Be it enacted by the Legislature of the State of Arizona:

Section 1. Section 20-261.01, Arizona Revised Statutes, is amended to read:

START_STATUTE20-261.01. Credit for reinsurance

A. A domestic ceding insurer shall be allowed a credit for reinsurance as an asset to or a deduction from liability on account of reinsurance ceded if the reinsurer satisfies one of the following requirements, except that a reinsurer that satisfies the requirements of paragraph 3 or 4 of this subsection must also satisfy the requirements of paragraph 6 7 of this subsection:

1. The reinsurance is ceded to an assuming insurer that is licensed to transact insurance or reinsurance in this state.

2. The reinsurance is ceded to an assuming insurer that is accredited as a reinsurer in this state. Credit shall not be allowed a domestic ceding insurer if the director after notice and a hearing revokes the assuming insurer's accreditation. For the purposes of this paragraph, "accredited reinsurer" means a reinsurer that:

(a) Files with the director evidence of its submission to this state's jurisdiction.

(b) Submits to this state's authority to examine its books and records.

(c) Is licensed to transact insurance or reinsurance in at least one state, or if the accredited reinsurer is a United States branch of an alien assuming insurer, is entered through and licensed to transact insurance or reinsurance in at least one state.

(d) Files annually with the director a copy of its annual statement that is filed with the insurance department of its state of domicile and a copy of its most recent audited financial statement. and maintains either:

(e) Demonstrates to the satisfaction of the director 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 either one of the following:

(i) A surplus as regards policyholders in an amount of not less than twenty million dollars and the director within ninety days of submission has not denied its accreditation.

(ii) A surplus as regards policyholders in an amount of less than twenty million dollars and the director approves its accreditation.

3. The reinsurance is ceded to an assuming insurer that is domiciled and licensed in, or is a United States branch of an alien assuming insurer that is entered through and licensed in, a state that employs standards regarding credit for reinsurance substantially similar to the standards applicable under this section and the assuming insurer does both of the following:

(a) Maintains a surplus as regards policyholders in an amount of not less than twenty million dollars. This subdivision does not apply to reinsurance that is ceded and assumed pursuant to pooling arrangements among insurers in the same holding company system.

(b) Submits to the authority of this state to examine its books and records.

4. The reinsurance is ceded to an assuming insurer that maintains a trust fund in a qualified United States financial institution as defined in section 20‑261.03, subsection B exclusively for the payment of the valid claims of its United States policyholders and ceding insurers and their assigns and successors in interest. To enable the director to determine the sufficiency of the trust fund, the assuming insurer shall report annually to the director information that is substantially similar to the information that must be reported by licensed insurers on the national association of insurance commissioners form. The assuming insurer shall submit to examination of its books and records by the director and bear the expense of examination. Credit for reinsurance is not allowed under this paragraph unless the form of trust and any amendments to the trust have been approved by the insurance director of the state where the trust is domiciled or the insurance director of another state who, pursuant to the terms of the trust instrument, has accepted principal regulatory oversight of the trust.� The form of the trust and any trust amendments shall also be filed with the insurance director of every state in which the ceding insurer beneficiaries of the trust are domiciled. The trust instrument shall provide that contested claims are valid and enforceable on 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 United States ceding insurers, their assigns and successors in interest.� The trust and the assuming insurer are subject to examination as determined by the director.� 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.� On or before February 28 of each year the trustee of the trust shall report to the director in writing the balance of the trust, 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 before the following December 31. The amount of the trust shall be as follows:

(a) Except as provided in this subdivision, in the case of a single assuming insurer, the trust shall consist of a trusteed account representing the assuming insurer's liabilities that are attributable to business written in the United States and the assuming insurer shall maintain a trusteed surplus of not less than twenty million dollars. At any time after the assuming insurer has permanently discontinued underwriting new business secured by the trust for at least three full years, the director 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 domestic 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 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 of the assuming insurer's liabilities attributable to reinsurance ceded by domestic ceding insurers covered by the trust.

(b) In the case of a group, including incorporated and individual unincorporated underwriters: ,

(i) 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 representing the group's liabilities that are in an amount not less than the respective underwriters' several liabilities attributable to business written in the ceded by United States ceding insurers to any underwriter of the group.

(ii) For reinsurance ceded under reinsurance agreements with an inception date on or before December 31, 1992 and not amended or renewed after that date, notwithstanding any other provision of this section, 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.

(iii) In addition to these trusts, and 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 group.

(c) The incorporated members of the group shall not engage in any business other than underwriting as a member of the group and are subject to the same level of solvency regulation and control by the group's domiciliary regulator as are the unincorporated members. The group shall make available to the director an annual certification of the solvency of each underwriter by the group's domiciliary regulator and its independent public accountants within ninety days after its financial statements are due to be filed with the group's domiciliary regulator 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.

(b) (d) In the case of a group of incorporated insurers under common administration that complies with the filing requirements under this paragraph, that has transacted continuously for at least three years immediately before applying for accreditation an insurance business outside the United States, that submits to this state's authority to examine its books and records and bears the expense of that examination and that has an aggregate policyholders' surplus of ten billion dollars, the trust shall be in an amount equal to not less than the group's several liabilities that are attributable to business ceded by United States ceding insurers to any member of the group pursuant to reinsurance contracts issued in the name of the group. The group shall maintain a joint trusteed surplus of which one hundred million dollars shall be held jointly as additional security for any such liabilities and shall be held exclusively for the benefit of United States ceding insurers of any member of the group. Within ninety days after its financial statements are due to be filed with the group's domiciliary regulator, each member shall make available to the director an annual certification of the member's solvency by the member's domiciliary regulator and its independent public accountant and financial statements of each underwriter member of the group prepared by its independent public accountant.

5. The reinsurance is ceded to an assuming insurer that has been certified by the director.� In order to be certified by the director, the assuming insurer must meet the following requirements:

(a) Be domiciled and licensed to transact insurance or reinsurance in a jurisdiction determined to be a qualified jurisdiction under subsection B, paragraph 1 of this section.�

(b) Agree to submit to the jurisdiction of this state, to appoint the director as its agent for service of process in this state and to provide security for one hundred percent 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.

(d) Maintain financial strength ratings from two or more rating agencies deemed acceptable by the director by rule.

(e) Agree to meet any information filing requirements as determined by the director, both with respect to its initial application for certification and on an ongoing basis.

(f) Satisfy any other requirements for certification deemed relevant by the director.

(g) Agree to secure obligations assumed from United States ceding insurers at a level consistent with its rating, as specified by rule, and in a form acceptable to the director and consistent with section 20‑261.02 or in a multibeneficiary trust pursuant to paragraph 4 of this subsection, except as otherwise provided in this subsection.� If the assuming insurer secures obligations in a multibeneficiary trust, it agrees to 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 the assuming insurer agrees to bind itself, by the language of the trust and agreement with the director with principal regulatory oversight of each such trust account to fund, on termination of any such trust account, out of the remaining surplus of such trust any deficiency of any other such trust account.

5. 6. The reinsurance is ceded to an assuming insurer that does not satisfy the requirements of paragraph 1, 2, 3, or 4 or 5 of this subsection with respect to the insurance of risks that are located in foreign or alien jurisdictions where the reinsurance is required by law or regulation.

6. 7. If the assuming insurer is not licensed or accredited to transact insurance or reinsurance in this state, credit will be allowed pursuant to paragraph 3 or 4 of this subsection only if the assuming insurer agrees in the reinsurance agreement:

(a) That, if the assuming insurer fails to perform its obligations under the agreement and at the request of the ceding insurer, the assuming insurer shall submit to the jurisdiction of any court of competent jurisdiction in any state of the United States, comply with all jurisdictional requirements necessary to give the court jurisdiction and abide by the court's final decision or, if an appeal is taken, the final decision of an appellate court.

(b) To designate the director or a qualified person under section 20‑218.01 as its true and lawful agent upon on whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the ceding company.

8. If the assuming insurer does not meet the requirements of paragraph 1, 2 or 3 of this subsection, the credit permitted by paragraph 4 or 5 of this subsection is not allowed unless the assuming insurer agrees in the reinsurance agreement to the following:

(a) Notwithstanding any other provision in the trust agreement, if the trust fund is inadequate because it contains an amount that is less than the amount required by paragraph 4, subdivision (d) of this subsection, 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 director with regulatory oversight over the trust or with an order of a court of competent jurisdiction directing the trustee to transfer to the director with regulatory oversight all of the assets of the trust fund.

(b) The assets shall be distributed by and claims shall be filed with and valued by the director with regulatory oversight under the laws of the state in which the trust is domiciled that apply to the liquidation of domestic insurance companies.

(c) If the director with regulatory oversight determines that the assets of the trust fund or any part thereof are not necessary to satisfy the claims of United States ceding insurers of the grantor of the trust, the assets or part thereof shall be returned by the director with regulatory oversight to the trustee for distribution pursuant to the trust agreement.

(d) The grantor of the trust shall waive any right otherwise available to it under United States law that is inconsistent with this section.

B. For the purposes of subsection A, paragraph 5 of this section:

1. In determining whether a jurisdiction shall be considered a qualified jurisdiction, the director shall evaluate the appropriateness and effectiveness of the reinsurance supervisory system of the jurisdiction, both initially and on an ongoing basis, consider the rights, benefits and the extent of reciprocal recognition afforded by the jurisdiction to reinsurers licensed and domiciled in the united states and consider the list of qualified jurisdictions published through the national association of insurance commissioners committee process. The director may consider additional factors in the director's discretion.� In order to be deemed a qualified jurisdiction, the jurisdiction must agree to share information and cooperate with the director with respect to all certified reinsurers domiciled within that jurisdiction.� A jurisdiction may not be recognized as a qualified jurisdiction if the director determines that the jurisdiction does not adequately and promptly enforce final United States judgments and arbitration awards.� United States jurisdictions that meet the requirements for accreditation under the national association of insurance commissioners financial standards and accreditation program shall be recognized as qualified jurisdictions. If the director approves a jurisdiction as qualified that does not appear on the national association of insurance commissioners list of qualified jurisdictions, the director shall provide thoroughly documented justification pursuant to criteria to be developed by rule. The director shall create and publish a list of qualified jurisdictions.� If an applicant for certification has been certified as a reinsurer in a national association of insurance commissioners accredited jurisdiction, the director may defer to that jurisdiction's certification and may defer to the rating assigned to the assuming insurer by that jurisdiction, and the applicant shall be considered to be a certified reinsurer in this state.

2. The director 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 director by rule.� The director shall publish a list of all certified reinsurers and their ratings.

3. If a certified reinsurer's domiciliary jurisdiction ceases to be a qualified jurisdiction, the director is authorized to suspend the reinsurer's certification indefinitely, in lieu of revocation. If a certified reinsurer's certification is, for any reason, revoked, suspended, voluntarily surrendered or deemed inactive, the reinsurer shall be treated as a certified reinsurer required to secure one hundred percent of its obligations.� If the director continues to assign a higher rating as permitted by other provisions of this paragraph, this requirement does not apply to a certified reinsurer in inactive status or to a reinsurer whose certification has been suspended.

4. The minimum trusteed surplus requirements provided in subsection A, paragraph 4 of this section do not apply with respect to a multibeneficiary trust maintained by a certified reinsurer for the purpose of securing obligations incurred under subsection A, paragraph 4 of this section, except that such trust shall maintain a minimum trusteed surplus of ten million dollars.

5. With respect to obligations incurred by a certified reinsurer under subsection A, paragraph 5 of this section, if the security is insufficient, the director shall reduce the allowable credit by an amount proportionate to the deficiency, and may impose further reductions in allowable credit on finding that there is a material risk that the certified reinsurer's obligations will not be paid in full when due.

6. 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 state, and the director shall assign a rating that takes into account, if relevant, the reasons why the reinsurer is not assuming new business.

C. If an accredited or certified reinsurer ceases to meet the requirements for accreditation or certification, the director may suspend or revoke the reinsurer's accreditation or certification and the following apply:

1. The director must give the reinsurer notice and an opportunity for hearing. The suspension or revocation may not take effect until after the director's order on hearing, unless one of the following occurs:

(a) The reinsurer waives the hearing.

(b) The director'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 subsection B, paragraph 1 of this section.

(c) The director finds that an emergency requires immediate action and a court of competent jurisdiction has not stayed the director's action.

2. 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 under section 20‑261.02.� 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 under subsection A, paragraph 5, subdivision (g) of this section or section 20‑261.02.

D. 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 director within thirty days after reinsurance recoverables from any single assuming insurer, or group of affiliated assuming insurers, exceeds fifty percent 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.� A ceding insurer shall take steps to diversify its reinsurance program.� A domestic ceding insurer shall notify the director within thirty days after ceding to any single assuming insurer, or group of affiliated assuming insurers, more than twenty percent 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.

B. E. A trust under subsection A, paragraph 4 of this section shall be established in a form that is approved by the director. The trust instrument shall provide that contested claims are valid and enforceable on 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 and their assigns and successors in interest. The trust and the assuming insurer are subject to examination by the director. The trust shall remain in effect for as long as the assuming insurer has outstanding obligations due under the reinsurance agreements that are subject to the trust. On or before February 28 of each year, the trustees of the trust shall submit in writing to the director a report setting forth the balance of the trust and listing the trust's investments at the preceding year end. If the termination of the trust is planned, the trustees shall certify the date of termination of the trust. Otherwise the trustees shall certify that the trust will not expire before December 31 of the following year.

C. F. This section shall not override the obligation of the parties to a reinsurance agreement to arbitrate a dispute if the agreement requires arbitration. END_STATUTE

Sec. 2. Section 20-261.02, Arizona Revised Statutes, is amended to read:

START_STATUTE20-261.02. Reduction from liability for reinsurance ceded by a domestic insurer to an assuming insurer

A. A reduction from liability for the reinsurance that is ceded by a domestic insurer to an assuming insurer who does not meet the requirements of section 20‑261.01 shall be allowed in the amount of monies that are held by or on behalf of the ceding insurer and that do not exceed the liabilities carried by the ceding insurer, including:

1. Security that is held in the United States subject to withdrawal solely by and under the exclusive control of the ceding insurer and monies held in trust for the ceding insurer, including monies held in trust, under a reinsurance contract with the assuming insurer as security for the payment of obligations thereunder.

2. In the case of a trust, monies held in a qualified United States financial institution as defined in section 20‑261.03, subsection B.

B. The security that is required by subsection A of this section may be in the form of:

1. Cash.

2. Securities that are 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 that qualify as admitted assets.

3. Clean, irrevocable and unconditional letters of credit that are issued or confirmed by a qualified United States financial institution as defined in section 20‑261.03, subsection A, that are issued no later than December 31 in the year for which filing is made and that are in the possession of, or held in trust for, the ceding company on or before the filing date of the ceding company's annual statement. Notwithstanding the issuing or confirming institution's subsequent failure to meet the applicable standards of issuer acceptability, letters of credit that meet applicable standards of issuer acceptability as to the date of issuance or confirmation are acceptable as security until their expiration, extension, renewal, modification or amendment, whichever first occurs.

4. Any other form of security that is acceptable to the director. END_STATUTE

Sec. 3. Rulemaking

For the purposes of implementing this act, including identifying the requirements for a jurisdiction to be considered a qualified jurisdiction by the director, the department of insurance is exempt from the rulemaking requirements of title 41, chapter 6, Arizona Revised Statutes, for two years after the effective date of this act.