10, Eff. May 18, 2021.

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R 500.1126 Other security.

Rule 6. 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.

History: 1996 AC; 2019 AACS.

R 500.1127 Reinsurance contract.

Rule 7. Credit must 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

section 1103 of the code, MCL 500.1103, not including section 1103(5), or section 1105 of the

code, MCL 500.1105, and applicable rules, or otherwise in compliance with section 1103 of the

code, MCL 500.1103, after the effective date of these rules, unless the reinsurance agreement

includes all of the following:

(a) A proper insolvency clause, which stipulates that reinsurance is payable directly to the

liquidator or successor without diminution regardless of the status of the ceding company.

(b) A provision pursuant to section 1103 of the code, MCL 500.1103, 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 the court or panel jurisdiction, has

designated an agent upon whom service of process may be served, and has agreed to abide by the

final decision of the court or panel.

History: 1996 AC; 2019 AACS; 2021 MR 10, Eff. May 18, 2021.

R 500.1128 Contracts affected.

Rule 8. All new and renewal reinsurance transactions entered into on or after January 1,

2019 must conform to the requirements of the code and these rules if credit is to be given to the

ceding insurer for the reinsurance.

History: 1996 AC; 2019 AACS; 2021 MR 10, Eff. May 18, 2021.

R 500.1129 Rescinded

History: 1996 AC; 2019 AACS.

R 500.1130 Credit for reinsurance; reinsurer licensed in this state.

Rule 10. Pursuant to section 1103(1) of the code, MCL 500.1103, the director shall allow

credit for reinsurance ceded by a domestic insurer to an assuming insurer that was licensed in

this state as of any date on which statutory financial statement credit for reinsurance is claimed.

History: 2019 AACS; 2021 MR 10, Eff. May 18, 2021.

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R 500.1131 Credit for reinsurance; certified reinsurers.

Rule 11. (1) Pursuant to section 1103(6) of the code, MCL 500.1103, the director shall

allow credit for reinsurance ceded by a domestic insurer to an assuming insurer that has been

certified as a reinsurer in this state at all times for which statutory financial statement credit for

reinsurance is claimed under this rule. The credit allowed must be based upon the security held

by or on behalf of the ceding insurer in accordance with a rating assigned to the certified

reinsurer by the director. The security must be in a form consistent with sections 1103(6) and

1105 of the code, MCL 500.1103 and MCL 500.1105, and the requirements, as applicable, under

R 500.1123, R 500.1124, R 500.1125, R 500.1126, and R 500.1133. The amount of security

required in order for full credit to be allowed must correspond with the following requirements:

Ratings

Security Required

Secure—1

Secure—2

Secure—3

Secure—4

Secure—5

Vulnerable—6

0%

10%

20%

50%

75%

100%

(2) Affiliated reinsurance transactions must receive the same opportunity for reduced

security requirements as all other reinsurance transactions.

(3) The director shall require the certified reinsurer to post 100% security, for the benefit of

the ceding insurer or its estate, upon the entry of an order of rehabilitation, liquidation, or

conservation against the ceding insurer.

(4) In order to facilitate the prompt payment of claims, a certified reinsurer must not be

required to post security for catastrophe recoverables for a period of one year from the date of

the first instance of a liability reserve entry by the ceding company as a result of a loss from a

catastrophic occurrence as recognized by the director. The one-year deferral period is contingent

upon the certified reinsurer continuing to pay claims in a timely manner. Reinsurance

recoverables for only the following lines of business as reported on the NAIC annual financial

statement related specifically to the catastrophic occurrence will be included in the deferral:

(a) Line 1: Fire.

(b) Line 2: Allied Lines.

(c) Line 3: Farmowners multiple peril.

(d) Line 4: Homeowners multiple peril.

(e) Line 5: Commercial multiple peril.

(f) Line 9: Inland Marine.

(g) Line 12: Earthquake.

(h) Line 21: Auto physical damage.

(5) Credit for reinsurance under this rule only applies to reinsurance contracts entered into

or renewed on or after the effective date of the certification of the assuming insurer. Any

reinsurance contract entered into before the effective date of the certification of the assuming

insurer that is subsequently amended after the effective date of the certification of the assuming

insurer, or a new reinsurance contract, covering any risk for which collateral was provided

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previously, is only subject to this rule with respect to the losses incurred and reserves reported

from and after the effective date of the amendment or new contract.

(6) Nothing in this rule prohibits the parties to a reinsurance agreement from agreeing to

provisions establishing security requirements that exceed the minimum security requirements

established for certified reinsurers under this rule.

(7) The director shall post notice on the department’s website promptly upon receipt of any

application for certification, including instructions on how members of the public may respond to

the application. The director may not take final action on the application until at least 30 days

after posting the notice required by this subrule.

(8) The director shall issue written notice to an assuming insurer that has applied and been

approved as a certified reinsurer. The notice must include the rating assigned the certified

reinsurer pursuant to subrules (1) to (6) of this rule. The director shall publish a list of all

certified reinsurers and their ratings.

(9) In order to be eligible for certification, the assuming insurer shall meet all of the

following requirements:

(a) The assuming insurer must be domiciled and licensed to transact insurance or

reinsurance in a qualified jurisdiction, as determined by the director pursuant to subrule (15) of

this rule.

(b) The assuming insurer must maintain capital and surplus, or its equivalent, of no less

than $250,000,000.00 calculated pursuant to subrule (10)(h) of this rule. This requirement may

also be satisfied by an association including incorporated and individual unincorporated

underwriters having minimum capital and surplus equivalents (net of liabilities) of at least

$250,000,000.00 and a central fund containing a balance of at least $250,000,000.00.

(c) The assuming insurer must maintain financial strength ratings from 2 or more rating

agencies considered acceptable by the director. These ratings must be based on interactive

communication between the rating agency and the assuming insurer and must not be based solely

on publicly available information. These financial strength ratings will be one factor used by the

director in determining the rating that is assigned to the assuming insurer. Acceptable rating

agencies include all of the following:

(i) Standard & Poor’s.

(ii) Moody’s Investors Service.

(iii) Fitch Ratings.

(iv) A.M. Best Company.

(v) Any other nationally recognized statistical rating organization.

(d) The certified reinsurer must comply with any other requirements reasonably imposed

by the director.

(10) Each certified reinsurer must be rated on a legal entity basis, with due consideration

being given to the group rating where appropriate, except that an association including

incorporated and individual unincorporated underwriters that has been approved to do business

as a single certified reinsurer may be evaluated on the basis of its group rating. Factors that may

be considered as part of the evaluation process include, but are not limited to, all of the

following:

(a) The certified reinsurer’s financial strength rating from an acceptable rating agency. The

maximum rating that a certified reinsurer may be assigned will correspond to its financial

strength rating as outlined in the table below. The director shall use the lowest financial strength

rating received from an approved rating agency in establishing the maximum rating of a certified

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reinsurer. A failure to obtain or maintain at least 2 financial strength ratings from acceptable

rating agencies will result in loss of eligibility for certification.

Ratings

Best

A++

A+

A

A-

S&P

AAA

AA+,AA, AA-

A+, A

A-

Moody’s

Aaa

Aa1, Aa2, Aa3

A1, A2

A3

Fitch

AAA

AA+,AA, AA-

A+, A

A-

Secure—1

Secure—2

Secure—3

Secure—4

Secure—5

B++, B+

BBB+,BBB, BBB- Baa1,Baa2, Baa3

BBB+,BBB, BBB-

Vulnerable—6 B, B-C++, C+, C, BB+, BB, BB-, Ba1, Ba2, Ba3, BB+, BB, BB-,

C-, D, E, F B+, B, B-, CCC, B1, B2, B3, Caa, B+, B, B-, CCC+,

CC, C, D, R Ca, C CC, CCC-, DD

(b) The business practices of the certified reinsurer in dealing with its ceding insurers,

including its record of compliance with reinsurance contractual terms and obligations.

(c) For certified reinsurers domiciled in the United States, a review of the most recent

applicable NAIC Annual Statement Blank, either Schedule F (for property/casualty reinsurers) or

Schedule S (for life and health reinsurers).

(d) For certified reinsurers not domiciled in the United States, a review annually of a form

approved by the director.

(e) The reputation of the certified reinsurer for prompt payment of claims under reinsurance

agreements, based on an analysis of ceding insurers’ Schedule F reporting of overdue

reinsurance recoverables, including the proportion of obligations that are more than 90 days past

due or are in dispute, with specific attention given to obligations payable to companies that are in

administrative supervision or receivership.

(f) Regulatory actions against the certified reinsurer.

(g) The report of the independent auditor on the financial statements of the insurance

enterprise, on the basis described in subdivision (h) of this subrule.

(h) For certified reinsurers not domiciled in the United States, audited financial statements,

regulatory filings, and actuarial opinion (as filed with the non-United States jurisdiction

supervisor, with a translation into English). Upon the initial application for certification, the

director will consider audited financial statements for the last 2 years filed with its non-United

States jurisdiction supervisor.

(i) The liquidation priority of obligations to a ceding insurer in the certified reinsurer’s

domiciliary jurisdiction in the context of an insolvency proceeding.

(j) A certified reinsurer’s participation in any solvent scheme of arrangement, or similar

procedure, that involves United States ceding insurers. The director shall receive prior notice

from a certified reinsurer that proposes participation by the certified reinsurer in a solvent

scheme of arrangement.

(k) Any other information considered relevant by the director.

(11) Based on the analysis conducted under subrule (10)(e) of this rule of a certified

reinsurer’s reputation for prompt payment of claims, the director may make appropriate

adjustments in the security the certified reinsurer is required to post to protect its liabilities to

United States ceding insurers as long as the director, at a minimum, increases the security the

certified reinsurer is required to post by 1 rating level under subrule (10)(a) of this rule if the

director finds either of the following:

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(a) More than 15% of the certified reinsurer’s ceding insurance clients have overdue

reinsurance recoverables on paid losses of 90 days or more that are not in dispute and exceed

$100,000.00 for each cedent.

(b) The aggregate amount of reinsurance recoverables on paid losses that are not in dispute

that are overdue by 90 days or more exceeds $50,000,000.00.

(12) The assuming insurer must submit a properly executed form approved by the director

as evidence of its submission to the jurisdiction of this state, appointment of the director as an

agent for service of process in this state, and agreement to provide security for 100% of the

assuming insurer’s liabilities attributable to reinsurance ceded by United States ceding insurers if

it resists enforcement of a final United States judgment. The director shall not certify any

assuming insurer that is domiciled in a jurisdiction that the director has determined does not

adequately and promptly enforce final United States judgments or arbitration awards.

(13) The certified reinsurer must agree to meet applicable information filing requirements as

determined by the director, both with respect to an initial application for certification and on an

ongoing basis. All information submitted by certified reinsurers that are not otherwise public

information subject to disclosure are exempted from disclosure under the freedom of information

act, 1976 PA 442, MCL 15.231 to 15.246, and must be withheld from public disclosure. The

applicable information filing requirements include all of the following:

(a) Notification within 10 days of any regulatory actions taken against the certified

reinsurer, any change in the provisions of its domiciliary license or any change in rating by an

approved rating agency, including a statement describing the changes and the reasons for the

changes.

(b) Annually, the filing of a form approved by the director.

(c) Annually, the report of the independent auditor on the financial statements of the

insurance enterprise, on the basis described in subdivision (d) of this subrule.

(d) Annually, the most recent audited financial statements, regulatory filings, and actuarial

opinion (as filed with the certified reinsurer’s supervisor, with a translation into English). Upon

the initial certification, audited financial statements for the last 2 years filed with the certified

reinsurer’s supervisor.

(e) At least annually, an updated list of all disputed and overdue reinsurance claims

regarding reinsurance assumed from United States domestic ceding insurers.

(f) A certification from the certified reinsurer’s domestic regulator that the certified

reinsurer is in good standing and maintains capital in excess of the jurisdiction’s highest

regulatory action level.

(g) Any other information that the director may reasonably require.

(14) All of the following apply to a change in rating or revocation of certification, as

applicable:

(a) In the case of a downgrade by a rating agency or other disqualifying circumstance, the

director shall upon written notice assign a new rating to the certified reinsurer pursuant to the

requirements of subrule (10)(a) of this rule.

(b) The director has the authority to suspend, revoke, or otherwise modify a certified

reinsurer’s certification at any time if the certified reinsurer fails to meet its obligations or

security requirements under this rule, or if other financial or operating results of the certified

reinsurer, or documented significant delays in payment by the certified reinsurer, lead the

director to reconsider the certified reinsurer’s ability or willingness to meet its contractual

obligations.

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(c) If the rating of a certified reinsurer is upgraded by the director, the certified reinsurer

may meet the security requirements applicable to its new rating on a prospective basis, but the

director shall require the certified reinsurer to post security under the previously applicable

security requirements as to all contracts in force on or before the effective date of the upgraded

rating. If the rating of a certified reinsurer is downgraded by the director, the director shall

require the certified reinsurer to meet the security requirements applicable to its new rating for

all business it has assumed as a certified reinsurer.

(d) Upon revocation of the certification of a certified reinsurer by the director, the assuming

insurer shall post security pursuant to section 1105 of the code, MCL 500.1105, in order for the

ceding insurer to continue to take credit for reinsurance ceded to the assuming insurer. If funds

continue to be held in trust pursuant to section 1103(4) of the code, MCL 500.1103, and R

500.1132, the director may allow additional credit equal to the ceding insurer’s pro rata share of

such funds, discounted to reflect the risk of uncollectibility and anticipated expenses of trust

administration. Notwithstanding the change of a certified reinsurer’s rating or revocation of its

certification, a domestic insurer that has ceded reinsurance to that certified reinsurer may not be

denied credit for reinsurance for a period of 3 months for all reinsurance ceded to that certified

reinsurer, unless the reinsurance is found by the director to be at high risk of uncollectibility.

(15) All of the following apply to the recognition of a jurisdiction as a qualified jurisdiction:

(a) If, upon conducting an evaluation under this rule with respect to the reinsurance

supervisory system of any non-United States assuming insurer, the director determines that the

jurisdiction qualifies to be recognized as a qualified jurisdiction, the director shall publish notice

and evidence of such recognition in an appropriate manner. The director may establish a

procedure to withdraw recognition of those jurisdictions that are no longer qualified.

(b) In order to determine whether the domiciliary jurisdiction of a non-United States

assuming insurer is eligible to be recognized as a qualified jurisdiction, the director shall

evaluate the reinsurance supervisory system of the non-United States jurisdiction, both initially

and on an ongoing basis, and consider the rights, benefits and the extent of reciprocal recognition

afforded by the non-United States jurisdiction to reinsurers licensed and domiciled in the United

States. The director shall determine the appropriate approach for evaluating the qualifications of

those jurisdictions and create and publish a list of jurisdictions for which reinsurers may be

approved by the director as eligible for certification. A qualified jurisdiction must agree to share

information and cooperate with the director with respect to all certified reinsurers domiciled

within that jurisdiction. Additional factors to be considered in determining whether to recognize

a qualified jurisdiction, in the discretion of the director, include, but are not limited to, all of the

following:

(i) The framework under which the assuming insurer is regulated.

(ii) The structure and authority of the domiciliary regulator with regard to solvency

regulation requirements and financial surveillance.

(iii) The substance of financial and operating standards for assuming insurers in the

domiciliary jurisdiction.

(iv) The form and substance of financial reports required to be filed or made publicly

available by reinsurers in the domiciliary jurisdiction and the accounting principles used.

(v) The domiciliary regulator’s willingness to cooperate with United States regulators in

general and the director in particular.

(vi) The history of performance by assuming insurers in the domiciliary jurisdiction.

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(vii) Any documented evidence of substantial problems with the enforcement of final

United States judgments in the domiciliary jurisdiction. A jurisdiction is not considered to be a

qualified jurisdiction if the director has determined that it does not adequately and promptly

enforce final United States judgments or arbitration awards.

(viii) Any relevant international standards or guidance with respect to mutual recognition

of reinsurance supervision adopted by the International Association of Insurance Supervisors or

successor organization.

(ix) Any other matters considered relevant by the director.

(c) A list of qualified jurisdictions is published through the NAIC committee process. The

director shall consider this list in determining qualified jurisdictions. If the director approves a

jurisdiction as qualified that does not appear on the list of qualified jurisdictions, the director

shall provide thoroughly documented justification with respect to the criteria provided under

subdivision (b)(i) to (ix) of this subrule.

(d) United States jurisdictions that meet the requirements for accreditation under the NAIC

financial standards and accreditation program must be recognized as qualified jurisdictions.

(16) All of the following apply to the recognition of certification issued by an NAIC

accredited jurisdiction:

(a) If an applicant for certification has been certified as a reinsurer in an NAIC accredited

jurisdiction, the director has the discretion to defer to that jurisdiction’s certification, and to defer

to the rating assigned by that jurisdiction, if the assuming insurer submits a properly executed

form approved by the director and additional information as the director requires. The assuming

insurer must be considered to be a certified reinsurer in this state.

(b) Any change in the certified reinsurer’s status or rating in the other jurisdiction applies

automatically in this state as of the date it takes effect in the other jurisdiction. The certified

reinsurer shall notify the director of any change in its status or rating within 10 days after

receiving notice of the change.

(c) The director may withdraw recognition of the other jurisdiction’s rating at any time and

assign a new rating pursuant to subrule (14)(a) of this rule.

(d) The director may withdraw recognition of the other jurisdiction’s certification at any

time, with written notice to the certified reinsurer. Unless the director suspends or revokes the

certified reinsurer’s certification under subrule (14)(a) of this rule, the certified reinsurer’s

certification remains in good standing in this state for a period of 3 months, which must be

extended if additional time is necessary to consider the assuming insurer’s application for

certification in this state.

(17) In addition to the clauses required under R 500.1127, reinsurance contracts entered into

or renewed under this rule must include a proper funding clause requiring the certified reinsurer

to provide and maintain security in an amount sufficient to avoid the imposition of any financial

statement penalty on the ceding insurer under this rule for reinsurance ceded to the certified

reinsurer.

(18) The director shall comply with all reporting and notification requirements that may be

established by the NAIC with respect to certified reinsurers and qualified jurisdictions.

History: 2019 AACS; 2021 MR 10, Eff. May 18, 2021.

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R 500.1132 Requirements for assets deposited in trusts established under section 1103

of the code, MCL 500.1103; specific security provided under section 1105 of the code, MCL

500.1105.

Rule 12. (1) Assets deposited in trusts established pursuant to section 1103 of the code,

MCL 500.1103, and this rule must be valued according to their current fair market value and

consist only of 1 or more of the following:

(a) Cash in United States dollars.

(b) Certificates of deposit issued by a qualified United States financial institution.

(c) Clean, irrevocable, unconditional, and “evergreen” letters of credit issued or confirmed

by a qualified United States financial institution.

(d) Investments of the type specified in this rule if the investments meet all of the following

criteria:

(i) Investments in or issued by an entity controlling, controlled by or under common

control with either the grantor or beneficiary of the trust does not exceed 5% of total

investments.

(ii) No more than 20% of the total of the investments in the trust are foreign investments

authorized under subrule (2)(a)(v), (c), (d)(ii), or (e) of this rule, and no more than 10% of the

total of the investments in the trust are securities denominated in foreign currencies. For

purposes of applying the preceding sentence, a depository receipt denominated in United States

dollars and representing rights conferred by a foreign security must be classified as a foreign

investment denominated in a foreign currency.

(2) The assets of a trust established to satisfy the requirements of section 1103 of the code,

MCL 500.1103, must be invested only in 1 or more of the following investments:

(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 any of the following:

(i) The United States or any agency or instrumentality of the United States.

(ii) A state of the United States.

(iii) A territory, possession, or other governmental unit of the United States.

(iv) An agency or instrumentality of a governmental unit referred to in paragraphs (ii) and

(iii) of this subdivision if the obligations are by law (statutory or 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 must not be obligations eligible for investment under this paragraph if

payable solely out of special assessments on properties benefited by local improvements.

(v) 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-United States market by a solvent United States institution (other than an

insurance company) or that are assumed or guaranteed by a solvent United States institution

(other than an insurance company) and that are not in default as to principal or interest if the

obligations meet 1 of the following requirements:

(i) 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.

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(ii) 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.

(iii) 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-United States institution

chartered in a country that is a member of the Organization for Economic Cooperation and

Development or obligations of United States corporations issued in a non-United States currency

if 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) Equity interests to which the following apply, as applicable:

(i) Investments in common shares or partnership interests of a solvent United States

institution are permissible if both of the following requirements are met:

(A) Its obligations and preferred shares, if any, are eligible as investments under this rule.

(B) 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 USC 78a to

78qq, 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

Financial Industry Regulatory Authority, or successor organization. A trust must not invest in

equity interests under this subparagraph in an amount exceeding 1% of the assets of the trust

even though the equity interests are not so registered and are not issued by an insurance

company.

(ii) 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 are

permissible if both of the following requirements are met:

(A) All its obligations are rated A or higher, or the equivalent, by a rating agency

recognized by the Securities Valuation Office of the NAIC.

(B) 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 must

not exceed 1% of the assets of the trust. The cost of an investment in equity interests made

pursuant to this paragraph, when added to the aggregate cost of other investments in equity

interests then held pursuant to this paragraph, must not exceed 10% of the assets in the trust.

(e) Obligations issued, assumed, or guaranteed by a multinational development bank, if the

obligations are rated A or higher, or the equivalent, by a rating agency recognized by the

Securities Valuation Office of the NAIC.

(f) Investment companies to which the following apply, as applicable:

(i) Securities of an investment company registered pursuant to the investment company act

of 1940, 15 USC 80a-1 to 80a-64, are permissible investments if the investment company meets

either of the following:

(A) Invests at least 90% of its assets in the types of securities that qualify as an investment

under subdivision (a), (b), or (c) of this subrule or invests in securities that are determined by the

director to be substantively similar to the types of securities set forth in subdivision (a), (b), or

(c) of this subrule.

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(B) Invests at least 90% of its assets in the types of equity interests that qualify as an

investment under subdivision (d)(i) of this subrule.

(ii) Investments made by a trust in investment companies under this subdivision must not

exceed either of the following limitations:

(A) An investment in an investment company qualifying under paragraph (i)(A) of this

subdivision must not exceed 10% of the assets in the trust, and the aggregate amount of

investment in qualifying investment companies must not exceed 25% of the assets in the trust.

(B) Investments in an investment company qualifying under paragraph (i)(B) of this

subdivision must not exceed 5% of the assets in the trust, and the aggregate amount of

investment in qualifying investment companies must be included when calculating the

permissible aggregate value of equity interests pursuant to subdivision (d)(i) of this subrule.

(g) Letters of credit to which all of the following apply:

(i) 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.

(ii) The trust agreement must provide that the trustee is 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 must be considered to be negligence, willful

misconduct, or both.

(3) A specific security provided to a ceding insurer by an assuming insurer pursuant to

section 1105 of the code, MCL 500.1105, must be applied, until exhausted, to the payment of

liabilities of the assuming insurer to the ceding insurer holding the specific security before, 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 rule.

(4) An investment made pursuant to the provisions of subrule (2)(a), (b), or (c) of this rule is

subject to all of 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 must not exceed 5% of the assets of the trust.

(b) An investment in any one mortgage-related security must not exceed 5% of the assets of

the trust.

(c) The aggregate total investment in mortgage-related securities must not exceed 25% of

the assets of the trust.

(d) Preferred or guaranteed shares issued or guaranteed by a solvent United States institution

are permissible investments if all of the institution’s obligations are eligible as investments under

subrule (2)(b)(i) and (iii) of this rule, but must not exceed 2% of the assets of the trust.

(5) 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 meets either of the following provisions:

(i) Represents ownership of 1 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 meet both of the following requirements:

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(A) 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 USC 5402(6), whether the manufactured home is

considered real or personal property under the laws of the state in which it is located.

(B) 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 USC 1709 and 1715b, 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 USC 1703.

(ii) Is secured by 1 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 paragraph (i)(A) and (B) of this subdivision.

(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.

History: 2019 AACS; 2021 MR 10, Eff. May 18, 2021.

R 500.1133 Trust agreements under section 1105 of the code, MCL 500.1105.

Rule 13. (1) Reinsurance trusts established under section 1105 of the code, MCL 500.1105,

must comply with the requirements of R 500.1123 and this rule.

(2) The trust agreement must be entered into between the beneficiary, the grantor, and a

trustee. The trustee must be a qualified United States financial institution.

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

(4) All assets in the trust account must be held by the trustee at the trustee’s office in the

United States.

(5) The trust agreement must provide for all of the following:

(a) The beneficiary has 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 to withdraw assets, except

that the beneficiary may be required to acknowledge receipt of withdrawn assets.

(c) The trust agreement must not be subject to any conditions or qualifications outside of

the trust agreement.

(d) The trust agreement must not contain references to any other agreements or documents,

except as provided for under subrules (12) and (13) of this rule.

(6) The trust agreement must be established for the sole benefit of the beneficiary.

(7) The trust agreement must require the trustee to do all of the following:

(a) Receive assets and hold all assets in a safe place.

(b) Determine that all assets are in a form that the beneficiary, or the trustee upon the

direction of the beneficiary, may, when necessary, negotiate the assets without the consent of, or

a 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 not less frequent than the end of each calendar quarter.

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(d) Notify the grantor and the beneficiary within 10 days of any deposits to, or withdrawals

from, the trust account.

(e) Upon written demand of the beneficiary, immediately take any and 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.

(f) Allow no substitutions or withdrawals of assets from the trust account, except on written

instructions from the beneficiary. However, the trustee may, without the consent of, but with

notice to, the beneficiary, upon call or maturity of any trust asset, withdraw the asset upon the

condition that the proceeds are paid into the trust account.

(8) The trust agreement must provide that written notice of termination must be delivered by

the trustee to the beneficiary not less than 30 days, but not more than 45 days, before termination

of the trust account.

(9) The trust agreement must be made subject to and governed by the laws of the state in

which the trust is domiciled.

(10) The trust agreement must prohibit invasion of the trust corpus for the purpose of

paying compensation to, or reimbursing the expenses of, the trustee. 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.

(11) The trust agreement must provide that the trustee is 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 is considered to be negligence, willful

misconduct, or both.

(12) Notwithstanding other provisions of these rules, when a trust agreement is established

in conjunction with a reinsurance agreement covering risks other than life, annuities, and

accident and health, where 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, for any of 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 make payment to the assuming insurer of any amounts held in the trust account that

are more than 102% of the actual amount required to fund the assuming insurer’s obligations

under the specific reinsurance agreement.

(c) Where the ceding insurer has received notification of termination of the trust account

and the assuming insurer’s entire obligations under the specific reinsurance agreement remain

unliquidated and undischarged 10 days before the termination date, to withdraw amounts equal

to the obligations and deposit the amounts in a separate account apart from its general assets in

the name of the ceding insurer in any qualified United States financial institution in trust for the

uses and purposes specified in subdivisions (a) and (b) of this subrule as may remain executory

after the withdrawal and for any period after the termination date.

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(13) Notwithstanding other provisions of these rules, when a trust agreement is established

in conjunction with a reinsurance agreement covering life, annuities, or accident and health risks,

where 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 1 or more of the following purposes:

(a) To pay or reimburse the ceding insurer for either or both of the following:

(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.

(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 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.

(c) Where the ceding insurer has received notification of termination of the trust and the

assuming insurer’s entire obligations under the specific reinsurance agreement remain

unliquidated and undischarged 10 days before 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 United States financial institution apart from its general

assets, in trust for the uses and purposes specified in subdivisions (a) and (b) of this subrule as

may remain executory after withdrawal and for any period after the termination date.

(14) Either the reinsurance agreement or the trust agreement must stipulate that assets

deposited in the trust account must be valued according to their current fair market value and

consist only of cash (United States legal tender), certificates of deposit issued by a United States

bank and payable in United States legal tender, and investments permitted by chapter 9 of the

code, MCL 500.901 to 500.947, or any combination of cash, certificates of deposit, or

investments, as long as investments in or issued by an entity controlling, controlled by or under

common control with either the grantor or the beneficiary of the trust must not exceed 5% of

total investments. The agreement may further specify the types of investments to be deposited.

If the reinsurance agreement covers life, annuities, or accident and health risks, then the

provisions required by this subrule must be included in the reinsurance agreement.

(15) The trust agreement may provide that the trustee may resign upon the delivery of a

written notice of resignation that is effective not less than 90 days after receipt by the beneficiary

and grantor of the notice and that the trustee may be removed by the grantor by the delivery, to

the trustee and the beneficiary, of a written notice of removal that is effective not less than 90

days after receipt by the trustee and the beneficiary of the notice. However, a resignation or

removal is not 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.

(16) The grantor may have the full and unqualified right to vote any shares of stock in the

trust account and to receive payments of any dividends or interest upon any shares of stock or

obligations included in the trust account. The interest or dividends must be either forwarded

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promptly upon receipt to the grantor or deposited in a separate account established in the

grantor’s name.

(17) The trustee may be given authority to invest and accept substitutions of any funds in

the account only if the investment or substitution is made with the 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 current fair market value to the assets withdrawn and are

consistent with the restrictions in R 500.1123(1)(c).

(18) 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. The transfer may be conditioned upon

the trustee’s receipt, either before the transfer or simultaneous with the transfer, of other

specified assets.

(19) The trust agreement may provide that, upon termination of the trust account, all assets

not previously withdrawn by the beneficiary must, with the written approval by the beneficiary,

be delivered over to the grantor.

History: 2019 AACS; 2021 MR 10, Eff. May 18, 2021.

R 500.1134 Credit for reinsurance; reciprocal jurisdictions.

Rule 14. (1) Pursuant to section 1103(7) to (18) of the code, MCL 500.1103, the director

shall allow credit for reinsurance ceded by a domestic insurer to an assuming insurer that is

licensed to write reinsurance by, and has its head office or is domiciled in, a reciprocal

jurisdiction, and that meets the other applicable requirements of these rules.

(2) Credit is allowed pursuant to this rule if the reinsurance is ceded from an insurer

domiciled in this state to an assuming insurer meeting all of the following conditions:

(a) The assuming insurer is licensed to transact reinsurance by, and has its head office or is

domiciled in, a reciprocal jurisdiction.

(b) The assuming insurer has and maintains on an ongoing basis minimum capital and

surplus, or its equivalent, calculated on at least an annual basis as of the preceding December 31

or at the annual date otherwise statutorily reported to the reciprocal jurisdiction, and confirmed

as set forth in subdivision (g) of this subrule according to the methodology of its domiciliary

jurisdiction, in the following amounts, as applicable:

(i) No less than $250,000,000.

(ii) For an assuming insurer that is an association, including incorporated and individual

unincorporated underwriters, both of the following amounts:

(A) Minimum capital and surplus equivalents (net of liabilities) or own funds of the

equivalent of at least $250,000,000.

(B) A central fund containing a balance of the equivalent of at least $250,000,000.

(c) The assuming insurer has and maintains on an ongoing basis a minimum solvency or

capital ratio, as applicable, as follows:

(i) For an assuming insurer that has its head office or is domiciled in a reciprocal

jurisdiction described in subrule (9)(b)(i) of this rule, the ratio specified in the applicable covered

agreement.

(ii) For an assuming insurer that is domiciled in a reciprocal jurisdiction described in

subrule (9)(b)(ii) of this rule, a risk-based capital (RBC) ratio of 300% of the authorized control

level, calculated pursuant to the formula developed by the NAIC.

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(iii) For an assuming insurer that is domiciled in a reciprocal jurisdiction described in

subrule (9)(b)(iii) of this rule, after consultation with the reciprocal jurisdiction and considering

any recommendations published through the NAIC committee process, including, but not limited

to, solvency or capital ratio as the director determines to be an effective measure of solvency.

(d) The assuming insurer agrees to and provides adequate assurance of its agreement to all

the following by submitting a properly executed form approved by the director:

(i) The assuming insurer must agree to provide prompt written notice and explanation to

the director if it falls below the minimum requirements set forth in subdivisions (b) or (c) of this

subrule, or if any regulatory action is taken against it for serious noncompliance with applicable

law.

(ii) The assuming insurer must consent in writing to the jurisdiction of the courts of this

state and to the appointment of the director as agent for service of process. The director may also

require that the consent be provided and included in each reinsurance agreement under the

director’s jurisdiction. This paragraph does not limit or in any way alter the capacity of parties to

a reinsurance agreement to agree to alternative dispute resolution mechanisms, except to the

extent the reinsurance agreement is unenforceable under applicable insolvency or delinquency

laws.

(iii) The assuming insurer must consent in writing to pay all final judgments, wherever

enforcement is sought, obtained by a ceding insurer, that have been declared enforceable in the

territory where the judgment was obtained.

(iv) Each reinsurance agreement must include a provision requiring the assuming insurer

to provide security in an amount equal to 100% of the assuming insurer’s liabilities attributable

to reinsurance ceded pursuant to that agreement if the assuming insurer resists enforcement of a

final judgment that is enforceable under the law of the jurisdiction in which it was obtained or a

properly enforceable arbitration award, whether obtained by the ceding insurer or by its legal

successor on behalf of its estate, if applicable.

(v) The assuming insurer must confirm that it is not presently participating in any solvent

scheme of arrangement that involves this state’s ceding insurers and agree to notify the ceding

insurer and the director and to provide 100% security to the ceding insurer consistent with the

terms of the scheme if the assuming insurer enters into a solvent scheme of arrangement. That

security must be in a form consistent with the provisions of sections 1103(6) and 1105 of the

code, MCL 500.1103 and 500.1105, and the requirements, as applicable, under R 500.1123, R

500.1124, R 500.1125, R 500.1126, and R 500.1133.

(vi) The assuming insurer must agree in writing to meet the applicable information filing

requirements as set forth in subdivision (e) of this subrule.

(e) The assuming insurer or its legal successor must provide, if requested by the director,

on behalf of itself and any legal predecessors, the following documentation to the director:

(i) For the 2 years preceding entry into the reinsurance agreement and on an annual basis

after those years, the assuming insurer’s annual audited financial statements, in accordance with

the applicable law of the jurisdiction of its head office or domiciliary jurisdiction, as applicable,

including the external audit report.

(ii) For the 2 years preceding entry into the reinsurance agreement, the solvency and

financial condition report or actuarial opinion if filed with the assuming insurer’s supervisor.

(iii) Before entry into the reinsurance agreement and not more than semi-annually

afterward, an updated list of all disputed and overdue reinsurance claims outstanding for 90 days

or more, regarding reinsurance assumed from ceding insurers domiciled in the United States.

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(iv) Before entry into the reinsurance agreement and not more than semi-annually

afterward, information regarding the assuming insurer’s assumed reinsurance by ceding insurer,

ceded reinsurance by the assuming insurer, and reinsurance recoverable on paid and unpaid

losses by the assuming insurer to allow for the evaluation of the criteria set forth in subdivision

(f) of this subrule.

(f) The assuming insurer must maintain a practice of prompt payment of claims under

reinsurance agreements. There is evidence of a lack of prompt payment if any of the following

criteria is met:

(i) More than 15% of the reinsurance recoverables from the assuming insurer are overdue

and in dispute as reported to the director.

(ii) More than 15% of the assuming insurer’s ceding insurers or reinsurers have overdue

reinsurance recoverables on paid losses of 90 days or more that are not in dispute and that exceed

for each ceding insurer $100,000, or as otherwise specified in a covered agreement.

(iii) The aggregate amount of reinsurance recoverables on paid losses that are not in

dispute, but are overdue by 90 days or more, exceeds $50,000,000, or as otherwise specified in a

covered agreement.

(g) The assuming insurer’s supervisory authority must confirm to the director on an annual

basis that the assuming insurer complies with the requirements set forth in subdivisions (b) and

(c) of this subrule.

(3) Subrule (2) of this rule does not preclude an assuming insurer from providing the

director with information on a voluntary basis.

(4) The director shall timely create and publish a list of reciprocal jurisdictions. The list

must include any reciprocal jurisdiction described in subrule (9)(b)(i) and (ii) of this rule and

consider any other reciprocal jurisdiction included on the list published through the NAIC

committee process. The director may approve a jurisdiction that does not appear the NAIC list,

as provided by applicable law or regulation or pursuant to criteria published through the NAIC

committee process. The director may remove a jurisdiction from the list of reciprocal

jurisdictions upon a determination that the jurisdiction no longer meets 1 or more of the

requirements of a reciprocal jurisdiction, as provided by applicable law or regulation or pursuant

to a process published through the NAIC committee process, except that the director shall not

remove from the list a reciprocal jurisdiction as described under subrule (9)(b)(i) or (ii). Upon

removal of a reciprocal jurisdiction from the list, credit for reinsurance ceded to an assuming

insurer domiciled in that jurisdiction must be allowed if otherwise allowed pursuant to sections

1103, 1105, and 1106 of the code, MCL 500.1103, 500.1105, and 500.1106, and these rules.

(5) The director shall timely create and publish a list of assuming insurers that have satisfied

the conditions set forth in this rule and to which cessions must be granted credit under this rule.

Both of the following apply to the list of assuming insurers:

(a) If an NAIC accredited jurisdiction has determined that the conditions set forth in

subrule (2) of this rule have been met, the director has the discretion to defer to that jurisdiction’s

determination and add that assuming insurer to the list of assuming insurers to which cessions

must granted credit under this subrule. The director may accept financial documentation filed

with another NAIC accredited jurisdiction or with the NAIC in satisfaction of the requirements

of subrule (2) of this rule.

(b) When requesting that the director defer to another NAIC accredited jurisdiction’s

determination, an assuming insurer must submit a properly executed form approved by the

director and additional information as the director may require. If the director receives a request

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under this subdivision, the director shall notify other states through the NAIC committee process

and provide relevant information with respect to the determination of eligibility.

(6) If the director determines that an assuming insurer no longer meets 1 or more of the

requirements under this rule, the director may revoke or suspend the eligibility of the assuming

insurer for recognition under this rule. While an assuming insurer’s eligibility is suspended, no

reinsurance agreement issued, amended, or renewed after the effective date of the suspension

qualifies for credit except to the extent that the assuming insurer’s obligations under the contract

are secured pursuant to section 1105 of the code, MCL 500.1105. If an assuming insurer’s

eligibility is revoked, no credit for reinsurance may be granted after the effective date of the

revocation with respect to any reinsurance agreements entered into by the assuming insurer,

including reinsurance agreements entered into before the date of revocation, except to the extent

that the assuming insurer’s obligations under the contract are secured in a form acceptable to the

director and are consistent with the provisions of section 1105 of the code, MCL 500.1105.

(7) Before denying statement credit or imposing a requirement to post security under

subrule (6) of this rule or adopting any similar requirement that has substantially the same

regulatory impact as security, the director shall do all of the following:

(a) Communicate with the ceding insurer, the assuming insurer, and the assuming insurer’s

supervisory authority that the assuming insurer no longer satisfies 1 of the conditions listed in

subrule (2) of this rule.

(b) Provide the assuming insurer with 30 days from the initial communication to submit a

plan to remedy the defect and 90 days from the initial communication to remedy the defect,

except in exceptional circumstances in which a shorter period is necessary for policyholder and

other consumer protection. After the expiration of 90 days or less, as set out in this subdivision,

if the director determines that no or insufficient action was taken by the assuming insurer, the

director may impose any of the requirements as set out in this subrule.

(c) Provide a written explanation to the assuming insurer of any of the requirements set out

in this subrule.

(8) If subject to a legal process of rehabilitation, liquidation, or conservation, as applicable,

the ceding insurer, or its representative, may seek and, if determined appropriate by the court in

which the proceedings are pending, may obtain an order requiring that the assuming insurer post

security for all outstanding liabilities.

(9) As used in this rule:

(a) “Covered agreement” means that term as defined in section 1103(27)(b)(i) of the code,

MCL 500.1103.

(b) “Reciprocal jurisdiction” means a jurisdiction, as designated by the director pursuant to

subrule (4) of this rule, that meets 1 of the following:

(i) A jurisdiction that meets the conditions under section 1103(27)(b)(i) of the code, MCL

500.1103.

(ii) A jurisdiction that meets the conditions under section 1103(27)(b)(ii) of the code, MCL

500.1103.

(iii) A qualified jurisdiction, as determined by the director pursuant to section 1103(6)(c)

of the code, MCL 500.1103, and R 500.1131(15), that is not otherwise described in paragraphs

(i) or (ii) of this subdivision, and that the director determines meets all of the following

additional requirements:

(A) Provides that an insurer that has its head office or is domiciled in the qualified

jurisdiction shall receive credit for reinsurance ceded to a United States-domiciled assuming

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insurer in the same manner as credit for reinsurance is received for reinsurance assumed by

insurers domiciled in the qualified jurisdiction.

(B) Does not require a United States-domiciled assuming insurer to establish or maintain a

local presence as a condition for entering into a reinsurance agreement with any ceding insurer

subject to regulation by the non-United States jurisdiction or as a condition to allow the ceding

insurer to recognize credit for such reinsurance.

(C) Recognizes the United States state regulatory approach to group supervision and

group capital, by providing written confirmation by a competent regulatory authority, in the

qualified jurisdiction, that insurers and insurance groups that are domiciled or maintain their

headquarters in this state or another jurisdiction accredited by the NAIC shall be subject only to

worldwide prudential insurance group supervision including worldwide group governance,

solvency and capital, and reporting, as applicable, by the director or the commissioner of the

domiciliary state and will not be subject to group supervision at the level of the worldwide parent

undertaking of the insurance or reinsurance group by the qualified jurisdiction.

(D) Provides written confirmation by a competent regulatory authority in the qualified

jurisdiction that information regarding insurers and their parent, subsidiary, or affiliated entities,

if applicable, must be provided to the director pursuant to a memorandum of understanding or

similar document between the director and the qualified jurisdiction, including, but not limited

to, the International Association of Insurance Supervisors Multilateral Memorandum of

Understanding or other multilateral memoranda of understanding coordinated by the NAIC.

History: 2021 MR 10, Eff. May 18, 2021.

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