R590. Insurance, Administration.R590-114. Letters of Credit.
R590-114-1. Authority.
This rule is promulgated by the commissioner pursuant to Sections 31A-2-201 and 31A-17-404.
R590-114-2. Purpose and Scope.
(1) The purpose of this rule is to determine, in accordance with Subsection 31A-17-404(10)(c)(ii), the form of letter of credit security to protect a ceding insurer in a reinsurance transaction if:
(a) the requirement in Subsection 31A-17-404(3) or the alternative security factors in Subsection 31A-17-404(6) are not present; and
(b) the ceding insurer retains the reinsurer's funds in the form of a letter of credit.
(2) Security for a reinsurance transaction is maintained because the ceding insurer's reinsurance credit may be allowed as an asset or a deduction from liabilities.
(3) The allowance or disallowance of credit in a reinsurance transaction may be used to determine if the transaction complies with other financial requirements of Title 31A, Insurance Code.
(4) This rule applies to any person transacting insurance under Title 31A, Insurance Code.
R590-114-3. Definitions.
Terms used in this rule are defined in Section 31A-1-301. Additional terms are defined as follows:
(1) "Clean" means a letter of credit that does not require the presentation of any document other than a sight draft for a draw upon available funds.
(2) "Evergreen clause" means a provision in a letter of credit that prevents the letter from expiring unless the issuer provides advance notice.
R590-114-4. Rule.
(1) A letter of credit issued to comply with Subsection 31A-17-404(10)(c)(ii) shall meet the requirements in this section.
(2) A letter of credit that takes the form of the Model Letter of Credit, available upon request from the department, complies with this rule.
(3) A letter of credit shall:
(a) be issued by a bank or trust company that is a member of the Federal Reserve system;
(b) name the ceding insurer as the sole beneficiary;
(c) be clean;
(d) be unconditional and not subject to any qualifications outside the letter of credit;
(e) be irrevocable;
(f) contain an evergreen clause;
(g) have a term of not less than one year;
(h) be automatically extended for not less than one additional year, unless the issuer notifies the ceding insurer and the reinsurer that the letter will not be renewed at least 30 days before the letter expires;
(i) state that a bank's obligation is not contingent upon reimbursement;
(j) state whether the letter of credit is subject to the laws of this state; and
(k) provide that any drafts drawn be presentable at a bank office in the United States.
(4) A letter of credit may not:
(a) contain references to any other agreement, document, or entity; or
(b) be reduced or revoked without the written consent of the beneficiary.
(5)(a) A letter of credit may contain a boxed reference section with the applicant's name and other appropriate information for internal identification.
(b) The information contained in the boxed reference section may not affect the terms of the letter or the obligations of the bank.
(6) When a letter of credit is not renewed or is withdrawn, the ceding insurer may:
(a) withdraw the balance of the letter of credit; and
(b) place the resulting sum in trust to secure continuing obligations under the reinsurance contract until the ceding insurer receives the following:
(i) a renewal letter of credit; or
(ii) an alternative form of security that complies with this rule and Title 31A, Insurance Code.
(7) A letter of credit used as security under this rule shall be available for inspection by the commissioner or the commissioner's designee upon request.
R590-114-5. Separability.
If any provision of this rule, Rule R590-114, or its application to any person or situation is held invalid, such invalidity does not affect any other provision or application of this rule that can be given effect without the invalid provision or application. The remainder of this rule shall be given effect without the invalid provision or application.
