SECTION 7.609. Trust Agreement Requirements

(a) Definitions for this section. The following words and terms, when used in this section, have the following meanings, unless the context clearly indicates otherwise.

(1) Beneficiary--The entity for whose benefit the trust has been established; the ceding insurer and any successor by operation of law of the ceding insurer including, without limitation, any liquidator, receiver, conservator, or supervisor.

(2) Grantor--The entity that has established a trust for the sole benefit of the beneficiary; the assuming insurer.

(3) Obligations--The sum total of trust property as set forth in subsection (b)(11) of this section which, unless specifically excluded under the reinsurance agreement is:

(A) reinsured losses and allocated loss expenses paid by the ceding insurer, but not recovered from the assuming insurer;

(B) reserves for reinsured losses reported and outstanding;

(C) reserves for reinsured losses incurred but not reported and corresponding allocated loss expenses;

(D) reserves for unearned premiums; and

(E) reserves for mortality and morbidity.

(4) Trustee--A qualified United States financial institution.

(b) Required conditions in trust agreements.

(1) The agreement must be in the form of a written trust agreement made and entered into among the beneficiary, the grantor, and a trustee, which must be a qualified United States financial institution.

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

(3) All assets in the trust account must be held by the trustee at the trustee's office in the United States. The written notice described in paragraph (4) of this subsection must be presentable at the trustee's office in the United States.

(4) The trust agreement must comply with subparagraphs (A)-(C) of this paragraph.

(A) The trust agreement must stipulate that the beneficiary will have the right to withdraw assets from the trust account at any time, without notice to the grantor, subject only to written notice from the beneficiary to the trustee and the terms of the trust agreement.

(B) No statement or document, other than the written notice from the beneficiary to the trustee, will be accepted to withdraw assets; the beneficiary may be required to acknowledge receipt of withdrawn assets.

(C) The trust agreement must indicate that it is not subject to any conditions or qualifications outside of the trust agreement and must not be conditioned on any other agreements or documents except as provided in paragraph (11) of this subsection.

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

(6) The trust agreement must provide for the trustee to:

(A) receive assets and hold all assets in safekeeping;

(B) determine that all assets are in such form that the beneficiary, or the trustee on direction by the beneficiary, may, whenever necessary, negotiate any such assets, without consent or signature from the grantor or any other person;

(C) furnish to the grantor and the beneficiary a statement of all assets in the trust account on its inception and at intervals no less frequent than the end of each calendar year quarter;

(D) notify the grantor and the beneficiary, within 10 days, of any deposits to or withdrawals from the trust account;

(E) on written demand of the beneficiary, immediately take any and all steps necessary to transfer absolutely and unequivocally all right, title, and interest in the assets held in the trust account to the beneficiary and deliver physical custody of such assets to the beneficiary; and

(F) allow no substitutions or withdrawals of assets from the trust account, except on written instructions from the beneficiary; or the trustee may, without the consent of but with written notice to the beneficiary, on call or maturity of any trust asset, withdraw such asset on condition that the proceeds are paid or deposited into the trust account.

(7) The trust agreement must provide that at least 30 days prior to termination of the trust account, written notification of termination must be delivered by the trustee via certified mail to the beneficiary and TDI.

(8) The trust agreement must specify whether it is subject to and governed by the laws of either the state in which the trust is established or the state in which the ceding insurer is domiciled as specified in the trust agreement.

(9) The trust agreement must prohibit invasion of the trust corpus in excess of one percent of the corpus per annum for the purpose of paying compensation to, or reimbursing the expenses of, the trustee.

(10) The trust agreement must provide that the trustee will be liable for its own negligence, willful misconduct, lack of good faith, or breach of fiduciary duty.

(11) When a trust agreement is established in conjunction with a reinsurance agreement and where it is customary practice to provide a trust agreement for a specific purpose, such trust agreement must, notwithstanding any other conditions in this section, provide that the ceding insurer must undertake to use and apply amounts drawn on the trust account, without diminution because of the insolvency of the ceding insurer or the assuming insurer, for the following purposes:

(A) to pay or reimburse such ceding insurer for the assuming insurer's share under the specific reinsurance agreement regarding any losses and allocated loss expenses paid by the ceding insurer, but not recovered from the assuming insurer or for unearned premiums due to the ceding insurer, if not otherwise paid by the assuming insurer;

(B) to make payment to the assuming insurer of any amounts held in the trust account that exceed 102 percent of the actual amount required to fund the assuming insurer's obligations under the specific reinsurance agreement; or

(C) where the ceding insurer has received notification of termination of the trust account and where the assuming insurer's entire obligations under the specific reinsurance agreement remain unliquidated and undischarged 10 days prior to such termination date, the ceding insurer withdraws amounts equal to such obligations and deposits such amounts in a separate account, in the name of the ceding insurer in any qualified United States financial institution apart from its general assets, in trust for such uses and purposes specified in subparagraphs (A) and (B) of this paragraph as may remain executory after such withdrawal and for any period after such termination date.

(12) The reinsurance agreement entered into in conjunction with such a trust agreement may, but need not, contain the provisions required by subsection (d)(1)(B) of this section, provided that these provisions are included in the trust agreement.

(13) The assuming insurer agrees in the trust agreement to comply with the requirements of Insurance Code §493.1561.

(c) Permitted conditions in trust agreements.

(1) The trust agreement must provide that the trustee may resign on delivery of a written notice of resignation, effective not less than 90 days after receipt by the beneficiary and grantor of the notice and that the trustee may be removed by the grantor by delivery to the trustee and the beneficiary of a written notice of removal, effective not less than 90 days after receipt by the trustee and the beneficiary of the notice, provided that no such resignation or removal will be effective until a successor trustee has been duly appointed and approved by the beneficiary and the grantor and all assets in the trust have been duly transferred to the new trustee.

(2) The trustee must be given authority to invest any of the funds in the account, provided that no investment may be made without prior approval of the beneficiary, unless the trust agreement specifies categories of investments acceptable to the beneficiary that are consistent with the restrictions in subsection (d)(1)(B) of this section.

(3) The trust agreement must provide that, on termination of the trust account, all assets not previously withdrawn by the beneficiary must, with written approval by the beneficiary, be delivered over to the grantor.

(4) The trust agreement must require the assuming insurer, prior to depositing assets with the trustee, to execute assignments, endorsements in blank, or transfer legal title to the trustee of all shares, obligations, or any other assets requiring assignments, in order that the beneficiary, or the trustee on the direction of the beneficiary may, whenever necessary, negotiate any such assets without consent or signature from the assuming insurer or any other entity.

(d) Additional conditions applicable to reinsurance agreements.

(1) A reinsurance agreement, which is entered into in conjunction with a trust agreement and the establishment of a trust account, must contain provisions that:

(A) require the assuming insurer to enter into a trust agreement and to establish a trust account for the benefit of the ceding insurer, and specifying what such agreement is to cover;

(B) stipulate that assets deposited in the trust account must be valued, according to their current fair market value, and must consist only of, in any combination, cash (United States legal tender), certificates of deposit (issued by a bank organized under the laws of the United States, or located in the United States, and payable in United States legal tender), or investments of the types permitted by Insurance Code §493.104 provided that such investments are issued by an institution that is not the parent, subsidiary, or affiliate of either the grantor or the beneficiary;

(C) require that all settlements of account between the ceding insurer and the assuming insurer be made in cash or its equivalent; and

(D) stipulate that the assuming insurer and the ceding insurer agree that the assets in the trust account, established pursuant to the provisions of the reinsurance agreement, may be withdrawn by the ceding insurer at any time, notwithstanding any other provisions in the reinsurance agreement, and must be utilized and applied by the ceding insurer or its successors in interest by operation of law, including any liquidator, rehabilitator, receiver, or conservator of such company, without diminution because of insolvency on the part of the ceding insurer or the assuming insurer, only for the following purposes:

(i) to reimburse the ceding insurer for the assuming insurer's share of premiums returned to the owners of policies reinsured under the reinsurance agreement on account of cancellations of such policies;

(ii) to reimburse the ceding insurer for the assuming insurer's share of surrenders and benefits or losses paid by the ceding insurer pursuant to the provisions of the policies reinsured under the reinsurance agreement;

(iii) in the event of notice of termination of the trust, to fund an account with the ceding insurer in an amount at least equal to the deduction, for reinsurance ceded, from the ceding insurer's liabilities for policies ceded under the agreement, such account must include amounts for policy reserves, claims and losses incurred (including losses incurred but not reported), loss adjustment expenses, and unearned premiums reserves; and

(iv) to pay any other amounts due the ceding insurer under the reinsurance agreement.

(2) The reinsurance agreement may also contain provisions that:

(A) give the assuming insurer the right to seek approval from the ceding insurer to withdraw from the aforementioned trust account all or any part of the assets contained therein and transfer such assets to the assuming insurer, provided:

(i) the assuming insurer must at the time of such withdrawal, replace the withdrawn assets with other qualified assets having a market value equal to the market value of the assets withdrawn so as to maintain at all times the deposit in the required amount; or

(ii) after such withdrawal and transfer, the market value of the trust account is no less than 102 percent of the required amount; and

(iii) the ceding insurer must be the sole judge as to the application of this subparagraph, but must not unreasonably or arbitrarily withhold its approval;

(B) provide for the return of any amount withdrawn in excess of the actual amounts required for paragraph (1)(D)(i)-(iii) of this subsection or, in the case of paragraph (1)(D)(iv) of this subsection, any amounts that are subsequently determined not to be due;

(C) provide for interest payments to the assuming insurer, at a rate not in excess of the rate of interest earned, on the amounts held pursuant to paragraph (1)(D)(iii) of this subsection; or

(D) permit the award by any arbitration panel or court of competent jurisdiction of:

(i) interest at a rate different from that provided in subparagraph (C) of this paragraph;

(ii) court or arbitration costs;

(iii) attorney's fees; and

(iv) any other reasonable expenses.

(e) Reduction in liability for reinsurance ceded to an unauthorized insurer. A trust agreement may be used to reduce any liability for reinsurance ceded to an unauthorized assuming insurer in financial statements required to be filed with TDI in compliance with the provisions of this section when established on or before the date of the financial statement of the ceding insurer. Further, the reduction for the existence of an acceptable trust account may be up to the current fair market value of acceptable assets available to be withdrawn from the trust account at that time, but such reduction must be no greater than the specific obligations under the reinsurance agreement that the trust account was established to secure.

Source Note: The provisions of this §7.609 adopted to be effective August 16, 1990, 15 TexReg 4435; amended to be effective June 19, 2018, 43 TexReg 3888