2017 -- S 0783

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LC002180

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     STATE OF RHODE ISLAND

IN GENERAL ASSEMBLY

JANUARY SESSION, A.D. 2017

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A N   A C T

RELATING TO INSURANCE -- CREDIT FOR REINSURANCE ACT

     Introduced By: Senator Roger Picard

     Date Introduced: April 25, 2017

     Referred To: Senate Commerce

     (Dept. of Business Regulation)

It is enacted by the General Assembly as follows:

     SECTION 1. Sections 27-1.1-1, 27-1.1-2 and 27-1.1-4 of the General Laws in Chapter

27-1.1 entitled "Credit for Reinsurance Act" are hereby amended to read as follows:

     27-1.1-1. Credit allowed a domestic ceding insurer.

     (a) Credit for reinsurance shall be allowed a domestic ceding insurer as either an asset or

a reduction from liability on account of reinsurance ceded only when the reinsurer meets the

requirements of subsections (b), (c), (d), (e), (f) or (g) of this section; provided, further, that the

commissioner may adopt by regulation pursuant to §27-1.1-4 specific additional requirements

relating to or setting forth:

     (1) The valuation of assets or reserve credits;

     (2) The amount and forms of security supporting reinsurance arrangements described in

§27-1.1-4; and

     (3) The circumstances pursuant to which credit will be reduced or eliminated.

     Credit shall be allowed under subsections (b), (c) or (d) of this section only as respects

cessions of those kinds or classes of business which the assuming insurer is licensed or otherwise

permitted to write or assume in its state of domicile or, in the case of a U.S. branch of an alien

assuming insurer, in the state through which it is entered and licensed to transact insurance or

reinsurance. Credit shall be allowed under subsections (d) or (e) of this section only if the

applicable requirements of subsection (h) have been satisfied.

     (b) Credit shall be allowed when the reinsurance is ceded to an assuming insurer that is

licensed to transact insurance or reinsurance in this state.

     (c) Credit shall be allowed when the reinsurance is ceded to an assuming insurer that is

accredited by the commissioner as a reinsurer in this state. In order to be eligible for an

accreditation a reinsurer must:

     (1) File with the commissioner evidence of its submission to this state's jurisdiction;

     (2) Submit to this state's authority to examine its books and records;

     (3) Be 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 be entered through and licensed to transact

insurance or reinsurance in at least one state;

     (4) Annually file 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:

     (5) Demonstrate to the satisfaction of the commissioner that it has adequate financial

capacity to meet its reinsurance obligations and is otherwise qualified to assume reinsurance from

domestic insurers. An assuming insurer is deemed to meet this requirement as of the time of its

application if it maintains a surplus as regards policyholders in an amount not less than twenty

million dollars ($20,000,000), and its accreditation has not been denied by the commissioner

within ninety (90) days after submission of its application.

     (d) (1) Credit shall be allowed when the reinsurance is ceded to an assuming insurer that

is domiciled in, or in the case of a United States branch of an alien assuming insurer is entered

through, a state that employs standards regarding credit for reinsurance substantially similar to

those applicable under this statute, and the assuming insurer or U.S. branch of an alien assuming

insurer:

     (i) Maintains a surplus regarding policyholders in an amount not less than twenty million

dollars ($20,000,000); and

     (ii) Submits to the authority of this state to examine its books and records;

     (2) Provided, that the requirement of subsection (d)(1)(i) does not apply to reinsurance

ceded and assumed pursuant to pooling arrangements among insurers in the same holding

company system.

     (e) (1) Credit shall be allowed when the reinsurance is ceded to an assuming insurer that

maintains a trust fund in a qualified United States financial institution, as defined in section 27-

1.1-3(b), for the payment of the valid claims of its United States ceding insurers their assigns and

successors in interest. To enable the commissioner to determine the sufficiency of the trust fund,

the assuming insurer shall report annually to the commissioner information substantially the same

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as that required to be reported on the National Association of Insurance Commissioners annual

statement form by licensed insurers. The assuming insurer shall submit to examination of its

books and records by the commissioner, and bear the expense of examination.

     (2) (i) Credit for reinsurance shall not be granted under this subsection unless the form of

the trust and any amendments to the trust have been approved by:

     (A) The commissioner of the state where the trust is domiciled; or

     (B) The commissioner of another state who, pursuant to the terms of the trust instrument,

has accepted principal regulatory oversight of the trust.

     (ii) The form of the trust and any trust amendments shall also be filed with the

commissioner of every state in which the ceding insurer beneficiaries of the trust are domiciled.

The trust instrument shall provide that 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 its trustees for the benefit of the assuming insurer's U.S. ceding insurers, their

assigns and successors in interest. The trust and the assuming insurer shall be subject to

examination as determined by the commissioner.

     (iii) The trust shall remain in effect for as long as the assuming insurer has outstanding

obligations due under the reinsurance agreements subject to the trust. No later than February 28

of each year the trustee of the trust shall report to the commissioner in writing 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 will not expire prior to the following

December 31.

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

     (i) The trust fund for a single assuming insurer shall consist of funds in trust in an amount

not less than the assuming insurer's liabilities attributable to reinsurance ceded by U.S. ceding

insurers, and, in addition, the assuming insurer shall maintain a trusteed surplus of not less than

twenty million dollars ($20,000,000), except as provided in paragraph (3)(ii) below.

     (ii) At any time after the assuming insurer has permanently discontinued underwriting

new business secured by the trust for at least three (3) full years, the commissioner with principal

regulatory oversight of the trust may authorize a reduction in the required trusteed surplus, but

only after a finding, based on an assessment of the risk, that the new required surplus level is

adequate for the protection of U.S. ceding insurers, policyholders and claimants in light of

reasonably foreseeable adverse loss development. The risk assessment may involve an actuarial

review, including an independent analysis of reserves and cash flows, and shall consider all

material risk factors, including when applicable the lines of business involved, the stability of the

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incurred loss estimates and the effect of the surplus requirements on the assuming insurer's

liquidity or solvency. The minimum required trusteed surplus may not be reduced to an amount

less than thirty percent (30%) of the assuming insurer's liabilities attributable to reinsurance ceded

by U.S. ceding insurers covered by the trust.

     (iii) (A) In the case of a group including incorporated and individual unincorporated

underwriters:

     (B) For reinsurance ceded under reinsurance agreements with an inception, amendment

or renewal date on or after January 1, 1993, the trust shall consist of a trusteed account in an

amount not less than the respective underwriters' several liabilities attributable to business ceded

by U.S. domiciled ceding insurers to any underwriter of the group;

     (C) For reinsurance ceded under reinsurance agreements with an inception date on or

before December 31, 1992, and not amended or renewed after that date, not-withstanding the

other provisions of this chapter, the trust shall consist of a trusteed account in an amount not less

than the respective underwriters' several insurance and reinsurance liabilities attributable to

business written in the United States;

     (D) In addition to these trusts, the group shall maintain in trust a trusteed surplus of

which one hundred million dollars ($100,000,000) shall be held jointly for the benefit of the U.S.

domiciled ceding insurers of any member of the group for all years of account; and

     (E) The incorporated members of the group shall not be engaged in any business other

than underwriting as a member of the group and shall be subject to the same level of regulation

and solvency control by the group's domiciliary regulator as are the unincorporated members.

     (I)(F) Within ninety (90) days after its financial statements are due to be filed with the

group's domiciliary regulator, the group shall provide to the commissioner an annual certification

by the group'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 group.

     (iv) In the case of a group of incorporated underwriters under common administration the

group shall

     (A) Have continuously transacted an insurance business outside the United States for at

least three (3) years immediately prior to making application for accreditation,

     (B) Maintain an aggregate policyholders surplus of ten billion dollars ($10,000,000,000).

     (C) Maintain a trust fund in an amount not less than the group's several liabilities

attributable to business ceded by United States domiciled ceding insurers to any member of the

group pursuant to reinsurance contracts issued in the name of the group.

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     (D) In addition, maintain a joint trusted surplus of which one hundred million dollars

($100,000,000) shall be held jointly for the benefit of U.S. domiciled ceding insurers of any

member of the group as additional security for these liabilities, and

     (E) Within ninety (90) days after its financial statements are due to be filed with the

group's domiciliary regulator, make available to the commissioner an annual certification of each

underwriter member's solvency by the member's domiciliary regulator, and financial statements

of each underwriter member of the group prepared by its independent public accountant;

     (f) Credit shall be allowed when the reinsurance is ceded to an assuming insurer that has

been certified by the commissioner as a reinsurer in this state and secures its obligations in

accordance with the requirements of this subsection.

     (1) In order to be eligible for certification, the assuming insurer shall meet the following

requirements:

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

reinsurance in a qualified jurisdiction, as determined by the commissioner pursuant to paragraph

(f)(iii) of this subsection;

     (ii) The assuming insurer must maintain minimum capital and surplus, or its equivalent,

in an amount to be determined by the commissioner pursuant to regulation;

     (iii) The assuming insurer must maintain financial strength ratings from two or more

rating agencies deemed acceptable by the commissioner pursuant to regulation;

     (iv) The assuming insurer must agree to submit to the jurisdiction of this state, appoint

the commissioner as its agent for service of process in this state, and agree to provide security for

one hundred percent (100%) of the assuming insurer's liabilities attributable to reinsurance ceded

by U.S. ceding insurers if it resists enforcement of a final U.S. judgment;

     (v) The assuming insurer must 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

     (vi) The assuming insurer must satisfy any other requirements for certification deemed

relevant by the commissioner.

     (2) An association including incorporated and individual unincorporated underwriters

may be a certified reinsurer. In order to be eligible for certification, in addition to satisfying

requirements of paragraph (i) above:

     (i) 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

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any of its members, in an amount determined by the commissioner to provide adequate

protection;

     (ii) 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

     (iii) Within ninety (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.

     (3) 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.

     (i) In order to determine whether the domiciliary jurisdiction of a non-U.S. 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-U.S. jurisdiction to reinsurers licensed and domiciled in the U.S.

A qualified jurisdiction must 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 U.S. judgments and arbitration awards.

Additional factors may be considered in the discretion of the commissioner.

     (ii) A list of qualified jurisdictions shall be published through the NAIC 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.

     (iii) U.S. jurisdictions that meet the requirement for accreditation under the NAIC

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

     (iv) If a certified reinsurer's domiciliary jurisdiction ceases to be a qualified jurisdiction,

the commissioner has the discretion to suspend the reinsurer's certification indefinitely, in lieu of

revocation.

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     (4) 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.

     (5) A certified reinsurer shall secure obligations assumed from U.S. ceding insurers under

this subsection at a level consistent with its rating, as specified in regulations promulgated by the

commissioner.

     (i) 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 the provisions of section 3, or in a multi-

beneficiary trust in accordance with subsection (e) of this section, except as otherwise provided in

this subsection.

     (ii) If a certified reinsurer maintains a trust to fully secure its obligations subject to

subsection (e) of this section, and chooses to secure its obligations incurred as a certified reinsurer

in the form of a multi-beneficiary 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 U.S. jurisdictions and for its obligations subject to subsection (e) of this section. It shall be a

condition to the grant of certification under subsection (f) of this section 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.

     (iii) The minimum trusteed surplus requirements provided in subsection D are not

applicable with respect to a multi-beneficiary 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 ten million dollars ($10,000,000).

     (iv) 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 has the discretion to 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.

     (v) 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 one hundred

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percent (100%) of its obligations.

     (A) As used in this subsection, the term "terminated" refers to revocation, suspension,

voluntary surrender and inactive status.

     (B) If the commissioner continues to assign a higher rating as permitted by other

provisions of this section, this requirement does not apply to a certified reinsurer in inactive status

or to a reinsurer whose certification has been suspended.

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

jurisdiction, the commissioner has the discretion to defer to that jurisdiction's certification, and

has the discretion to defer to the rating assigned by that jurisdiction, and such assuming insurer

shall be considered to be a certified reinsurer in this state.

     (7) A certified reinsurer that ceases to assume new business in this state 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.

     (g) Credit shall be allowed when the reinsurance is ceded to an assuming insurer not

meeting the requirements of subsections (b), (c), (d) (e) or (f) of this section, but only as to the

insurance of risks located in jurisdictions where the reinsurance is required by applicable law or

regulation of that jurisdiction.

     (h) If the assuming insurer is not licensed, accredited or certified to transact insurance or

reinsurance in this state, the credit permitted by subsections (d) and (e) of this section shall not be

allowed unless the assuming insurer agrees in the reinsurance agreements:

     (1) (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 any court of competent jurisdiction in any state of the

United States, will comply with all requirements necessary to give the court jurisdiction, and will

abide by the final decision of the 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 may be served any lawful process in any action, suit or proceeding instituted by or on

behalf of the ceding insurer.

     (2) This subsection is not intended to conflict with or override the obligation of the

parties to a reinsurance agreement to arbitrate their disputes, if this obligation is created in the

agreement.

     (i) If the assuming insurer does not meet the requirements of subsections (b), (c) or (d),

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the credit permitted by subsection (e) or (f) of this section shall not be allowed unless the

assuming insurer agrees in the trust agreements to the following conditions:

     (1) Notwithstanding any other provisions in the trust instrument, if the trust fund is

inadequate because it contains an amount less than the amount required by subsection (e)(iii) of

this section, 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.

     (2) The assets shall be distributed by and claims 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.

     (3) 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 U.S. ceding insurers of the

grantor of the trust, 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.

     (4) The grantor shall waive any right otherwise available to it under U.S. law that is

inconsistent with this provision.

     (j) 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.

     (1) The commissioner must give the reinsurer notice and opportunity for hearing. The

suspension or revocation may not take effect until after the commissioner's order on hearing,

unless:

     (i) The reinsurer waives its right to hearing;

     (ii) 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 (f)(vi) of this section; or

     (iii) The commissioner finds that an emergency requires immediate action and a court of

competent jurisdiction has not stayed the commissioner's action.

     (A) While a reinsurer's accreditation or certification is suspended, no reinsurance contract

issued or renewed after the effective date of the suspension qualifies for credit except to the

extent that the reinsurer's obligations under the contract are secured in accordance with Section 3.

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If a reinsurer's accreditation or certification is revoked, no credit for reinsurance may 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 subsection (f)(v) or section 3.

     (k) Concentration Risk.

     (1) 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

thirty (30) days after reinsurance recoverables from any single assuming insurer, or group of

affiliated assuming insurers, exceeds fifty percent (50%) of the domestic ceding insurer's last

reported surplus to policyholders, or after it is determined that reinsurance recoverables from any

single assuming insurer, or group of affiliated assuming insurers, is likely to exceed this limit.

The notification shall demonstrate that the exposure is safely managed by the domestic ceding

insurer.

     (2) A ceding insurer shall take steps to diversify its reinsurance program. A domestic

ceding insurer shall notify the commissioner within thirty (30) days after ceding to any single

assuming insurer, or group of affiliated assuming insurers, more than twenty percent (20%) of the

ceding insurer's gross written premium in the prior calendar year, or after it has determined that

the reinsurance ceded to any single assuming insurer, or group of affiliated assuming insurers, is

likely to exceed this limit. The notification shall demonstrate that the exposure is safely managed

by the domestic ceding insurer.

     27-1.1-2. Asset or reduction from liability for reinsurance ceded by a domestic

insurer to an assuming insurer not meeting the requirements of 27-1.1-1.

     An asset or a reduction from liability for the reinsurance ceded by a domestic insurer to

an assuming insurer not meeting the requirements of § 27-1.1-1 shall be allowed in an amount not

exceeding the liabilities carried by the ceding insurer; provided, further, that the commissioner

may adopt by regulation pursuant to §27-1.1-4 specific additional requirements relating to or

setting forth:

     (1) The valuation of assets or reserve credits;

     (2) The amount and forms of security supporting reinsurance arrangements described in

§27-1.1-4; and

     (3) The circumstances pursuant to which credit will be reduced or eliminated. The

reduction shall be in the amount of funds held by or on behalf of the ceding insurer, including

funds held in trust for the ceding insurer, under a reinsurance contract with the assuming insurer

as security for the payment of obligations thereunder, if the security is held in the United States

subject to withdrawal solely by, and under the exclusive control of, the ceding insurer, or, in the

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case of a trust, held in a qualified United States financial institution as defined in § 27-1.1-3(b).

This security may be in the form of:

     (1) Cash;

     (2) Securities listed by the securities valuation office of the National Association of

Insurance Commissioners, including those deemed exempt from filing as defined by the Purposes

and Procedures Manual of the Securities Valuation Office, and qualifying as admitted assets;

     (3) (i) Clean, irrevocable, unconditional letters of credit, issued or confirmed by a

qualified United States financial institution as defined in § 27-1.1-3(a), no later than December

31st of the year for which the filing is being made, and in the possession of, or in trust for, the

ceding insurer on or before the filing date of its annual statement.

     (ii) Letters of credit meeting applicable standards of issuer acceptability as of the dates of

their issuance or confirmation shall, notwithstanding the issuing or confirming institution's

subsequent failure to meet applicable standards of issuer acceptability, continue to be acceptable

as security until their expiration, extension, renewal, modification, or amendment, whichever first

occurs; or

     (4) Any other form of security acceptable to the commissioner.

     27-1.1-4. Rules and regulations.

     (a) The commissioner may adopt reasonable rules and regulations implementing the

provisions of this law.

     (b) The commissioner is further authorized to adopt rules and regulations applicable to

reinsurance arrangements described in this section.

     (1) A regulation adopted pursuant to this section may apply only to reinsurance relating

to:

     (i) Life insurance policies with guaranteed nonlevel gross premiums or guaranteed

nonlevel benefits;

     (ii) Universal life insurance policies with provisions resulting in the ability of a

policyholder to keep a policy in force over a secondary guarantee period;

     (iii) Variable annuities with guaranteed death or living benefits;

     (iv) Long-term insurance care policies; or

     (v) Other life and health insurance and annuity products as to which the NAIC adopts

model regulatory requirements with respect to credit for reinsurance.

     (2) A regulation adopted pursuant to subsection (b)(1)(i) or (b)(1)(ii) of this section, may

apply to any treaty containing:

     (i) Policies issued on or after January 1, 2015; and

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     (ii) Policies issued prior to January 1, 2015, if risk pertaining to the pre-2015 policies is

ceded in connection with the treaty, in whole or in part, on or after January 1, 2015.

     SECTION 2. Section 27-3-38 of the General Laws in Chapter 27-3 entitled "Surplus

Lines Insurance" is hereby amended to read as follows:

     27-3-38. Surplus line brokers -- License -- Affidavit of inability to obtain insurance -

- Reports and records -- Premium tax -- Notice to purchasers.

     (a) The insurance commissioner may issue a surplus line broker's license to any person

authorizing the licensee to procure, subject to the restrictions provided in this section, policies of

insurance, except life and health and accident, from eligible surplus lines insurers. Residents of

this state must hold a property and casualty insurance producer license to qualify for a surplus

lines broker license. This license may be denied, suspended, or revoked by the insurance

commissioner whenever, in the commissioner's judgment, any of the bases under § 27-2.4-14

exist. Before any license is issued by the insurance commissioner and before each renewal of a

license, there shall be filed in his or her office a written application by the person desiring the

license in the form, and containing any information, that the insurance commissioner may

prescribe. For the purposes of carrying out the provisions of the Nonadmitted and Reinsurance

Reform Act of 2010, the commissioner is authorized to utilize the national insurance producer

database of the National Association of Insurance Commissioners (NAIC), or any other

equivalent uniform national database, for the licensure of a person as a surplus lines producer and

for renewal of such license. For insureds whose home state is this state, a person shall not procure

a contract of surplus lines insurance with a nonadmitted insurer unless the person possesses a

current surplus lines insurance license issued by the commissioner.

     (b) A Rhode Island resident business entity acting as a surplus line broker may elect to

obtain a surplus line broker license. Application shall be made using the uniform business entity

application. Prior to approving the application, the commissioner shall find both of the following:

     (1) The business entity has paid the appropriate fees.

     (2) The business entity has designated a licensed surplus line broker responsible for the

business entity's compliance with the insurance laws and rules of this state.

     (c) When any policy of insurance is procured under the authority of that license, there

shall be executed, both by the licensee and by the insured, affidavits setting forth facts showing

that the insured, or a licensed Rhode Island producer, were unable, after diligent effort, to procure

from no less than three (3) admitted insurers the full amount of insurance required to protect the

property owned or controlled by the insured or the risks insured. Provided, however, the

aforementioned affidavit shall not be required when insuring the following interest: amusement

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parks and devices, environmental improvement and/or remediation sites, vacant property or

property under renovation, demolition operations, event cancellation due to weather, railroad

liability, discontinued products, fireworks and pyrotechnics, warehouseman's legal liability,

excess property coverage, private flood, and contingent liability. In addition, no such affidavit is

required for exempt commercial purchasers as defined by the Nonadmitted and Reinsurance

Reform Act of 2010. For purposes of this section, residual market mechanisms shall not be

considered authorized insurers. Prior to renewing, continuing, or extending any policy, the

licensed surplus line broker must confirm that the insurer is on the insurance commissioner's list

of approval surplus line insurers in this state.

     (d) The licensee shall keep a complete and separate record of all policies procured from

approved surplus lines insurers under the license and these records shall be open to the

examination of both the insurance commissioner and tax administrator at all reasonable times and

shall show the exact amount of each kind of insurance permitted under this section which has

been procured for each insured; the gross premiums and fees charged by the insurers or brokers

for each kind of insurance permitted under this section which were returned to each insured; the

name of the insurer or insurers which issued each of these policies; the effective dates of these

policies; and the terms for which these policies were issued. The licensee shall file a yearly report

with the insurance commissioner on a form prescribed by the insurance commissioner showing

the business procured under the surplus line license for the preceding calendar year, and the

report shall be due annually on or before April 1.

     (e) Every person, firm, or corporation licensed pursuant to the provisions of this section

shall file with the insurance commissioner, at the time of the insurance producer license renewal,

sufficient information, as determined by the insurance commissioner, whether a licensee or a

person acting on the licensee's behalf, has paid to the tax administrator, for all policies procured

by the licensee pursuant to the license during the next preceding calendar year, a tax, computed at

the rate of four percent (4%) on the gross premiums and fees charged the insured by the insurers

or brokers, less the amount of premiums returned to the insured.

     (f) Every application form for insurance from a surplus lines insurer, every affidavit form

executed by the insured, and every policy (on its front and declaration pages) issued by the

surplus lines insurer, shall contain in ten-point (10) type the following notice:

NOTICE

     THIS INSURANCE CONTRACT HAS BEEN PLACED WITH AN INSURER NOT

LICENSED TO DO BUSINESS IN THE STATE OF RHODE ISLAND BUT APPROVED AS

A SURPLUS LINES INSURER. THE INSURER IS NOT A MEMBER OF THE RHODE

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ISLAND INSURERS INSOLVENCY FUND. SHOULD THE INSURER BECOME

INSOLVENT, THE PROTECTION AND BENEFITS OF THE RHODE ISLAND INSURERS

INSOLVENCY FUND ARE NOT AVAILABLE.

     SECTION 3. Section 27-64-6 of the General Laws in Chapter 27-64 entitled "The

Protected Cell Companies Act" is hereby amended to read as follows:

     27-64-6. Reach of creditors and other claimants.

     (a) (1) Protected cell assets shall only be available to the creditors of the protected cell

company that are creditors in respect to that protected cell and shall be entitled, in conformity

with the provisions of this chapter, to have recourse to the protected cell assets attributable to that

protected cell, and shall be absolutely protected from the creditors of the protected cell company

that are not creditors in respect of that protected cell and, who accordingly, shall not be entitled to

have recourse to the protected cell assets attributable to that protected cell. Creditors with respect

to a protected cell shall not be entitled to have recourse against the protected cell assets of other

protected cells or the assets of the protected cell company's general account.

     (2) Protected cell assets shall only be available to creditors of a protected cell company

after all protected cell liabilities have been extinguished or provided for in accordance with the

plan of operation relating to that protected cell.

     (b) When an obligation of a protected cell company to a person arises from a transaction,

or is imposed, in respect of a protected cell: (1) that obligation of the protected cell company shall

extend only to the protected cell assets attributable to that protected cell, and the person shall,

with respect to that obligation, be entitled to have recourse only to the protected cell assets

attributable to that protected cell, and (2) that obligation of the company shall not extend to the

protected cell assets of any other protected cell or the assets of the protected cell company's

general account, and that person shall not, with respect to that obligation, be entitled to have

recourse to the protected cell assets of any other protected cell or the assets of the protected cell

company's general account.

     (c) When an obligation of a protected cell company relates solely to the general account,

the obligation of the protected cell company shall extend only to, and that creditor shall, with

respect to that obligation, be entitled to have recourse only to the assets of the protected cell

company's general account.

     (d) Other than with regard to the application of §27-64-6, the The activities, assets, and

obligations relating to a protected cell are not subject to the provisions of chapters 34, 34.1 and

34.3 of this title and neither a protected cell nor a protected cell company shall be assessed by or

be required to contribute to any guaranty fund or guaranty association in this state with respect to

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the activities, assets or obligations of a protected cell. Nothing in this section shall affect the

activities or obligations of an insurer's general account.

     (e) In no event shall the establishment of one or more protected cells alone constitute or

be deemed to be a fraudulent conveyance, an intent by the protected cell company to defraud

creditors or the carrying out of business by the protected cell company for any other fraudulent

purpose.

     SECTION 4. Section 44-17-1 of the General Laws in Chapter 44-17 entitled "Taxation of

Insurance Companies" is hereby amended to read as follows:

     44-17-1. Companies required to file -- Payment of tax -- Retaliatory rates.

     (a) Every domestic, foreign, or alien insurance company, mutual association,

organization, or other insurer, including any health maintenance organization as defined in § 27-

41-2, any medical malpractice insurance joint underwriters association as defined in § 42-14.1-1,

any nonprofit dental service corporation as defined in § 27-20.1-2 and any nonprofit hospital or

medical service corporation as defined in chapters 19 and 20 of title 27, except companies

mentioned in § 44-17-6 and organizations defined in § 27-25-1, transacting business in this state,

shall, on or before April 15 in each year, file with the tax administrator, in the form that he or she

may prescribe, a return under oath or affirmation signed by a duly authorized officer or agent of

the company, containing information that may be deemed necessary for the determination of the

tax imposed by this chapter, and shall at the same time pay an annual tax to the tax administrator

of two percent (2%) of the gross premiums on contracts of insurance, except for ocean marine

insurance as referred to in § 44-17-6, covering property and risks within the state, written during

the calendar year ending December 31st next preceding.

     (b) Qualifying insurers for purposes of this subsection means every domestic, foreign, or

alien insurance company, mutual association, organization, or other insurer and excludes:

     (1) Health maintenance organizations, as defined in § 27-41-2;

     (2) Nonprofit dental service corporations, as defined in § 27-20.1-2; and

     (3) Nonprofit hospital or medical service corporations, as defined in §§ 27-19-1 and 27-

20-1.

     (c) For tax years 2018 and thereafter, the rate of taxation may be reduced as set forth

below and, if so reduced, shall be fully applicable to qualifying insurers instead of the two percent

(2%) rate listed in subsection (a). In the case of foreign or alien companies, except as provided in

§ 27-2-17(d), the tax shall not be less in amount than is imposed by the laws of the state or

country under which the companies are organized upon like companies incorporated in this state

or upon its agents, if doing business to the same extent in the state or country. The tax rate shall

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not be reduced for gross premiums written on contracts of health insurance as defined in § 42-14-

5(c) but shall remain at two percent (2%) or the appropriate retaliatory tax rate, whichever is

higher.

     (d) For qualifying insurers, the premium tax rate may be decreased based upon Rhode

Island jobs added by the industry as detailed below:

     (1) A committee shall be established for the purpose of implementing tax rates using the

framework established herein. The committee shall be comprised of the following persons or their

designees: the secretary of commerce, the director of the department of business regulation, the

director of the department of revenue, and the director of the office of management and budget.

No rule may be issued pursuant to this section without the prior, unanimous approval of the

committee.

     (2) On the timetable listed below, the committee shall determine whether qualifying

insurers have added new qualifying jobs in this state in the preceding calendar year. A qualifying

job for purposes of this section is one in which a person is employed for consideration for at least

thirty-five (35) hours a week earning no less than the median hourly wage as reported by the

United States Bureau of Labor Statistics for the state of Rhode Island any employee with total

annual wages equal to or greater than forty percent (40%) of the average annual wages of the

Rhode Island insurance industry as published by the annual employment and wages report of the

Rhode Island department of labor and training in NAICS code 5241.

     (3) If the committee determines that there has been a sufficient net increase in qualifying

jobs in the preceding calendar year(s) to offset a material reduction in the premium tax, it shall

calculate a reduced premium tax rate. Such rate shall be determined via a method selected by the

committee and designed such that the estimated personal income tax generated by the increase in

qualifying jobs is at least one hundred and twenty-five percent (125%) of the anticipated

reduction in premium tax receipts resulting from the new rate. For purposes of this calculation,

the committee may consider personal income tax withholdings or receipts, but in no event may

the committee include for the purposes of determining revenue neutrality income taxes that are

subject to segregation pursuant to § 44-48.3-8(f) or that are otherwise available to the general

fund.

     (4) Any reduced rate established pursuant to this section must be established in a

rulemaking proceeding pursuant to chapter 35 of title 42, subject to the following conditions:

     (i) Any net increase in qualifying jobs and the resultant premium tax reduction and

revenue impact shall be determined in any rulemaking proceeding conducted under this section

and shall be set forth in a report included in the rulemaking record, which report shall also include

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a description of the data sources and calculation methods used. The first such report shall also

include a calculation of the baseline level of employment of qualifying insurers for the calendar

year 2015.

     (ii) Notwithstanding any provision of the law to the contrary, no rule changing the tax

rate shall take effect until one hundred and twenty (120) days after notice of the rate change is

provided to the speaker of the house, the president of the senate, the house and senate fiscal

advisors, and the auditor general, which notice shall include the report required under the

preceding provision.

     (5) For each of the first three (3) rulemaking proceedings required under this section, the

tax rate may remain unchanged or be decreased consistent with the requirements of this section,

but may not be increased. These first three (3) rulemaking proceedings shall be conducted by the

division of taxation and occur in the following manner:

     (i) The first rulemaking proceeding shall take place in calendar year 2017. This

proceeding shall establish a rule that sets forth: (A) A new premium tax rate, if allowed under the

requirements of this section, which rate shall take effect in 2018, and (B) A method for

calculating the number of jobs at qualifying insurers.

     (ii) The second rulemaking proceeding shall take place in calendar year 2018. This

proceeding shall establish a rule that sets forth: (A) A new premium tax rate, if allowed under the

requirements of this section, which rate shall take effect in 2019, and (B) The changes, if any, to

the method for calculating the number of jobs at qualifying insurers.

     (iii) The third rulemaking proceeding shall take place in calendar year 2019. This

proceeding shall establish a rule that sets forth: (A) A new premium tax rate, if allowed under the

requirements of this section, which rate shall take effect in 2020, and (B) The changes, if any, to

the method for calculating the number of jobs at qualifying insurers.

     (6) The tax rate established in the regulation following regulatory proceedings that take

place in 2019 shall remain in effect through and including 2023. In calendar year 2023, the

department of business regulation will conduct a rulemaking proceeding and issue a rule that sets

forth: (A) A new premium tax rate, if allowed under the requirements of this section, which rate

shall take effect in 2024, and (B) The changes, if any, to the method for calculating the number of

jobs at qualifying insurers. A rule issued by the department of business regulation may decrease

the tax rate if the requirements for a rate reduction contained in this section are met, or it may

increase the tax rate to the extent necessary to achieve the overall revenue level sought when the

then-existing tax rate was established. Any rate established shall be no lower than one percent

(1%) and no higher than two percent (2%). This proceeding shall be repeated every three (3)

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calendar years thereafter, however, the base for determination of job increases or decreases shall

remain the number of jobs existing during calendar year 2022.

     (7) No reduction in the premium tax rate pursuant to this section shall be allowed absent a

determination that qualifying insurers have added in this state at least three hundred fifty (350)

new, full-time, qualifying jobs above the baseline level of employment of qualifying insurers for

the calendar year 2015.

     (8) Notwithstanding any provision of this section to the contrary, the premium tax rate

shall never be set lower than one percent (1%).

     (9) The division of taxation may adopt implementation guidelines, directives, criteria,

rules and regulations pursuant to chapter 35 of title 42 as are necessary to implement this section.

     (10) The calculation of revenue impacts under this section is at the sole discretion of the

committee established under subsection (d)(1). Notwithstanding any provision of law to the

contrary, any administrative action or rule setting a tax rate pursuant to this section or failing or

declining to alter a tax rate pursuant to this section shall not be subject to judicial review under

chapter 35 of title 42.

     SECTION 5. This act shall take effect upon passage.

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EXPLANATION

BY THE LEGISLATIVE COUNCIL

OF

A N   A C T

RELATING TO INSURANCE -- CREDIT FOR REINSURANCE ACT

***

     This act would amend: (1) The provisions of the general laws relating to credit for

reinsurance to make the laws consistent with the most recent National Association of Insurance

Commissioners (NAIC) model; (2) The surplus lines laws to provide for taxation of fees incurred

by licensed insurers; (3) The protected cell legislation to address transfer of business with

insolvency protection; and (4) The definition of qualifying jobs in the insurance premium tax law.

     This act would take effect upon passage.

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