CHAPTER 66 SENATE BILL No. 48 An  Act concerning insurance; relating to reinsurance; amending K.S.A. 40-3634 and K.S.A. 1998 Supp. 40-221a and repealing the existing sections. Be it enacted by the Legislature of the State of Kansas:

      Section  1. K.S.A. 1998 Supp. 40-221a is hereby amended to read as
follows: 40-221a. (a) Any insurance company organized under the laws of
this state may (1) with the consent of the commissioner of insurance, cede
all of its risks to any other solvent insurance company authorized to trans-
act business in this state or accept all of the risks of any other company,
(2) accept all or any part of an individual risk or all or any part of a
particular class of risks which it is authorized to insure, and (3) cede all
or any part of an individual risk or all or any part of a particular class of
risks to another solvent insurer or insurers having the power to accept
such reinsurance.

      (b) Any insurance company organized under the laws of this state
may take credit as an asset or as a deduction from loss and unearned
premium reserves on such ceded risks to the extent reinsured by an in-
surer or insurers authorized to transact business in this state, but such
credit on ceded risks reinsured by any insurer which is not authorized to
transact business in this state may be taken in an amount not exceeding:

      (1) The amount of deposits by, and funds withheld from, the assum-
ing insurer pursuant to express provision therefor in the reinsurance con-
tract, as security for the payment of the obligations thereunder, if such
deposits or funds are held subject to withdrawal by, and under the control
of, the ceding insurer or are placed in trust for such purposes in a bank
which is insured by the federal deposit insurance corporation or its suc-
cessor, if withdrawals from such trust cannot be made without the consent
of the ceding company;

      (2) the amount of a clean and irrevocable letter of credit issued by a
bank which is insured by the federal deposit insurance corporation or its
successor if such letter of credit is initially issued for a term of at least
one year and by its terms is automatically renewed at each expiration date
for at least an additional one-year term unless at least 30 days prior written
notice of intention not to renew is given to the ceding company by the
issuing bank or the assuming company and provided that such letter of
credit is issued under arrangements satisfactory to the commissioner of
insurance as constituting security to the ceding insurer substantially equal
to that of a deposit under paragraph (1) of this subsection; or

      (3) the amount of loss and unearned premium reserves on such ceded
risks to an assuming insurer which maintains a trust fund in a qualified
United States financial institution, as defined in (b)(3)(D), for the pay-
ment of the valid claims of its United States ceding insurers, their assigns
and successors in interest. The assuming insurer shall report annually to
the commissioner information substantially the same as that required to
be reported on the national association of insurance commissioners an-
nual statement form by licensed insurers to enable the commissioner to
determine the sufficiency of the trust fund. In the case of a single assum-
ing insurer, the trust shall consist of a trusteed account representing the
assuming insurer's liability attributable to business written in the United
States and, in addition, the assuming insurer shall maintain a trusteed
surplus of not less than $20,000,000. In the case of a group including
incorporated and individual unincorporated underwriters, the trust shall
consist of a trusteed account representing the group's liabilities attribut-
able to business written in the United States and, in addition, the group
shall maintain a trusteed surplus of which $100,000,000 shall be held
jointly for the benefit of United States ceding insurers of any member of
the group; 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 solvency regulation and control by
the group's domiciliary regulator as are the unincorporated members; and
the group shall make available to the commissioner an annual certification
of the solvency of each underwriter by the group's domiciliary regulator
and its independent public accountants.

      (A) Such trust must be in a form approved by the commissioner of
insurance. The trust instrument shall provide that contested claims shall
be valid and enforceable upon the final order of any court of competent
jurisdiction in the United States. The trust shall vest legal title to its assets
in the trustees of the trust for its United States ceding insurers, their
assigns and successors in interest. The trust and the assuming group or
insurer shall be subject to examination as determined by the commis-
sioner. The trust, described herein, must remain in effect for as long as
the assuming group or insurer shall have outstanding obligations due un-
der the reinsurance agreements subject to the trust.

      (B) No later than February 28 of each year the trustees of the trust
shall report to the commissioner in writing setting forth the balance of
the trust and listing the trust's investments at the preceding year end and
shall certify the date of termination of the trust, if so planned, or certify
that the trust shall not expire prior to the next following December 31.

      (C) The credit authorized under subsection (b)(3) shall not be al-
lowed unless the assuming group or insurer agrees in the reinsurance
agreements:

      (i) That in the event of the failure of the assuming group or insurer
to perform its obligations under the terms of the reinsurance agreement,
the assuming group or 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 such court jurisdiction, and will abide by the final decision of such
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 com-
pany.

      (iii) This provision is not intended to conflict with or override the
obligation of the parties to a reinsurance agreement to arbitrate their
disputes, if such an obligation to do so is created in the agreement.

      (D) A ``qualified United States financial institution'' means, for pur-
poses of those provisions of this law specifying those institutions that are
eligible to act as a fiduciary of a trust, an institution that:

      (i) Is organized, or (in the case of a U.S. branch or agency office of
a foreign banking organization) licensed, under the laws of the United
States or any state thereof and has been granted authority to operate with
fiduciary powers; and

      (ii) is regulated, supervised and examined by federal or state author-
ities having regulatory authority over banks and trust companies.

      The foregoing provisions of paragraphs (1), (2) and (3) of subsection
(b) shall not apply to a domestic title insurance company subject to the
provisions of K.S.A. 40-1107a and amendments thereto.

      (c) Any reinsurance ceded by a company No credit shall be allowed,
as an admitted asset or deduction from liability, to any ceding insurer
organized under the laws of this state or ceded by any company not or-
ganized under the laws of this state and transacting business in this state
must, pursuant to express provisions contained in the reinsurance agree-
ment, be payable by the assuming insurer on the basis of the liability of
the ceding company under the contract or contracts reinsured for rein-
surance, unless the reinsurance contract provides, in substance, that in
the event of the insolvency of the ceding insurer, the reinsurance shall be
payable under a contract reinsured by the assuming insurer on the basis
of the liability of the ceding company under the contract or contracts
reinsured, as approved by the liquidation court, without diminution be-
cause of the insolvency of the ceding company and any such reinsurance
agreement which may be canceled on less than 90 days' notice must
provide in the reinsurance agreement for a run-off of the reinsurance in
force at the date of cancellation. Any reinsurance agreement entered into
with a domestic insurer which may be canceled on less than 90 days'
notice, and which cancellation would constitute a material cancellation as
defined by K.S.A. 40-2,156a and amendments thereto, must provide in
the reinsurance agreement, in substance, for a run-off of the reinsurance
in force at the date of cancellation, unless the agreement is canceled for
nonpayment of premium or fraud in the inducement. Reinsurance pay-
ments shall be made directly to the ceding insurer or to its domiciliary
liquidator except: (1) Where the reinsurance contract or policy reinsured
specifically provides another payee of such reinsurance in the event of the
insolvency of the ceding insurer; or (2) where the assuming insurer, with
the consent of the direct insured, has assumed such policy obligations of
the ceding insurer as direct obligations of the assuming insurer to the
payees under such policies and in substitution for the obligations of the
ceding insurer to such payees.

      (d) The reinsurance agreement may provide that the domiciliary li-
quidator of an insolvent ceding insurer shall give written notice to the
assuming insurer of the pendency of a claim against such ceding insurer
on the contract reinsured within a reasonable time after such claim is filed
in the liquidation proceeding. During the pendency of such claim, any
assuming insurer may investigate such claim and interpose, at its own
expense, in the proceeding where such claim is to be adjudicated any
defenses which it deems available to the ceding insurer, or its liquidator.
Such expense may be filed as a claim against the insolvent ceding insurer
to the extent of a proportionate share of the benefit which may accrue to
the ceding insurer solely as a result of the defense undertaken by the
assuming insurer. Where two or more assuming insurers are involved in
the same claim and a majority in interest elect to interpose a defense to
such claim, the expense shall be apportioned in accordance with the terms
of the reinsurance agreement as though such expense had been incurred
by the ceding insurer.

      Sec.  2. K.S.A. 40-3634 is hereby amended to read as follows: 40-
3634. Except as provided in K.S.A. 40-3602 and amendments thereto,
the amount recoverable by the liquidator from reinsurers shall not be
reduced as a result of the delinquency proceedings, regardless of any
provision in the reinsurance contract or other agreement. Payment made
directly to an insured or other creditor shall not diminish the reinsurer's
obligation to the insurer's estate except when the reinsurance contract
provided for direct coverage of a named insured and the payment was
made in discharge of such obligation. in the event of the insolvency of the
ceding insurer, the reinsurance shall be payable under a contract rein-
sured by the assuming insurer on the basis of the liability of the ceding
company under the contract or contracts reinsured, as approved by the
liquidation court, without diminution because of the insolvency of the
ceding insurer. Such payments shall be made directly to the ceding insurer
or to its domiciliary liquidator except: (a) Where the reinsurance contract
or policy reinsured specifically provides another payee of such reinsur-
ance in the event of the insolvency of the ceding insurer; or (b) where the
assuming insurer, with the consent of the direct insured, has assumed
such policy obligations of the ceding insurer as direct obligations of the
assuming insurer to the payees under such policies and in substitution for
the obligations of the ceding insurer to such payees.

      Sec.  3. K.S.A. 40-3634 and K.S.A. 1998 Supp. 40-221a are hereby
repealed.

      Sec.  4. This act shall take effect and be in force from and after its
publication in the statute book.

Approved April 7, 1999.
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