§ 20A — Credit for reinsurance; requirements

Section 20A. (1) Credit for reinsurance shall be allowed a domestic ceding insurer as either an asset or a deduction from liability on account of reinsurance ceded only when the reinsurer meets the requirements of paragraph (A), (B), (C), (D), (E), (E1/2) or (F) of this subsection. If meeting the requirements of paragraph (C), the requirements of paragraph (G) shall also be met. If meeting the requirements of paragraph (D), the requirements of paragraphs (G) and (H) shall also be met.(A) Credit shall be allowed when the reinsurance is ceded to an assuming insurer which is licensed: (i) to issue policies in the commonwealth covering risks of the same kinds as those reinsured, or (ii) to reinsure in the commonwealth risks of the same kinds as those reinsured.(B) Credit shall be allowed when the reinsurance is ceded to an assuming insurer which is accredited as a reinsurer in this commonwealth. An accredited reinsurer is one which:(i) files with the commissioner evidence of its submission to this commonwealth's jurisdiction;(ii) submits to the commonwealth's authority to examine its books and records;(iii) is licensed to transact insurance or reinsurance in at least one state, or in the case of a United States branch of an alien assuming insurer is entered through and licensed to transact insurance or reinsurance in at least one state; and(iv) files annually with the commissioner a copy of its annual statement filed with the insurance department of its state of domicile and a copy of its most recent audited financial statement; and either(a) maintains a surplus as regards policyholders in an amount which is not less than twenty million dollars and whose accreditation has not been denied by the commissioner within ninety days of its submission; or(b) maintains a surplus as regards policyholders in an amount less than twenty million dollars and whose accreditation has been approved by the commissioner.No credit shall be allowed a domestic ceding insurer, if the assuming insurers' accreditation has been revoked by the commissioner after notice and hearing.(C) Credit shall be allowed when the reinsurance is ceded to an assuming insurer which is domiciled and licensed in, or in the case of a United States branch of an alien assuming insurer is entered through, a state which employs standards regarding credit for reinsurance substantially similar to those applicable under this section and the assuming insurer or United States branch of an alien assuming insurer:(i) maintains a surplus as regards policyholders in an amount not less than twenty million dollars; and (ii) submits to the authority of the commonwealth to examine its books and records; provided, however, that the requirement of clause (i) of paragraph (C) does not apply to reinsurance ceded and assumed pursuant to pooling arrangements among insurers in the same holding company system.(D)(i) Credit shall be allowed when the reinsurance is ceded to an assuming insurer which maintains a trust fund in a qualified United States financial institution, as defined in paragraph (B), for the payment of the valid claims of its United States policyholders and ceding insurers, their assigns and successors in interest. The assuming insurer shall report annually to the commissioner information substantially the same as that required to be reported on the National Association of Insurance Commissioners Annual Statement form by licensed insurers to enable the commissioner to determine the sufficiency of the trust fund. In the case of a single assuming insurer, the trust shall consist of a trusteed account representing the assuming insurer's liabilities attributable to business written in the United States and, in addition, the assuming insurer shall maintain a trusteed surplus of not less than $20,000,000. In the case of a group of individual unincorporated underwriters, the trust shall consist of a trusteed account representing the group's liabilities attributable to business written in the United States and, in addition, the group shall maintain a trusteed surplus of which one hundred million dollars shall be held jointly for the benefit of United States ceding insurers of any member of the group; and the group shall make available to the commissioner an annual certification of the solvency of each underwriter by the group's domiciliary regulator and its independent public accountants.(ii) In the case of a group of incorporated insurers under common administration which complies with the filing requirements contained in the previous subparagraph, and which has continuously transacted an insurance business outside the United States for at least three years immediately prior to making application for accreditation; and submits to the commonwealth's authority to examine its books and records and bears the expense of the examination, and which has aggregate policyholders' surplus of ten billion dollars; the trust shall be in an amount equal to the group's several liabilities attributable to business ceded by United States ceding insurers to any member of the group pursuant to reinsurance contracts issued in the name of such group; plus the group shall maintain a joint trusteed surplus of which one hundred million dollars shall be held jointly for the benefit of United States ceding insurers of any member of the group as additional security for any such liabilities, and each member of the group shall make available to the commissioner an annual certification of the member's solvency by the member's domiciliary regulator and its independent public accountant.(iii) Such trust shall be established in a form approved by the commissioner. The trust instrument shall provide that contested claims shall be valid and enforceable upon the final order of any court of competent jurisdiction in the United States. The trust shall vest legal title to its assets in the trustees of the trust for its United States policyholders and ceding insurers, their assigns and successors in interest. The trust and the assuming insurer shall be subject to examination as determined by the commissioner. The trust described herein must remain in effect for as long as the assuming insurer shall have outstanding obligations due under the reinsurance agreements subject to the trust.(iv) No later than February twenty-eighth of each year the trustees of the trust shall report to the commissioner in writing setting forth the balance of the trust and listing the trust's investments at the preceding year end and shall certify the date of termination of the trust, if so planned, or certify that the trust shall not expire prior to the next following December thirty-first.(E) Credit shall be allowed when the reinsurance is ceded to an assuming insurer that has been certified by the commissioner as a reinsurer in the commonwealth and secures its obligations in accordance with the requirements of this subsection.(i) In order to be eligible for certification, the assuming insurer shall meet the following requirements:(a) the assuming insurer shall be domiciled and licensed to transact insurance or reinsurance in a qualified jurisdiction, as determined by the commissioner pursuant to subparagraph (iii);(b) the assuming insurer shall maintain minimum capital and surplus, or its equivalent, in an amount to be determined by the commissioner pursuant to regulation;(c) the assuming insurer shall maintain financial strength ratings from 2 or more rating agencies deemed acceptable by the commissioner pursuant to regulation;(d) the assuming insurer shall agree to submit to the jurisdiction of the commonwealth, appoint the commissioner as its agent for service of process in the commonwealth and agree to provide security for 100 per cent 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;(e) the assuming insurer shall agree to meet applicable information filing requirements as determined by the commissioner, both with respect to an initial application for certification and on an ongoing basis; and(f) the assuming insurer shall satisfy any other requirements for certification deemed relevant by the commissioner.(ii) An association, including incorporated and individual unincorporated underwriters, may be a certified reinsurer. In order to be eligible for certification, in addition to satisfying the requirements of subparagraph (i):(a) the association shall satisfy its minimum capital and surplus requirements through the capital and surplus equivalents, net of liabilities, of the association and its members, which shall include a joint central fund that may be applied to any unsatisfied obligation of the association or any of its members, in an amount determined by the commissioner to provide adequate protection;(b) the incorporated members of the association shall not be engaged in any business other than underwriting as a member of the association and shall be subject to the same level of regulation and solvency control by the association's domiciliary regulator as are the unincorporated members; and(c) within 90 days after its financial statements are due to be filed with the association's domiciliary regulator, the association shall provide to the commissioner an annual certification by the association's domiciliary regulator of the solvency of each underwriter member; or if a certification is unavailable, financial statements, prepared by independent public accountants, of each underwriter member of the association.(iii) The commissioner shall create and publish a list of qualified jurisdictions, under which an assuming insurer licensed and domiciled in such jurisdiction is eligible to be considered for certification by the commissioner as a certified reinsurer.(a) 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 commissioner shall evaluate the appropriateness and effectiveness of the reinsurance supervisory system of the 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. A qualified jurisdiction shall agree to share information and cooperate with the commissioner with respect to all certified reinsurers domiciled within that jurisdiction. A jurisdiction may not be recognized as a qualified jurisdiction if the commissioner has determined that the jurisdiction does not adequately and promptly enforce final United States judgments and arbitration awards. Additional factors may be considered in the discretion of the commissioner.(b) A list of qualified jurisdictions shall be published through the National Association of Insurance Commissioners' committee process. The commissioner shall consider this list in determining qualified jurisdictions. If the commissioner approves a jurisdiction as qualified that does not appear on the list of qualified jurisdictions, the commissioner shall provide thoroughly documented justification in accordance with criteria to be developed under regulations.(c) United States jurisdictions that meet the requirement for accreditation under the National Association of Insurance Commissioners' financial standards and accreditation program shall be recognized as qualified jurisdictions.(d) If a certified reinsurer's domiciliary jurisdiction ceases to be a qualified jurisdiction, the commissioner may suspend the reinsurer's certification indefinitely, in lieu of revocation.(iv) The commissioner shall assign a rating to each certified reinsurer, giving due consideration to the financial strength ratings that have been assigned by rating agencies deemed acceptable to the commissioner pursuant to regulation. The commissioner shall publish a list of all certified reinsurers and their ratings.(v) A certified reinsurer shall secure obligations assumed from United States ceding insurers under this subsection at a level consistent with its rating, as specified in regulations promulgated by the commissioner.(a) In order for a domestic ceding insurer to qualify for full financial statement credit for reinsurance ceded to a certified reinsurer, the certified reinsurer shall maintain security in a form acceptable to the commissioner and consistent with subsection (2) or in a multibeneficiary trust in accordance with paragraph (D), except as otherwise provided in this subsection.(b) If a certified reinsurer maintains a trust to fully secure its obligations, subject to paragraph (D), and chooses to secure its obligations incurred as a certified reinsurer in the form of a multibeneficiary trust, the certified reinsurer shall maintain separate trust accounts for its obligations incurred under reinsurance agreements issued or renewed as a certified reinsurer with reduced security as permitted by this subsection or comparable laws of other United States jurisdictions and for its obligations subject to paragraph (D). It shall be a condition to the grant of certification under paragraph (E) that the certified reinsurer shall have bound itself, by the language of the trust and agreement with the commissioner with principal regulatory oversight of each such trust account, to fund, upon termination of any such trust account, out of the remaining surplus of such trust any deficiency of any other such trust account.(c) The minimum trusteed surplus requirements provided in paragraph (D) are not applicable with respect to a multibeneficiary trust maintained by a certified reinsurer for the purpose of securing obligations incurred under this subsection, except that such trust shall maintain a minimum trusteed surplus of not less than $10,000,000.(d) With respect to obligations incurred by a certified reinsurer under this subsection, if the security is insufficient, the commissioner shall reduce the allowable credit by an amount proportionate to the deficiency and may impose further reductions in allowable credit upon finding that there is a material risk that the certified reinsurer's obligations will not be paid in full when due.(e) For purposes of this subsection, a certified reinsurer whose certification has been terminated for any reason shall be treated as a certified reinsurer required to secure 100 per cent of its obligations. As used in this subsection, the term ''terminated'' shall refer to revocation, suspension, voluntary surrender and inactive status. If the commissioner continues to assign a higher rating as permitted by other provisions of this section, this requirement shall not apply to a certified reinsurer in inactive status or to a reinsurer whose certification has been suspended.(vi) If an applicant for certification has been certified as a reinsurer in a National Association of Insurance Commissioner's accredited jurisdiction, the commissioner may defer to that jurisdiction's certification and may defer to the rating assigned by that jurisdiction and such assuming insurer shall be considered to be a certified reinsurer in this state.(vii) A certified reinsurer that ceases to assume new business in the commonwealth may request to maintain its certification in inactive status in order to continue to qualify for a reduction in security for its in-force business. An inactive certified reinsurer shall continue to comply with all applicable requirements of this subsection and the commissioner shall assign a rating that takes into account, if relevant, the reasons why the reinsurer is not assuming new business.(E1/2)(i) Credit shall be allowed when the reinsurance is ceded to an assuming insurer meeting each of the conditions set forth in this paragraph.(a) The assuming insurer shall have its head office or be domiciled in, as applicable, and be licensed in a reciprocal jurisdiction. A ''reciprocal jurisdiction'' shall mean a jurisdiction that is:(1) A jurisdiction outside of the United States that is subject to an in-force covered agreement with the United States, each within its legal authority, or, in the case of a covered agreement between the United States and the European Union, is a member state of the European Union; provided, however, that for purposes of this paragraph, a ''covered agreement'' shall mean an agreement entered into pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, 31 U.S.C. sections 313 and 314, that is currently in effect or in a period of provisional application and addresses the elimination, under specified conditions, of collateral requirements as a condition for entering into any reinsurance agreement with a ceding insurer domiciled in the commonwealth or for allowing the ceding insurer to recognize credit for reinsurance.(2) A jurisdiction of the United States that meets the requirements for accreditation under the NAIC financial standards and accreditation program; or(3) A qualified jurisdiction, as determined by the commissioner pursuant to clause (iii) of paragraph (E) of subsection (1), which is not otherwise described in subclause (1) or (2) of this subparagraph but meets certain additional requirements, consistent with the terms and conditions of in-force covered agreements, as specified by the commissioner pursuant to regulation.(b) The assuming insurer shall have and maintain, on an ongoing basis, minimum capital and surplus, or its equivalent, calculated according to the methodology of its domiciliary jurisdiction, in an amount to be set forth in regulation. If the assuming insurer is an association, including incorporated and individual unincorporated underwriters, it shall have and maintain, on an ongoing basis, minimum capital and surplus equivalents, net of liabilities, calculated according to the methodology applicable in its domiciliary jurisdiction, and a central fund containing a balance in amounts to be set forth in regulation.(c) The assuming insurer shall have and maintain, on an ongoing basis, a minimum solvency or capital ratio, as applicable, which shall be set forth in regulation. If the assuming insurer is an association, including incorporated and individual unincorporated underwriters, it shall have and maintain, on an ongoing basis, a minimum solvency or capital ratio in the reciprocal jurisdiction where the assuming insurer has its head office or is domiciled, as applicable, and is also licensed.(d) The assuming insurer shall agree and provide adequate assurance to the commissioner, in a form specified by the commissioner pursuant to regulation, as follows:(1) The assuming insurer shall provide prompt written notice and explanation to the commissioner if it falls below the minimum requirements set forth in subparagraphs (b) or (c), or if any regulatory action is taken against it for serious noncompliance with applicable law;(2) The assuming insurer shall consent in writing to the jurisdiction of the courts of the commonwealth and to the appointment of the commissioner as agent for service of process; provided, however, that the commissioner may require that consent for service of process be provided to the commissioner and included in each reinsurance agreement; and provided further, that nothing in this provision shall 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 such agreements are unenforceable under applicable insolvency or delinquency laws;(3) The assuming insurer shall consent in writing to pay all final judgments, wherever enforcement is sought, obtained by a ceding insurer or its legal successor, that have been declared enforceable in the jurisdiction where the judgment was obtained;(4) Each reinsurance agreement shall include a provision requiring the assuming insurer to provide security in an amount equal to 100 per cent 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 resolution estate; and(5) The assuming insurer shall confirm that it is not presently participating in any solvent scheme of arrangement which involves the commonwealth's ceding insurers and agree to notify the ceding insurer and the commissioner and to provide security in an amount equal to 100 per cent of the assuming insurer's liabilities to the ceding insurer should the assuming insurer enter into such a solvent scheme of arrangement; provided, however, that such security shall be in a form consistent with the provisions of paragraph (E) of subsection (1) and subsection (2) and as specified by the commissioner in regulation.(e) The assuming insurer or its legal successor shall provide, if requested by the commissioner, on behalf of itself and any legal predecessors, certain documentation to the commissioner as specified by the commissioner in regulation.(f) The assuming insurer shall maintain a practice of prompt payment of claims under reinsurance agreements, pursuant to criteria set forth in regulation.(g) The assuming insurer's supervisory authority shall confirm to the commissioner on an annual basis, as of the preceding December 31 or at the annual date otherwise statutorily reported to the reciprocal jurisdiction that the assuming insurer complies with the requirements set forth in subparagraphs (b) and (c).(h) Nothing in this subparagraph precludes an assuming insurer from providing the commissioner with information on a voluntary basis.(ii) The commissioner shall timely create and publish a list of reciprocal jurisdictions.(a) The commissioner's list of reciprocal jurisdictions shall include any reciprocal jurisdiction as defined under subclauses (1) and (2) of subparagraph (a) of clause (i) of this paragraph and shall consider any other reciprocal jurisdiction included on the list of reciprocal jurisdictions published by NAIC. The commissioner may approve a jurisdiction that does not appear on the NAIC list of reciprocal jurisdictions in accordance with criteria to be developed under regulations issued by the commissioner.(b) The commissioner may remove a jurisdiction from the list of reciprocal jurisdictions upon a determination that the jurisdiction no longer meets the requirements of a reciprocal jurisdiction, in accordance with a process set forth in regulations issued by the commissioner, except that the commissioner shall not remove from the list a reciprocal jurisdiction as defined under subclauses (1) and (2) of subparagraph (a) of clause (i) of this paragraph. Upon removal of a reciprocal jurisdiction from the list, credit for reinsurance ceded to an assuming insurer which has its home office or is domiciled in that jurisdiction shall be allowed, if otherwise allowed pursuant to this section.(iii) The commissioner shall timely create and publish a list of assuming insurers that have satisfied the conditions set forth in this subsection and to which cessions shall be granted credit in accordance with this subsection. The commissioner may add an assuming insurer to such list if a NAIC-accredited jurisdiction has added such assuming insurer to a list of such assuming insurers or if, upon initial eligibility, the assuming insurer submits the information to the commissioner as required under subparagraph (d) of clause (i) of this paragraph and complies with any additional requirements that the commissioner may impose by regulation, except to the extent that they conflict with an applicable covered agreement.(iv) If the commissioner determines that an assuming insurer no longer meets 1 or more of the requirements under this subsection, the commissioner may revoke or suspend the eligibility of the assuming insurer for recognition under this subsection in accordance with procedures set forth in regulation.(a) While an assuming insurer's eligibility is suspended, no reinsurance agreement issued, amended or renewed after the effective date of the suspension shall be qualified for credit except to the extent that the assuming insurer's obligations under the contract are secured in accordance with subsection (2).(b) 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 prior to 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 commissioner and consistent with subsection (2).(v) 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 ceded liabilities.(vi) Nothing in this subsection shall limit or in any way alter the capacity of parties to a reinsurance agreement to agree on requirements for security or other terms in that reinsurance agreement, except as prohibited by this section or other applicable law or regulation.(vii) Credit may be taken under this subsection only for reinsurance agreements entered into, amended or renewed on or after the effective date of the statute adding this subsection, and only with respect to losses incurred and reserves reported on or after the later of: (1) the date on which the assuming insurer has met all eligibility requirements pursuant to clause (i) of this paragraph; or (2) the effective date of the new reinsurance agreement, amendment or renewal.(a) This paragraph shall not alter or impair a ceding insurer's right to take credit for reinsurance, to the extent that credit is not available under this subsection, as long as the reinsurance qualifies for credit under any other applicable provision of this section.(b) Nothing in this subsection shall authorize an assuming insurer to withdraw or reduce the security provided under any reinsurance agreement except as permitted by the terms of the agreement.(c) Nothing in this subsection shall limit, or in any way alter, the capacity of parties to any reinsurance agreement to renegotiate the agreement.(F) Credit shall be allowed when the reinsurance is ceded to an assuming insurer not meeting the requirements of paragraphs (A), (B), (C), (D), (E) or (E1/2) but only with respect to the insurance of risks located in jurisdictions where such reinsurance is required by applicable law or regulation of that jurisdiction.(G) If the assuming insurer is not licensed or accredited to transact insurance or reinsurance in the commonwealth, the credit permitted by paragraphs (C) and (D) shall not be allowed unless the assuming insurer agrees in the reinsurance agreements:(i) that in the event of the failure of the assuming insurer to perform its obligations under the terms of the reinsurance agreement, the assuming insurer, at the request of the ceding insurer, shall submit to the jurisdiction of an alternative dispute resolution panel or any court of competent jurisdiction in any state of the United States, shall comply with all requirements necessary to give such panel or court jurisdiction and shall abide by the final decision of such panel or court or of any appellate court in the event of an appeal; and(ii) to designate the commissioner or a designated attorney as its true and lawful attorney upon whom any lawful process may be served in any action, suit or proceeding instituted by or on behalf of the ceding company.This paragraph shall not create a conflict with or override the obligation of the parties to a reinsurance agreement to arbitrate their disputes, if such an obligation is created in the agreement.(H) If the assuming insurer does not meet the requirements of paragraphs (A), (B), (C) or (E1/2), the credit permitted by paragraph (D) shall not be allowed unless the assuming insurer agrees in substance in the trust agreements to the following conditions:(i) notwithstanding any other provisions in the trust instrument, if the trust fund is inadequate because it contains an amount less than the amount set forth in paragraph (D), or if the grantor of the trust has been declared insolvent or placed into receivership, rehabilitation, liquidation or similar proceedings under the laws of its state or country of domicile, the trustee shall comply with an order of the commissioner with regulatory oversight over the trust or with an order of a court of competent jurisdiction directing the trustee to transfer to the commissioner with regulatory oversight all of the assets of the trust fund;(ii) the assets shall be distributed by and claims of United States trust beneficiaries shall be filed with and valued by the commissioner with regulatory oversight in accordance with the laws of the state in which the trust is domiciled that are applicable to the liquidation of domestic insurance companies;(iii) if the commissioner with regulatory oversight determines that the assets of the trust fund or any part thereof are not necessary to satisfy the claims of the United States ceding insurers, which are United States trust beneficiaries, the assets or part thereof shall be returned by the commissioner with regulatory oversight to the trustee for distribution in accordance with the trust agreement; and(iv) the grantor shall waive any right otherwise available to it under United States law that is inconsistent with these provisions.(I) If an accredited or certified reinsurer ceases to meet the requirements for accreditation or certification, the commissioner may suspend or revoke the reinsurer's accreditation or certification.(i) The commissioner shall give the reinsurer notice and opportunity for hearing. The suspension or revocation shall not take effect until after the commissioner's order on hearing, unless:(a) the reinsurer waives its right to hearing;(b) the commissioner's order is based on regulatory action by the reinsurer's domiciliary jurisdiction or the voluntary surrender or termination of the reinsurer's eligibility to transact insurance or reinsurance business in its domiciliary jurisdiction or in the primary certifying state of the reinsurer under subparagraph (vi) of paragraph (E); or(c) the commissioner finds that an emergency requires immediate action and a court of competent jurisdiction has not stayed the commissioner's action.(ii) While a reinsurer's accreditation or certification is suspended, no reinsurance contract issued or renewed after the effective date of the suspension shall qualify for credit except to the extent that the reinsurer's obligations under the contract are secured in accordance with subsection (2). If a reinsurer's accreditation or certification is revoked, no credit for reinsurance shall be granted after the effective date of the revocation except to the extent that the reinsurer's obligations under the contract are secured in accordance with subparagraph (v) of paragraph (E) or subsection (2).(J)(i) A ceding insurer shall take steps to manage its reinsurance recoverables proportionate to its own book of business. A domestic ceding insurer shall notify the commissioner within 30 days after: (1) reinsurance recoverables from any single assuming insurer, or group of affiliated assuming insurers, exceeds 50 per cent of the domestic ceding insurer's last reported surplus to policyholders, or (2) it is determined that reinsurance recoverables from any single assuming insurer, or group of affiliated assuming insurers, is likely to exceed 50 per cent of the domestic ceding insurer's last reported surplus to policyholders. The notification shall demonstrate that the exposure is safely managed by the domestic ceding insurer.(ii) A ceding insurer shall take steps to diversify its reinsurance program. A domestic ceding insurer shall notify the commissioner within 30 days after: (1) ceding to any single assuming insurer, or group of affiliated assuming insurers, more than 20 per cent of the ceding insurer's gross written premium in the prior calendar year, or (2) it has determined that the reinsurance ceded to any single assuming insurer, or group of affiliated assuming insurers, is likely to exceed 20 per cent of the ceding insurer's gross written premium in the prior calendar year. The notification shall demonstrate that the exposure is safely managed by the domestic ceding insurer.(2) A reduction from liability for the reinsurance ceded by a domestic insurer to an assuming insurer not meeting the requirements of subsection (1) shall be allowed in an amount not exceeding the related liabilities carried by the ceding insurer and such reduction shall be in the amount of funds held by or on behalf of the ceding insurer, including funds held in trust for the ceding insurer, under a reinsurance contract with such assuming insurer as security for the payment of obligations thereunder, if such security is held in the United States subject to withdrawal solely by, and under the exclusive control of, the ceding insurer; or in the case of a trust, held in a qualified United States financial institution, as defined in paragraph (B) of subsection (3). This security may be in the form of:(A) Cash.(B) Securities listed by the Securities Valuation Office of the National Association of Insurance Commissioners and qualifying as admitted assets.(C) Clean, irrevocable, unconditional letters of credit, issued or confirmed by a qualified United States institution, as defined in paragraph (A) of subsection (3), no later than December thirty-first in respect of the year of which filing is being made, and in the possession of the ceding company on or before the filing date of its annual statement. Any such letter of credit shall have a term of at least 1 year and shall contain a clause which prevents the expiration of the letter of credit without notice from the issuer not less than 30 days notice before the end of the term.Letters of credit meeting applicable standards of issuer acceptability as for the dates of their issuance or confirmation shall, notwithstanding the issuing or confirming institution's subsequent failure to meet applicable standards of issuer acceptability, continue to be acceptable as security until their expiration, extension, renewal, modification or amendment, whichever first occurs.(D) Any other form of security acceptable to the commissioner.(3)(A) For purposes of paragraph (C) of subsection (2), a qualified United States financial institution means an institution that:(i) is organized or, in the case of a United States office of a foreign banking organization, licensed under the laws of the United States or any state thereof; (ii) is regulated, supervised and examined by United States federal or state authorities having regulatory authority over banks and trust companies; and (iii) has been determined by either the commissioner or the Securities Valuation Office of the National Association of Insurance Commissioners to meet such standards of financial condition and standing as are considered necessary and appropriate to regulate the quality of financial institutions whose letters of credit will be acceptable to the commissioner.(B) A qualified United States financial institution means, for purposes of those provisions of this section specifying those institutions that are eligible to act as a fiduciary of a trust, an institution that:(i) is organized, or, in the case of a United States branch or agency office of a foreign banking organization, licensed, under the laws of the United States or any state thereof and has been granted authority to operate with fiduciary powers; and (ii) is regulated, supervised and examined by federal or state authorities having regulatory authority over banks and trust companies.(4)(A) A credit shall not be allowed, as an admitted asset or deduction from liability, to any ceding insurer for reinsurance unless the reinsurance contract provides, in substance, that in the event of the insolvency of the ceding insurer, the reinsurance shall be payable under a contract(s) reinsured by the assuming insurer on the basis of claims filed and allowed in the liquidation proceeding, without diminution because of the insolvency of the ceding insurer. The payments shall be made directly to the ceding insurer or to its domiciliary liquidator except: (1) where the contract of insurance or reinsurance specifically provides another payee of such reinsurance in the event of the insolvency of the ceding insurer, or (2) where the assuming insurer, with the consent of the direct insured, has assumed the policy obligations of the ceding insurer as direct obligations of the assuming insurer to the payees under the policies and in substitution for the obligations of the ceding insurer to the payees.(B) Notwithstanding paragraph (A), if a life and health insurance guaranty association has made the election to succeed to the rights and obligations of the insolvent insurer under the contract of reinsurance, the reinsurer's liability to pay covered reinsured claims shall continue under the contract of reinsurance, subject to the payment to the reinsurer of the reinsurance premiums for the coverage. Payment for the reinsured claims shall only be made by the reinsurer pursuant to the direction of the guaranty association or its designated successor. Any payment made at the direction of the guaranty association or its designated successor by the reinsurer shall discharge the reinsurer of all further liability to any other party for the claim payment.(C) A reinsurance agreement may provide that the liquidator or receiver or statutory successor of an insolvent ceding insurer shall give written notice of the pendency of a claim against the insolvent ceding insurer on the policy or contract reinsured within a reasonable time after the claim is filed in the insolvency proceeding and during the pendency of the claim the assuming insurer may investigate the claim and interpose, at its own expense, in the proceedings where the claim is to be adjudicated any defense or defenses which it may consider available to the ceding company or its liquidator or receiver or statutory successor. Subject to court approval, the expense thus incurred by the assuming insurer shall be chargeable, against the insolvent ceding insurer as part of the expense of liquidation, to the extent of a proportionate share of the benefit, which may accrue to the ceding insurer solely as a result of the defense undertaken by the assuming insurer. Where 2 or more assuming insurers are involved in the same claim and a majority in interest elect to interpose a defense to the claim, the expense shall be apportioned in accordance with the terms of the reinsurance agreement as though the expense had been incurred by the ceding insurer.(5)(A) The commissioner may, in accordance with chapter 30A and after notice and hearing, promulgate reasonable rules and regulations necessary to effectuate this section.(B) The commissioner is further authorized to adopt rules and regulations applicable to reinsurance arrangements described in subparagraph (i) of paragraph (B) of this subsection.(i) A regulation adopted pursuant to paragraph (B) of this subsection, may apply only to reinsurance relating to:(a) Life insurance policies with guaranteed nonlevel gross premiums or guaranteed nonlevel benefits;(b) Universal life insurance policies with provisions resulting in the ability of a policyholder to keep a policy in force over a secondary guarantee period;(c) Variable annuities with guaranteed death or living benefits;(d) Long-term care insurance policies; or(e) Such other life and health insurance and annuity products as to which the NAIC adopts model regulatory requirements with respect to credit for reinsurance.(ii) A regulation adopted pursuant to clauses (i) and (ii) of paragraph (B) shall apply to any reinsurance contract containing:(a) policies issued on or after January 1, 2015, or(b) policies issued prior to January 1, 2015, if risk pertaining to such pre–2015 policies is ceded in connection with the contract, in whole or in part, on or after January 1, 2015.(iii) A regulation adopted pursuant to paragraph (B) of this subsection may require the ceding insurer, in calculating the amounts or forms of security required to be held under regulations promulgated under this authority, to use the Valuation Manual adopted by the NAIC under Section 11B(1) of the NAIC Standard Valuation Law, including all amendments adopted by the NAIC and in effect on the date as of which the calculation is made, to the extent applicable.(iv) A regulation adopted pursuant to this paragraph (B) of this subsection shall not apply to cessions to an assuming insurer that:(a) meets the conditions set forth in paragraph (E1/2) of subsection (1);(b) is certified in the commonwealth; or(c) maintains at least $250,000,000 in capital and surplus when determined in accordance with the NAIC Accounting Practices and Procedures Manual, including all amendments thereto adopted by the NAIC, excluding the impact of any permitted or prescribed practices, and is licensed in at least 26 states or licensed in at least 10 states and licensed or accredited in a total of at least 35 states.(v) The authority to adopt regulations pursuant to paragraph (B) shall not limit the commissioner's authority to adopt regulations pursuant to paragraph (A).(6) Credit for reinsurance ceded to a certified reinsurer shall only be allowed for reinsurance contracts entered into or renewed on or after the effective date of the certification of the assuming insurer by the commissioner of insurance.