premium reserves. The requirements only apply to business written in the United States. account requirement. The reason for this is $40,000,000 Ceiling. It should be noted that a ceiling of $40,000,000 has been put on the essentially that, although the requirement should cause little problem to any well-run company, nevertheless, if it applies to 100% of all reserves, regardless of the size of the company, the total amount of money in these accounts--to be audited by the Insurance Departments--will run into billions of dollars. A study of past insolvencies made by the Antitrust and Monopoly Subcommittee of the United States Senate prior to the Gateway insolvency and confirmed by the firm of Woodward and Fondiller in their review of this proposal, notes that there has been no insolvency in at least 30 years greater than 10 million dollars. A cap of 40 million should provide ample coverage for most problems which are likely to arise, unless the pattern of past insolvencies is altered drastically in the future. Section 3 Foreign and Alien Insurers. The severe impact of the insolvency of a foreign company cannot be disputed--the Gateway insolvency dramatically demonstrates this. A truly effective program must therefore cover foreign and alien companies. A provision has therefor been added to cover alien and foreign insurers for the writings done in the state enacting the law. During the several years that this proposal has been before the industry, there has been substantial controversy as to whether or not the requirement should apply to foreign as well as domestic companies. The fear on the part of a number of industry people involves the retaliatory laws. companies, the retaliatory laws of a number of states would result in requiring that accounts be established in scattered locations. We do not believe that this would be the result. The retaliatory statutes would not be applied to such a requirement and even if applied, the only result would be a requirement that an account be maintained in its home state. The liberal definition of "custodian" would permit such a result. In addition, the statute has a provision that if a similar law exists in the state of domicile of the foreign company, a complete exemption is provided. However, in order to qualify for such an exemption, that law must recognize the lien rights of foreign insolvency funds against the Policyholder Security Account of its domestic insurers. Section 4 Reinsurance in Affiliated Companies. It is absolutely necessary to make allowance for reinsurance if smaller companies are to maintain these accounts without undue difficulty. On the other hand, it is absolutely essential to avoid any problem of phony reinsurance with affiliates. Such arrangements have, in the past, caused difficulties. Note the problem which involved the Dealers National of Texas, and which indirectly caused the insolvency of Fidelity General Insurance Company of Illinois. Reinsurance of Fidelity General in Dealers National, removal of some of Fidelity General's prime assets to pay for the reinsurance and subsequent insolvency of Dealers combined to wreck Fidelity General. It is therefore provided - in this draft that affiliated foreign reinsurers can afford credit to the insurer only if the affiliated reinsurer itself establishes an account equal to the amount of the resources which would be required were the cessions not made by the domestic insurer. All domestic reinsurers, affiliated or non-affiliated, will have to establish Policyholder Security Accounts. Unaffiliated Reinsurers. Section 4 does not spell out the requirement that unaffiliated domestic or admitted reinsurers maintain a Policyholder Security Account equal to the reserves applicable to the cessions from a company which claims credit for reinsurance. Domestic or admitted reinsurers will, themselves, be subject to a direct requirement that a Policyholder Security Account be maintained. Section 5. It is, of course, important that the Insurance Department determine that the Policyholder Security Account is intact and that the values therein are sufficient to provide coverage for the various reserves and obligations of the Accordingly, several means of accomplishing this are established in company. the model statute as follows: 1. Valuation of the Account. It is noted under the definition of custodian, the custodian must furnish to the commissioner by the Lest it be feared that the valuation problem will be a substantial 99-073 0 78-41 2. themselves, or which may be in shaky circumstances. The rules of reason apply, of course, but the commissioner is given authority to demand a schedule of the cash and marketable securities at any specific time. It has been noted by commentators on this proposal that a company which has a dishonest or reckless management has 29 or 30 days in which to manipulate its assets. This period of time occurs following the submission of the monthly schedule and before the time of the next monthly schedule of transactions is due. However, if the commissioner has the authority to go in at any time, without notice to the custodian, and demand a schedule. If the commissioner will do this on occasion, the fear of detection should deter those managements which may be deliberately intending to play games with the account. In addition, Section 7 has a provision requiring prior approval of a withdrawal of more than 10%. If total withdrawals in a 90-day period exceed 10% of the Policyholder Security Account, the commissioner must be contacted and approval obtained. 3. Monthly report of transactions. Subsection (c) (2) of the definition of custodian requires that the custodian furnish to the commissioner monthly a certified schedule of transactions affecting the account during the preceding 30 days. Again, most companies will have little or no activity in the account during a given month, and there will be a report merely stating that no activity has taken place. However, for those companies which must remove, substitute or exchange securities in a given month, this report will go to the commissioner and his audit section will have an opportunity to consider the impact, if any, of such removal or substitution. It should be noted that banks, as a matter of routine, furnish these monthly transaction schedules as to their depositors and will merely send a copy of the transaction report to the commissioner. Section 6. 4. The commissioner is permitted to allow insurers to take credit for securities maintained with a custodian by underwriting association pools and syndicates. As noted above, companies as a matter of right can take credit for securities on deposit with states. Commissioners Notice. The commissioner shall require any deficiency to be eliminated within a period of not more than 90 days. It is suggested that in most cases the commissioner will select a period much shorter than 90 days. However, depending on the type of problem involved, some discretion should be given to the commissioner. The company must respond to the commissioner's order or be subject to an order as provided for in the Rehabilitation or Liquidation Statute. The Failure to Comply. Most states have a provision in their liquidation act which authorizes certain action by the commissioner even though a condition of insolvency has not yet been established. It is believed that reference to this section is appropriate and in almost every case, this section affords the commissioner sufficient authority to take whatever protective action might be appropriate, depending on the seriousness of the failure to maintain the Policyholder Security Account, the amount of the deficiency, other conditions existing within the knowledge of the commissioners, etc. Section 7. Investment Freedom. Subsection (a) spells out the fact that companies which maintain the account may, without question, without prior authority, or without any restriction whatsoever, substitute or exchange cash or marketable securities in the account. The only caveat is that the exchange must result in |