Rule2024-12491
Surety Companies Doing Business With the United States
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
June 10, 2024
Effective
August 9, 2024
Issuing agencies
Treasury DepartmentBureau of the Fiscal Service
Abstract
This final rule amends the regulations of the Department of the Treasury, Bureau of the Fiscal Service (Treasury), regarding the corporate Federal surety bond program (the program). Treasury is amending its regulations to allow for recognition of additional companies as reinsurers. Treasury is also amending its regulations to incorporate requirements, previously published in supplemental guidance documents, for surety companies to submit information that Treasury uses to perform financial analysis of these companies. Treasury is also reorganizing the existing regulations to modernize and improve their structure.
Full Text
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<title>Federal Register, Volume 89 Issue 112 (Monday, June 10, 2024)</title>
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[Federal Register Volume 89, Number 112 (Monday, June 10, 2024)]
[Rules and Regulations]
[Pages 48827-48838]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-12491]
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DEPARTMENT OF THE TREASURY
Bureau of the Fiscal Service
31 CFR Part 223
[Docket No. FISCAL-2021-0006]
RIN 1530-AA20
Surety Companies Doing Business With the United States
AGENCY: Fiscal Service, Bureau of the Fiscal Service, Treasury.
ACTION: Final rule.
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SUMMARY: This final rule amends the regulations of the Department of
the Treasury, Bureau of the Fiscal Service (Treasury), regarding the
corporate Federal surety bond program (the program). Treasury is
amending its regulations to allow for recognition of additional
companies as reinsurers. Treasury is also amending its regulations to
incorporate requirements, previously published in supplemental guidance
documents, for surety companies to submit information that Treasury
uses to perform financial analysis of these companies. Treasury is also
reorganizing the existing regulations to modernize and improve their
structure.
DATES: This final rule is effective August 9, 2024.
FOR FURTHER INFORMATION CONTACT: Melvin Saunders at
<a href="/cdn-cgi/l/email-protection#9cf1f9f0eaf5f2b2effde9f2f8f9eeefdcfaf5effffdf0b2e8eef9fdefe9eee5b2fbf3ea"><span class="__cf_email__" data-cfemail="04696168726d6a2a7765716a6061767744626d776765682a707661657771767d2a636b72">[email protected]</span></a> or 304-480-5108; Bobbi McDonald at
<a href="/cdn-cgi/l/email-protection#6c0e030e0e0542010f0803020d00082c0a051f0f0d0042181e090d1f191e15420b031a"><span class="__cf_email__" data-cfemail="77151815151e591a14131819161b1337111e0414161b59030512160402050e59101801">[email protected]</span></a> or 304-480-7098; or David Crowe at
<a href="/cdn-cgi/l/email-protection#a5c1c4d3ccc18bc6d7cad2c0e5c3ccd6c6c4c98bd1d7c0c4d6d0d7dc8bc2cad3"><span class="__cf_email__" data-cfemail="5e3a3f28373a703d2c31293b1e38372d3d3f32702a2c3b3f2d2b2c2770393128">[email protected]</span></a> or 304-480-8971.
SUPPLEMENTARY INFORMATION:
I. Background
Treasury administers the corporate Federal surety bond program,
which issues certificates of authority to authorized surety companies,
analyzes the financial statements of applicant and authorized companies
to ensure compliance, and publishes lists of companies holding a
certificate authority. Treasury also reviews applications by companies
to become admitted reinsurers, i.e., companies permitted by Treasury to
provide reinsurance to certified sureties except on excess risks that
run to the United States. Treasury administers the program pursuant to
31 CFR part 223 (part 223) and publishes supplemental guidance on its
website.
Treasury published a request for information (RFI) on December 30,
2019.\1\ The RFI sought public input on a variety of topics relating to
Treasury's evaluation of surety companies, as well as the operations of
the corporate Federal surety bond program. These topics included, among
other things, Treasury's financial analysis methodology, its rules
regarding credit for reinsurance, and the documentation it requires to
perform its review of companies seeking designation and renewal as
certified sureties or admitted reinsurers. The public comments
informed, in part, Treasury's development of this rulemaking.
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\1\ 84 FR 72138.
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On March 3, 2022, Treasury published a notice of proposed
rulemaking (NPRM) at 87 FR 12003 to propose amendments to part 223,
which implements the provisions of 31 U.S.C. 9304-9308. The NPRM
proposed two main amendments to part 223. First, the NPRM proposed to
add two new categories of reinsurance companies that can receive
recognition from Treasury: complementary reinsurers and alien
reinsurers. The proposed amendments would allow Treasury-certified
surety companies to receive credit for reinsurance ceded to these
companies with reduced or zero collateral, and would also allow
complementary or alien reinsurers to reinsure excess risks of certified
surety companies not running to the United States. Second, Treasury
proposed amending 31 CFR 223.9 to describe in greater detail the
financial analysis it performs related to companies applying for a
certificate of authority or renewal of a certificate of authority and
to incorporate certain requirements previously published in the
program's annual and supplemental guidance. Additionally, Treasury
proposed various amendments to part 223 to reorganize and modernize the
structure of the regulations.
Treasury received 13 comment letters from a cross-section of
entities associated with the surety industry and other stakeholders.
Seven of the comment letters were from surety companies or reinsurers,
three were from surety or insurance trade associations, one was from a
law firm that represents surety companies, one was from a coalition of
environmental groups, and one was from an anonymous individual.
Treasury has considered the comments and addresses them below.
II. Analysis of Comments
The public comments were generally supportive of the NPRM's
proposed changes to add new categories of reinsurers eligible for
Treasury recognition, to add more detailed information regarding
Treasury's financial analysis, and to update and modernize the
structure of the surety regulations. Treasury did not receive any
comments expressing disagreement with the key objectives described
above. Several of the favorable comments regarding Treasury's proposal
to add new categories of reinsurers eligible for Treasury recognition
noted that these changes would benefit the surety industry as a whole
by lowering the regulatory burden on surety companies and increasing
the reinsurance capacity available to Treasury-certified surety
companies. Commenters also concurred with the NPRM that these changes
would not increase the risk to the Federal Government of surety
companies being unable to carry out their obligations.
A surety company commented that smaller and medium-sized surety
companies, which typically have a lower underwriting limit than larger
firms, might particularly benefit from greater access to international
reinsurance without the posting of collateral under the proposal to
recognize additional reinsurers. The same commenter also noted that
these changes could lower the price of surety bonds in the marketplace,
which could not only benefit smaller and medium-sized surety companies
but also benefit smaller and minority-owned contractors who frequently
obtain surety bonds from smaller or mid-sized surety companies. Thus,
in the view of the commenter, the proposed changes could make it easier
for small, minority-owned contractors to bid on construction projects
for the Federal Government.
[[Page 48828]]
Some commenters, while expressing support for the NPRM generally,
suggested changes or clarifications, as discussed below.
A. Categories of Reinsurers
Two commenters suggested that the NPRM's definition of the two new
categories of reinsurers--complementary reinsurers and alien
reinsurers--should be expanded to include additional reinsurers that
are recognized under state laws that are based on the National
Association of Insurance Commissioners' (NAIC) Credit for Reinsurance
Model Law (Model 785) and Model Regulation (Model 786). Under the NPRM,
to be recognized as a complementary reinsurer, a company must be from a
non-U.S. jurisdiction that is subject to an in-force Covered Agreement,
among other requirements. A ``Covered Agreement'' is an agreement, as
described in Sec. 223.12(i), regarding prudential matters with respect
to the business of insurance or reinsurance between the United States
and one or more foreign authorities, entered into pursuant to 31 U.S.C.
313-314.
Per the NPRM, the company must also be recognized by at least one
U.S. state as a Reciprocal Jurisdiction Reinsurer. A ``Reciprocal
Jurisdiction'' is a jurisdiction that meets one of the following: (1) a
non-U.S. jurisdiction that is subject to an in-force Covered Agreement
with the United States, (2) a U.S. jurisdiction that meets the
requirements for accreditation under the NAIC financial standards and
accreditation program, or (3) a Qualified Jurisdiction, as defined by
state law that is based on the NAIC Credit for Reinsurance Model Law
(Model 785) and Model Regulation (Model 786), which meets certain
additional requirements. A ``Reciprocal Jurisdiction Reinsurer'' is a
reinsurer with its head office in or domicile in a Reciprocal
Jurisdiction and which meets all capital and surplus, solvency, and
market conduct requirements under state law based on the 2019
Amendments to the NAIC Credit for Reinsurance Model Law and Model
Regulation.
To be recognized by Treasury as an alien reinsurer, the NPRM
provided that a company must be from a non-U.S. jurisdiction that is
recognized by state law and the NAIC as a Qualified Jurisdiction or as
a Reciprocal Jurisdiction, provided the Reciprocal Jurisdiction is not
party to an in-force Covered Agreement, among other requirements. A
``Qualified Jurisdiction'' is a jurisdiction determined by a state
insurance supervisor to have appropriate and effective supervision of
reinsurance and which meets other requirements defined in state law.
The NAIC also publishes a list of Qualified Jurisdictions. The NPRM
also required the company to be recognized by at least one state as a
Certified Reinsurer or Reciprocal Jurisdiction Reinsurer. A ``Certified
Reinsurer'' is a reinsurer from a Qualified Jurisdiction that meets the
requirements of the state insurance laws and regulations based on the
NAIC models.
The two commenters pointed out that these definitions of
complementary reinsurer and alien reinsurer excluded some reinsurers
eligible for recognition at the state level, namely reinsurers referred
to as Accredited Reinsurers under the NAIC Credit for Reinsurance Model
Law and Model Regulation. Under state law based on these models, an
``Accredited Reinsurer'' is a reinsurer meeting specific conditions,
which allow it to receive accreditation from the state and to assume
reinsurance from U.S. reinsurers. The commenters suggested that
Treasury clarify whether the definitions of the new categories of
reinsurers include Accredited Reinsurers and, if not, consider
expanding the definitions to include such companies.
The NPRM's goal in expanding the types of reinsurers eligible for
recognition was to ease the administrative burden on surety companies
by allowing them to use additional reinsurers that meet Treasury's
financial strength and market conduct requirements and that are from
jurisdictions with sufficient regulatory regimes, as well as by
incorporating greater harmony with state regulation. Treasury agrees
with the commenters that allowing recognition of Accredited Reinsurers
would further this goal, provided that they meet Treasury's other
requirements. The final rule therefore includes revisions in Sec.
223.12(d) and (j) to clarify that a company recognized as an Accredited
Reinsurer by a U.S. state is eligible to be recognized by Treasury as
an alien reinsurer. Note that under Sec. 223.11(b)(2), that if a
company, including an Accredited Reinsurer, seeking recognition as an
alien reinsurer is required by its U.S. state of domicile to provide
100 percent collateral in order for its ceding insurers to obtain full
credit for reinsurance, then that company is not eligible to reinsure a
surety company's excess risk pursuant to Sec. 223.11(b). Such a
company may only be used by a surety company to receive credit for
reinsurance pursuant to Sec. 223.9(c) and must provide the same level
of collateral as called for under state law. This change is being made
to highlight and codify Treasury's existing policy that companies
cannot rely on collateral for both credit for reinsurance and
limitations of excess risks.
B. Admitted Assets
One commenter suggested that the NPRM adopt an approach towards
``admitted assets'' set forth in the NAIC's Accounting Practices and
Procedures Manual, which all 50 states have adopted. However, Treasury
does not intend to adopt the approach utilized by the NAIC. Adoption of
that approach would limit Treasury's discretionary authority to reject
an asset in the limited circumstances where it determines that such a
rejection may be warranted. The NPRM codifies into the surety
regulations, in 31 CFR 223.9, several provisions regarding Treasury's
admissibility and valuation of assets that previously were only
contained in the program's annual guidance, while also retaining the
ability for Treasury to value a company's assets and liabilities in its
discretion.
C. Letters of Credit
One commenter suggested that Treasury update the NPRM to allow for
irrevocable, unconditional, evergreen letters of credit to be used to
protect risks underwritten in excess of a surety company's underwriting
limit. Treasury has had a longstanding policy, which the NPRM proposed
to codify at Sec. 223.9(e)(2), of allowing surety companies to use
letters of credit to obtain credit for reinsurance, under certain
circumstances. Treasury has reservations, however, about allowing
letters of credit to be used to protect excess risks (i.e., those risk
that exceed the company's underwriting limit). Historically, companies
attempting to rely on letters of credit for such a purpose have not
been able to demonstrate to Treasury that the assets referred to in the
letter of credit are set aside by the issuer solely for the exclusive
use of protecting the particular excess risk. This means that Treasury
has been unable to verify that the companies could actually rely on the
assets referred to in the letter of credit if the companies need to pay
a claim on the excess risk. Accordingly, Treasury declines to amend
Sec. 223.11 to allow for the blanket usage of irrevocable,
unconditional, evergreen letters of credit to protect excess risks.
However, Treasury may consider, on a case-by-case basis, allowing a
surety company to use a letter of credit for such purpose if Treasury
can verify that the assets referenced in the letter are
[[Page 48829]]
pledged exclusively to secure the excess risk--that is, if the assets
references in the letter of credit cannot be drawn upon for any other
purpose--and if the letter of credit meets other requirements Treasury
might prescribe. A modification to Sec. 223.11(c)(1) has been made
reflecting this clarification.
D. Underwriting Limitation
Another commenter recommended that Treasury alter the way it
calculates the underwriting limitation for certified surety companies.
The commenter stated that Treasury's current method, which sets the
limit at 10 percent of a company's surplus as determined by Treasury,
is outdated and may adversely impact monoline surety companies. The
letter proposes that Treasury adopt an approach that would set a surety
company's underwriting limit based on its risk-based capital. The
existing underwriting limitation is one of Treasury's most important
tools in ensuring that the sureties it certifies are able to carry out
their contracts, and Treasury's longstanding method of determining the
underwriting limitation has worked well in accomplishing this goal. A
national association of surety companies responded to the RFI that
Treasury published on December 31, 2019, strongly encouraging Treasury
not to change its method of calculating the underwriting limitation
because of the strong safeguard it provides to the Federal Government.
While the NPRM relies on certain risk-based approaches, Treasury
believes the existing limitation is appropriate and beneficial.
E. Eligibility
One commenter requested that Treasury reconsider a provision of the
NPRM regarding companies that only insure or reinsure risks of their
parent, affiliated, or controlled unaffiliated business, or that are
deemed by Treasury to be primarily engaged in self-insurance. Sections
223.1(c) and 223.12(e) of the proposed rules codified Treasury's
longstanding policy that such companies are not eligible to obtain a
certificate of authority, nor for recognition as a reinsurer. As noted
in the NPRM, these types of companies cannot provide the documentation
required by Treasury to evaluate them consistent with its standards.
Treasury acknowledges the alternative view offered by this commenter,
but continues to believe its existing policy is in the best interests
of the surety program. Accordingly, Treasury is adopting these
provisions of the rule as proposed.
F. Small Business Administration Surety Bond Guarantee Program
One commenter suggested that Treasury consider a surety's admission
in the Small Business Administration's (SBA) Surety Bond Guarantee
program to serve as an alternative to reinsurance under the program's
requirements. SBA's Surety Bond Guarantee program is not intended to be
akin to reinsurance for companies admitted into Treasury's surety bond
program. Given the different purposes of the two programs, it would not
be appropriate to treat the SBA Surety Bond Guarantee program as
reinsurance for this purpose. Accordingly, Treasury declines to adopt
the recommendation in this comment.
G. Risk Analysis
One comment letter suggested that Treasury make additional
amendments unrelated to the substance of the changes proposed in the
NPRM that would, in the view of the commenters, allow Treasury to
better consider potential risk posed by ``the aggregate of all
currently-issued bonds'' of a particular surety. The letter asserts
that in certain sectors, a small number of surety companies have issued
bonds that, in the aggregate, exceed each company's ability to pay,
creating a risk that these surety companies will go bankrupt if the
obligees on the bonds undertake forfeiture of the bonds. Accordingly,
the letter asks that Treasury consider revisions to part 223 that would
analyze a surety's aggregate risk when determining whether a surety
qualifies for certification, and that Treasury impose an underwriting
limitation on the aggregate risk of all bonds issued by a given surety.
The letter also asks, should Treasury decline to make such changes,
that Treasury clarify that it neither considers nor places limits on
aggregate risk when evaluating sureties. The letter also addresses
certain regulatory matters that are beyond the scope of the surety bond
program.
The substance of these proposed changes is beyond the scope of
those proposed by the NPRM. Accordingly, Treasury does not express an
opinion on the letter's proposed amendments to the regulations.
Nevertheless, for clarity, Treasury notes that there are multiple ways,
in addition to its requirement that companies report bonds in excess of
their underwriting limitation, by which Treasury ensures that a surety
is not underwriting bonds in excess of its ability to pay. For example,
Treasury's financial analysis, now codified in more detail in part 223
through this rulemaking, encompasses a robust review of a surety's
financial statements. This review includes a detailed analysis by
Treasury of the surety company's reinsurance portfolio via the Treasury
Schedule F. And although a surety company reports excess risks to
Treasury on a per-bond basis, the Schedule of Excess Risks form that
each company submits gives Treasury insight into the overall risk
profile of each company and the adequacy of protective measures taken
by the company. Additionally, Treasury requires surety companies to
report on a quarterly basis the penal sum of all Federal surety bonds
(not just those bonds in excess of the companies' underwriting limits)
written and outstanding as of the close of the reporting period,
including identifying the types of surety bonds being written (e.g.,
customs, reclamation, construction contract) and the agency obligee.
All of these tools provide Treasury with the means to evaluate risks
from a surety company, which could result in a deeper analysis of the
company and potential non-renewal of its certificate of authority.
III. Additional Changes
In addition to the changes made in response to comments, discussed
above, Treasury made a number of changes to the final rule text in
Sec. Sec. 223.2, 223.3, 223.5, 223.7, 223.8, 223.9, 223.10, 223.11,
223.12, 223.16, and 223.22 that were not specified in the NPRM. These
changes are clarifying, technical, or nonsubstantive and are made in
furtherance of the purposes described in the NPRM.
Treasury updated the application requirements in Sec.
223.2(a)(5)(i) to clarify that when applying for a certificate of
authority companies must also report significant changes in operations
or corporate structure that might impact their financial statements.
Treasury routinely asks for this information in the application process
and is now codifying it with the other application requirements.
Treasury added a similar requirement in Sec. 223.12(h)(1)(ix) to apply
to applications for recognition as an admitted reinsurer.
In Sec. 223.3(a), Treasury removed the phrase ``at the company's
expense'' from the provision that Treasury may require companies to
submit additional information when making decisions to issue or renew
certificates of authority. Treasury made this edit for consistency with
other provisions of part 223 that state Treasury may require additional
information but do not specify that doing so is at the company's
expense. Treasury believes it is self-evident that companies are
responsible for the expense of submitting any required
[[Page 48830]]
additional information, and therefore removed that clause from Sec.
223.3 to avoid any confusion as to why the requirement was not
mentioned elsewhere.
Treasury made edits in Sec. Sec. 223.2(a) and (b) and 222.12(h)
through (j), to remove ``receipt or proof of payment'' as part of the
application requirements. In the time since Treasury published the
NPRM, Treasury has updated its processes whereby it no longer requires
applicant companies to submit a receipt or other proof of payment for
Treasury to verify that the companies have paid the required fees.
In Sec. Sec. 223.2(a) and (b), 223.8(a), and 223.12(h) Treasury
added a requirement that companies provide the NAIC file upload when
submitting their annual or quarterly financial statements. Companies
have submitted their statements via the text file upload for many
years, so Treasury wanted to clarify these sections to remove any doubt
that the companies should continue to do so.
Treasury made an additional edit to the application requirements in
Sec. 223.2(b) to clarify that a Schedule of Excess Risks form is
submitted as of the close of the preceding quarter, not the preceding
year.
In Sec. Sec. 223.2(b) and 223.8, Treasury corrected the name of
the form utilized by companies to report Federal business written and
outstanding.
Treasury also made edits to Sec. 223.9(c)(2) to reflect its
practice that companies must submit sufficient documentation before
receiving credit for reinsurance to the extent of funds withheld, trust
agreements, or letters of credit. Treasury also made an edit in this
paragraph to conform with a similar statement previously published in
supplemental guidance that Treasury's allowance of credit in these
circumstances is discretionary.
Treasury removed language in Sec. 223.11 describing the
requirements for Miller Act bonds to improve the clarity of the
section.
Treasury made edits to Sec. 223.12(i) and (j) to clarify that
Treasury will look to state law to determine whether a reinsurer
applying to be a complementary reinsurer or alien reinsurer is
recognized as a Reciprocal Jurisdiction Reinsurer, Accredited
Reinsurer, or Certified Reinsurer, as appropriate. The NPRM stated that
Treasury would look to the NAIC definition of those categories of
reinsurer, but as Treasury requires reinsurers to submit proof that
they have obtained recognition from at least one U.S. state, Treasury
finds it more appropriate to reference state law that is based on the
NAIC models. For similar reasons, Treasury made an edit in Sec.
223.12(j) to clarify that an alien reinsurer must be domiciled in a
non-U.S. jurisdiction that is recognized by a U.S. state as a Qualified
Jurisdiction or Reciprocal Jurisdiction (provided that the Reciprocal
Jurisdiction is not party to an in-force Covered Agreement as described
in Sec. 223.12(i)). Treasury removed the language contained in the
NPRM that an alien reinsurer's jurisdiction must be recognized as
Qualified or Reciprocal by the NAIC, but Treasury also made an edit in
Sec. 223.12(j) to clarify that Treasury may consider, if it deems
appropriate, the NAIC lists of Qualified and Reciprocal Jurisdictions.
Treasury also removed the word ``independent'' where it appeared
before the term ``qualified actuary'' in Sec. Sec. 223.2(a) and (b)
and 223.12(h). The application requirements in these sections require
companies to submit reports by ``qualified actuary,'' as defined by the
NAIC. Treasury removed the word ``independent'' to be clear the term
``qualified actuary'' in part 223 should be understood as having the
same meaning as the term used by the NAIC.
Treasury updated the provision of Sec. 223.9(c)(1)(ii) discussing
amounts ceded to parents, subsidiaries, or affiliates to better align
with Treasury's pre-existing guidance on these cessions.
IV. Procedural Analysis
Regulatory Planning and Review
The final rule does not meet the criteria for a ``significant''
regulatory action under Executive Order 12866, as amended. Therefore,
the regulatory review procedures contained therein do not apply.
Administrative PAYGO
The Administrative Pay-As-You-Go Act of 2023 (Pub. L. 118-5) does
not apply to this rule because it does not increase direct spending.
Regulatory Flexibility Act
It is hereby certified that the final rule will not have a
significant economic impact on a substantial number of small entities.
The final rule adopts criteria for recognition for reinsurers outlined
in the Covered Agreements and in the NAIC Credit for Reinsurance Model
Law and Regulation. Accordingly, reinsurance companies from relevant
non-U.S. jurisdictions seeking to assume business from U.S. ceding
insurers are already complying with similar financial requirements.
Additionally, adherence to these requirements is only required for
companies seeking recognition by Treasury; participation in the program
is voluntary. The final rule changes regarding Treasury's financial
analysis mainly codify existing requirements and policies, of which
Treasury-certified sureties were already aware. Therefore, this final
rule will not have a significant economic impact on a substantial
number of small entities, and a regulatory flexibility analysis under
the Regulatory Flexibility Act is not required.
Unfunded Mandates Act of 1995
Section 202 of the Unfunded Mandates Reform Act of 1995, 2 U.S.C.
1532, requires agencies to prepare budgetary impact statements before
promulgating any rule likely to result in a Federal mandate that may
result in the expenditure by state, local, and tribal governments, in
the aggregate, or by the private sector, of $100 million or more in any
one year. If a budgetary impact statement is required, section 205 of
the Unfunded Mandates Reform Act also requires the agency to identify
and consider a reasonable number of regulatory alternatives before
promulgating the rule. This final rule will not result in expenditures
by state, local, and tribal governments, or by the private sector, of
$100 million of more in any one year. Accordingly, Treasury has not
prepared a budgetary impact statement or specifically addressed any
regulatory alternatives.
Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (Act) (codified at 44 U.S.C.
3507(d)) requires that collections of information prescribed in the
proposed rules be submitted to the Office of Management and Budget
(OMB) for review and approval. In accordance with that requirement,
Treasury has submitted the collection of information contained in the
notice of proposed rulemaking to OMB for approval under OMB Control
Number 1530-0074. Under the Act, an agency may not conduct or sponsor,
and a person is not required to respond to, a collection of information
unless it displays a valid OMB control number.
The collection of information is contained in Sec. 223.12(i) and
(j). The amendments require companies applying for initial recognition
as a complementary reinsurer to submit to Treasury all information
provided by the company or by the supervisory authority of the
company's domiciliary jurisdiction to any U.S. state regulator in the
two most recently completed calendar years. For renewal of such
recognition, companies will submit all semi-annual and annual filing
[[Page 48831]]
information provided by the company or by the supervisory authority of
the company's domiciliary jurisdiction to any U.S. state regulator in
the most recently completed calendar year. Companies applying for
initial recognition as an alien reinsurer will submit to Treasury all
information provided to any U.S. state regulator in the two most
recently completed calendar years. For renewal of such recognition,
companies will submit all annual filing information provided to any
U.S. state regulator in the most recently completed calendar year.
List of Subjects in 31 CFR Part 223
Financial analysis, Reinsurance, Surety bonds.
For the reasons set forth in the NPRM and in this preamble,
Treasury amends 31 CFR part 223 as follows:
PART 223--SURETY COMPANIES DOING BUSINESS WITH THE UNITED STATES
0
1. The authority citation for part 223 continues to read as follows:
Authority: 5 U.S.C. 301; 31 U.S.C. 9304-9308.
0
2. Revise Sec. 223.1 to read as follows:
Sec. 223.1 Certificate of authority.
(a) The regulations in this part govern the issuance, renewal, and
revocation by the Secretary of the Treasury, acting through the U.S.
Department of the Treasury, Bureau of the Fiscal Service (Treasury), of
certificates of authority to bonding companies to do business with the
United States as sureties on, or reinsurers of, Federal surety bonds
(hereinafter ``bonds'' or ``obligations'') under the authority of 31
U.S.C. 9304-9308 and this part, and the acceptance of such obligations.
(b) A company applying for authority to write surety bonds in favor
of the United States must be engaged in the business of writing surety
or fidelity contracts at the time of its application to Treasury,
whether or not also making contracts in other classes of insurance, but
shall not be engaged in any type or class of business not authorized by
its charter or the laws of the state in which the company is
incorporated. It must be the intention of the company to engage
actively in the execution of surety bonds or fidelity contracts in
favor of the United States.
(c) A company is not eligible for a certificate of authority if it
only insures or reinsures risks of its parent, affiliated, or
controlled unaffiliated business, or is deemed by Treasury to be
primarily engaged in self-insurance.
0
3. Revise Sec. 223.2 to read as follows:
Sec. 223.2 Application for certificate of authority.
(a) Application for issuance of certificate of authority. Every
company not currently holding a certificate of authority wishing to
apply for a certificate of authority shall submit an application to
Treasury, c/o Surety Bonds Program, to the location, and in the manner,
specified online at <a href="https://www.fiscal.treasury.gov/surety-bonds/">https://www.fiscal.treasury.gov/surety-bonds/</a>. The
company shall file the following data with Treasury, and shall transmit
therewith the fee in accordance with the provisions of Sec. 223.22:
(1) Payment of the application fee in accordance with the
provisions of Sec. 223.22;
(2) A written request for a certificate of authority, signed by an
officer of the company. This request must indicate:
(i) Whether the company has previously applied for a certificate of
authority from Treasury and, if so, the date and disposition of the
previous application; and
(ii) Whether Treasury has ever previously issued the company a
certificate of authority, the reason for termination of its certificate
of authority, and the applicable dates;
(3) A certified copy of its charter or articles of incorporation
showing that it is duly authorized to conduct the business referenced
under 31 U.S.C. 9304(a)(2) and a statement from an officer of the
company certifying that:
(i) The company is authorized to transact surety business; and
(ii) If granted a certificate of authority, there are no
restrictions upon the company preventing it from being able to execute
and guarantee bonds and undertakings in judicial proceedings, and
guarantee contracts to which the United States is a party;
(4) A listing of the names of the company's current officers and
directors as of the date of application, including a biographical
affidavit of each officer and director per instructions online at
<a href="https://www.fiscal.treasury.gov/surety-bonds/">https://www.fiscal.treasury.gov/surety-bonds/</a>;
(5) A memorandum setting forth:
(i) A comprehensive statement of the company's method of operation,
including, but not limited to, underwriting guidelines, claims
adjustment procedures, reinsurance philosophy, control over collateral,
and significant changes in operations or corporate structure that
impact its financial statements;
(ii) The classes of business in which it engages;
(iii) Any special underwriting agreements, management agreements,
or pooling agreements in force. Copies of such agreements must be
included with the memorandum; and
(iv) Present plans of the company as to the types of Federal bonds
it intends to write, the anticipated annual premium volume of the
Federal bonds, and the geographical areas in which it intends to write
the Federal bonds;
(6) A certified copy of a license from its state of incorporation
and a completed Surety License Form (Form No. FS 2208);
(7) A copy of the latest available report of its examination by its
domiciliary State Insurance Department including a copy of company
responses to any significant findings or recommendations;
(8) The National Association of Insurance Commissioners (NAIC)
annual statement form with all Schedules and Exhibits completed,
including copies of the NAIC File Upload, showing the last two full
calendar years of the company's financial condition, including proof
that the company has paid-up capital of at least $250,000 in cash or
its equivalent, in the case of a stock insurance company, or has net
assets of not less than $500,000 over and above all liabilities, in the
case of a mutual insurance company. The annual financial statement's
Jurat Page (only) is to be signed (facsimile or electronic signatures
are acceptable) by the company President, Secretary, and a Notary
Public who shall also affix a notary seal;
(9) The Insurance Regulatory Information System (IRIS) ratio
results, and an explanation for any ratios outside the normal ranges as
established by the NAIC for the last two full calendar years preceding
the date of application;
(10) A written statement signed by the Insurance Commissioner or
other proper financial officer of any state attesting that the company
maintains on deposit legal investments having a current market value of
not less than $100,000 for the protection of claimants, including all
of its policyholders in the U.S.;
(11) A completed Treasury Schedule F (Form No. TFS 6314), as
referenced in Sec. 223.9(c) for the last two full calendar years
preceding the date of application;
(12) Copies of all reinsurance treaties currently in force along
with a completed Summary of Reinsurance Treaties, per instructions
provided online at <a href="https://www.fiscal.treasury.gov/surety-bonds/">https://www.fiscal.treasury.gov/surety-bonds/</a>;
(13) A completed Schedule of Excess Risks form (Form No. FS 285-A)
as of the date of the application;
[[Page 48832]]
(14) A Statement of Actuarial Opinion as of the close of the last
two full calendar years preceding the date of application provided by a
qualified actuary, as defined by the NAIC, on the adequacy of all loss
reserves with the scope and format of the statement also conforming to
the requirements of the NAIC; and
(15) Such other evidence as Treasury may, in its discretion,
request to establish that the company is solvent, willing, and able to
meet the continuing obligation to carry out its contracts.
Additionally, Treasury will publish supplemental guidance annually
regarding evidence it may require, submission methods, and format of
the data listed in paragraphs (a)(1) through (14) of this section.
(b) Applications for renewal of certificate of authority. Every
company wishing to apply for the annual renewal of its certificate of
authority shall submit an application to Treasury, c/o Surety Bonds
Program, to the location, and in the manner, specified online at
<a href="https://www.fiscal.treasury.gov/surety-bonds/">https://www.fiscal.treasury.gov/surety-bonds/</a>. The company shall file
the following data with Treasury, and shall transmit therewith the fee
in accordance with the provisions of Sec. 223.22:
(1) Payment of the application fee in accordance with the
provisions of Sec. 223.22;
(2) A completed Surety License Form (Form No. FS 2208) and a
certified copy of the licenses from any states indicated on the Surety
License Form that were not indicated on the company's most recent form;
(3) A copy of the latest available report of its examination by its
domiciliary State Insurance Department including a copy of company
responses to any significant findings or recommendations;
(4) A statement of its financial condition, as of the close of the
preceding year, on the annual statement form of the NAIC with all
Schedules and Exhibits completed, including copies of the NAIC File
Upload, showing that it has paid-up capital of at least $250,000 in
cash or its equivalent, in the case of a stock insurance company, or
has net assets of not less than $500,000 over and above all
liabilities, in the case of a mutual insurance company. The Annual
Financial Statement's Jurat Page (only) is to be signed (facsimile or
electronic signatures are acceptable) by the company President,
Secretary, and a Notary Public who shall also affix a notary seal;
(5) IRIS ratio results, and an explanation for any ratios outside
the normal ranges as established by the NAIC, as of the close of the
preceding year;
(6) A completed Treasury Schedule F (Form No. TFS 6314), as
referenced in Sec. 223.9(c) as of the close of the preceding year;
(7) A completed Schedule of Excess Risks form (Form No. FS 285-A)
as of the close of the preceding quarter;
(8) A Statement of Actuarial Opinion as of the close of the
preceding year provided by a qualified actuary, as defined by the NAIC,
on the adequacy of all loss reserves with the scope and format of the
statement also conforming to the requirements of the NAIC;
(9) A listing of the names of the company's current officers and
directors as of the close of the preceding year, including a
biographical affidavit of any new officer and director for whom a
biographical affidavit was not previously provided, per instructions
online at <a href="https://www.fiscal.treasury.gov/surety-bonds/">https://www.fiscal.treasury.gov/surety-bonds/</a>;
(10) A Report of Federal Business Written and/or Outstanding as of
the close of the preceding year, per instructions provided online at
<a href="https://www.fiscal.treasury.gov/surety-bonds/">https://www.fiscal.treasury.gov/surety-bonds/</a>; and
(11) Such other evidence as Treasury may request to establish that
the company is solvent, willing, and able to meet the continuing
obligation to carry out its contracts. Additionally, Treasury will
publish supplemental guidance annually regarding evidence it may
require, submission methods, and format of the data listed in
paragraphs (b)(1) through (10) of this section.
0
4. Revise Sec. 223.3 to read as follows:
Sec. 223.3 Issuance of certificates of authority.
(a) In determining whether to issue or renew a certificate of
authority, Treasury will evaluate the whole application package under
Sec. 223.2, the financial condition of the company as determined under
Sec. 223.9, the history of the company, and any further evidence or
information that Treasury may, in its discretion, require the company
to submit.
(b) A certificate of authority will be effective for a term that
expires on the last day of the next July. All statutory requirements
and regulatory requirements under this part are continuing obligations,
and any certificate issued is expressly subject to continuing
compliance with such requirements. The certificate of authority will be
renewed annually on the first day of August, provided that the company
remains qualified under the law, the regulations in this part, and
other relevant Treasury requirements, and the company submits the fee
required under Sec. 223.22 by March 1st of each year.
(c) If a company meets the requirements for a certificate of
authority as an acceptable surety on Federal bonds in all respects
except that it is limited to reinsurance business only, it may be
issued a certificate of authority as a reinsuring company on Federal
bonds. The fees for initial application and renewal of a certificate as
a reinsuring company are the same as the fees for an initial
application and renewal of a certificate of authority as an acceptable
surety on Federal bonds.
Sec. 223.4 [Removed and Reserved]
0
5. Remove and reserve Sec. 223.4.
0
6. Revise Sec. 223.5 to read as follows:
Sec. 223.5 Business.
A company holding a certificate of authority, or its agent, may
only execute (sign or otherwise validate) a surety bond in favor of the
United States in a state where it is licensed to do surety business. It
need not be licensed in the state or other area in which the principal
resides or where the contract is to be performed. The term other area
includes the District of Columbia, American Samoa, Guam, the Northern
Mariana Islands, Puerto Rico, and the U.S. Virgin Islands.
Sec. 223.6 [Removed and Reserved]
0
7. Remove and reserve Sec. 223.6.
0
8. Revise Sec. 223.7 to read as follows:
Sec. 223.7 Notification of changes.
(a) Every company certified under this part or recognized as an
admitted reinsurer pursuant to Sec. 223.12(h) must notify Treasury of
changes that have a significant impact on its financial statements or
solvency during the term of such certification or admission. Paragraphs
(a)(1) through (4) of this section are not intended to be an exhaustive
list of all such changes that Treasury may require to be reported and
may evaluate as part of its ongoing analysis of the company.
Additionally, Treasury will publish supplemental guidance on additional
information that may be required. Every company certified under this
part or recognized as an admitted reinsurer pursuant to Sec. 223.12(h)
must notify Treasury of the following:
(1) Capital changes. Companies must forward to Treasury, when
available, approvals by the insurance authorities of the company's
state regulator when changes in paid-up capital or contributions or
withdrawals to surplus have occurred;
[[Page 48833]]
(2) Changes in stock ownership. Stock insurance companies must
provide a statement signed and sworn to by the Secretary or Assistant
Secretary and by the Treasurer or Assistant Treasurer of the company
each time any person (whether an individual, corporation, or
organization of any kind) becomes owner of more than 5 percent of any
class of outstanding stock issued by the company;
(3) Mergers, transfer, assumption, and group/pool restructuring.
Companies must notify Treasury at least six months prior to any merger,
consolidation, transfer, assumption, material group or pool
restructuring, or name changes in which the reporting company is
involved. The company must furnish to Treasury copies or agreements or
documents pertaining to the same, as approved by the insurance
authorities of the company's state regulator; and
(4) Charters and bylaws amendments. Whenever a company amends its
charter or bylaws it must submit a certified copy of the amended
charter or bylaws to Treasury.
(b) Noncompliance with this section may result in Treasury denying
a company's application for its certificate of authority, its
recognition as an admitted reinsurer, renewal of its certificate of
authority, or renewal of its recognition as an admitted reinsurer; or
in Treasury revoking a company's certificate of authority or
recognition as an admitted reinsurer.
0
9. Revise Sec. 223.8 to read as follows:
Sec. 223.8 Quarterly financial reporting requirements.
Every company certified under this part is required to file the
following each quarter with Treasury, c/o Surety Bonds Program, to the
location, and in the manner, specified online at <a href="https://www.fiscal.treasury.gov/surety-bonds/">https://www.fiscal.treasury.gov/surety-bonds/</a>:
(a) A statement of its financial condition, as of the close of the
preceding quarter, on the quarterly statement form of the NAIC with all
Schedules and Exhibits completed, including copies of the NAIC File
Upload, showing that it has paid-up capital of at least $250,000 in
cash or its equivalent, in the case of a stock insurance company, or
has net assets of not less than $500,000 over and above all
liabilities, in the case of a mutual insurance company. The Quarterly
Financial Statement's Jurat Page (only) is to be signed (facsimile or
electronic signatures are acceptable) by the company President,
Secretary, and a Notary Public who shall also affix a notary seal;
(b) A completed Schedule of Excess Risks form (Form No. FS 285-A)
as of the close of the preceding quarter;
(c) A Report of Federal Business Written and/or Outstanding as of
the close of the preceding quarter, per instructions provided online at
<a href="https://www.fiscal.treasury.gov/surety-bonds/">https://www.fiscal.treasury.gov/surety-bonds/</a>;
(d) A copy of the latest available report of its examination by its
domiciliary State Insurance Department including a copy of company
responses to any significant findings or recommendations;
(e) A listing of the names of the company's current officers and
directors as of the close of the preceding quarter, including a
biographical affidavit of each new officer and director per
instructions online at <a href="https://www.fiscal.treasury.gov/surety-bonds/">https://www.fiscal.treasury.gov/surety-bonds/</a>;
and
(f) Such other evidence as Treasury may request to establish that
the company is solvent, willing, and able to meet the continuing
obligation to carry out its contracts. Additionally, Treasury will
publish supplemental guidance annually regarding evidence it may
require, submission methods, and format of the data listed in
paragraphs (a) through (e) of this section along with the due dates for
quarterly reporting.
0
10. Revise Sec. 223.9 to read as follows:
Sec. 223.9 Determination of financial condition and other required
information.
In determining the financial condition of every company applying
for a certificate of authority or renewal of a certificate of authority
under this part, Treasury will generally compute the company's assets
and liabilities in accordance with paragraphs (a) through (f) of this
section, provided that Treasury may exercise discretion in valuing the
assets and liabilities of such companies. While paragraphs (a) through
(f) specify how Treasury will value certain classes of assets and
liabilities and the analysis that Treasury will perform, they are not
intended to be an exhaustive list of all assets and liabilities that
Treasury may require to be reported and may evaluate as part of this
analysis. Additionally, Treasury will annually publish supplemental
guidance on the financial analysis performed by Treasury, including
applicable ratios and acceptable ranges for ratios.
(a) Assets--(1) General criteria for admissibility. The cash
capital and other funds included in the financial statement must be
safely invested in accordance with the laws of the state in which the
company is incorporated. Admissible assets must be reported in U.S.
Dollars and are generally limited to investments in cash, cash
equivalents, short term investments, mortgage loans (within certain
limits), and real property necessary for the conduct of a company's
business. In cases where an investment (other than U.S. Government
securities and securities of affiliates or subsidiaries) exceeds 10
percent of the total admitted assets, Treasury may require additional
supporting documentation as needed on a case-by-case basis in order for
the asset to be admissible. Additionally, Treasury considers normal
account balances (such as, but not limited to, investment income due
and accrued, agents' balances and premiums receivables, reinsurance
recoverables on paid losses, and funds held by or deposited with ceding
reinsuring companies) to be admissible provided they meet Treasury's
standards. In order to be admissible, normal account balances may be
evaluated for transactional substance, quality, and liquidity. Some
assets that may be admissible under codification and/or certain state
permitted practices may require supporting documentation as needed on a
case-by-case basis in order to be admissible under Treasury's criteria.
Assets resulting from reinsurance transactions must meet the credit for
reinsurance standards listed under paragraph (c) of this section.
(2) Securities. Bonds, unaffiliated common stocks, and unaffiliated
preferred stocks must be valued and reported in accordance with the
NAIC's Accounting Practices and Procedures Manual (as updated or
amended from time to time) and the NAIC Securities Valuation Office
(SVO). Those with an investment grade designation will be admissible
and those with a non-investment grade designation will be considered on
a case-by-case basis.
(i) All other securities. The value of all other securities should
be valued as of December 31 and reported in U.S. Dollars. For
securities that do not have a SVO designation or have a SVO non-
investment grade designation and are significant for Treasury purposes,
Treasury may consider, if it deems appropriate, other relevant data
(e.g., prospectus, marketability/liquidity information, internal
investment strategies/philosophies) and perform an analysis to
determine whether the securities meet Treasury's criteria for
admissibility.
(ii) Securities of controlled companies. Investments in
subsidiaries, controlled entities, and affiliated entities must be
reported in accordance with the NAIC Accounting Practices and
Procedures Manual (as updated or amended from time to time).
[[Page 48834]]
(A) Other insurance companies. Companies owning securities of other
insurance companies, which are under the same direction and control as
the reporting company, must furnish copies of the NAIC File Upload of
the subsidiaries. The assets of these subsidiaries will be analyzed
according to the criteria set forth in this section.
(B) Non-insurance companies. Companies owning securities of non-
insurance companies, which are under the same direction and control as
the reporting company, must furnish copies of independently audited
financial statements of such companies as of the reporting date.
(3) Real estate and mortgages. Only real estate essential to the
operating needs of the company for conducting its business, and
conventional first mortgage loans on unencumbered, improved, or
productive real estate located within the United States, are
admissible. These must be reported in accordance with the NAIC's
Accounting Practices and Procedures Manual (as updated or amended from
time to time). The real estate and mortgaged property must be supported
by an appraisal report that includes the information and computations
normally used in arriving at a competent appraised value. In instances
where the aggregate values exceed 20 percent of the policyholders'
surplus, Treasury may, if it deems appropriate, require additional
supporting documentation.
(b) Minimum bail reserve requirements. Companies transacting surety
bail business must submit a schedule showing bail premiums in force,
bail liability, and the amount of any associated unearned premium
reserve.
(c) Reinsurance. (1) Companies are required to submit Treasury
Schedule F (Treasury Form No. TFS 6314) reflecting information in the
company's annual statements. Credit for reinsurance may be taken (to
the extent specified in the referenced provisions of Sec. 223.12) for
reinsurance in all classes of risk provided that it is ceded to the
following companies:
(i) Companies holding a current certificate of authority from
Treasury;
(ii) U.S. domiciled non-Treasury certified or recognized parents,
subsidiaries, and/or affiliates if Treasury determines that the parent,
subsidiary, and/or affiliate is financially solvent;
(iii) Admitted reinsurers as defined under Sec. 223.12(h);
(iv) Complementary reinsurers as defined under Sec. 223.12(i);
(v) Alien reinsurers as defined under Sec. 223.12(j), up to the
extent credit is allowed for reinsurance ceded to the alien reinsurer
by the ceding company's state of domicile (subject to paragraph (c)(3)
of this section); and
(vi) An instrumentality or agency of the United States that is
permitted by Federal law or regulation to execute reinsurance
contracts.
(2) Treasury may give credit for reinsurance not covered in
paragraph (c)(1) of this section, to the extent of funds withheld or
letters of credit or trust agreements from such reinsurers, provided
the company advises Treasury and provides sufficient documentation of
the amount of funds held, letters of credit posted or funds secured in
trust for each company. Treasury may also give credit for trust account
assets associated with multi-beneficiary trust agreements established
and maintained in the United States by overseas accredited or trusteed
reinsurers listed online at <a href="https://www.fiscal.treasury.gov/surety-bonds/">https://www.fiscal.treasury.gov/surety-bonds/</a>, to the extent the relevant ceded business is covered by these
trust account assets.
(3) If, after its review of the financial documentation submitted
by an alien reinsurer recognized pursuant to Sec. 223.12(j) and of the
financial documentation submitted by the ceding company, Treasury
determines that either company may be unable to carry out its
obligations, Treasury may require additional collateral for the ceding
company to receive credit for reinsurance to the extent credit is given
for reinsurance ceded to the alien reinsurer by the ceding company's
state of domicile.
(d) Risk based capital (RBC). Treasury uses RBC in determining the
financial solvency of companies, together with such companies' overall
financial results, ratios, and trends. Companies must maintain RBC
results that fall within acceptable ranges as established by the NAIC
or provide a satisfactory explanation for results that do not.
(e) Financial ratios. Treasury uses the NAIC IRIS ratios to measure
companies' solvency, profitability, and liquidity. Companies must
maintain results for these ratios that fall within acceptable ranges as
established by the NAIC or provide a satisfactory explanation for
results that do not.
(f) Financial results and trends. Treasury analyzes financial
results from annual and quarterly financial statements required under
this part for evidence of negative financial results or trends.
Treasury may require companies to submit additional documentation or
explanation regarding financial statements with evidence of negative
financial results or trends such as decreasing policyholders' surplus,
large underwriting losses, negative cashflows, or unsatisfactory IRIS
ratio results.
(g) Noncompliance. Noncompliance with paragraphs (a) through (f) of
this section may result in Treasury denying a company's application for
its certificate of authority, or renewal of its certificate, or in
Treasury revoking a company's certificate.
0
11. Revise Sec. 223.10 to read as follows:
Sec. 223.10 Limitation of risk.
(a) Except as provided in Sec. 223.11, no company holding a
certificate of authority shall underwrite any single risk on any bond
or policy on behalf of any individual, firm, association, or
corporation, whether or not the United States is interested as a party
thereto, the amount of which is greater than 10 percent of the paid-up
capital and surplus of such company, as determined by Treasury. Such
figure (i.e., 10 percent of a company's paid-up capital and surplus as
determined by Treasury) is hereinafter referred to as the underwriting
limitation. For purposes of this part, single risk means the total risk
under one bond or policy regardless of the number of individual risks
under that bond or policy.
(b) In determining the underwriting limitation, the full penalty of
any surety and fidelity obligation will be regarded as the liability,
and no offset will be allowed on account of any estimate of risk that
is less than such full penalty, except in the following cases:
(1) Appeal bonds; in which case the liability will be regarded as
the amount of the judgment appealed from, plus 10 percent of said
amount to cover interest and costs;
(2) Bonds of executors, administrators, trustees, guardians, and
other fiduciaries, where the penalty of the bond or other obligation is
fixed in excess of the estimated value of the estate; in which cases
the estimated value of the estate, upon which the penalty of the bond
was fixed, will be regarded as the liability;
(3) Indemnifying agreements executed by sole heirs or beneficiaries
of an estate releasing the surety from liability;
(4) Contract bonds given in excess of the amount of the contract;
in which cases the amount of the contract will be regarded as the
liability; or
(5) Bonds for banks or trust companies as principals, conditioned
to repay moneys on deposit, whereby pursuant to any law or decree of a
court, the amount to be deposited shall be less than the penalty of the
bond; in which cases the maximum amount on deposit at any one time will
be regarded as the liability.
0
12. Revise Sec. 223.11 to read as follows:
[[Page 48835]]
Sec. 223.11 Limitation of risk: Protective methods.
In the case of risks otherwise in excess of a company's limitation
of risk prescribed in Sec. 223.10, compliance may be achieved by the
following methods:
(a) Coinsurance. Two or more companies holding a certificate of
authority may underwrite a single risk on any bond or policy, the
amount of which does not exceed their aggregate underwriting
limitations. Each company must limit its liability upon the face of the
bond or policy to an amount which must be within its respective
underwriting limitation.
(b) Reinsurance--(1) Bonds running to the United States. (i) With
respect to all bonds running to the United States to the extent that
its excess liability is not addressed through another protective method
specified in this section, a company writing such bonds must reinsure
liability in excess of the underwriting limitation with one or more
companies holding a certificate of authority from Treasury within 45
days from the date of execution and delivery of the bond. Such
reinsurance shall not be in excess of the underwriting limitation of
the reinsuring company. Federal agencies may accept a bond from the
direct writing company in satisfaction of the total bond requirement
even though it may exceed the direct writing company's underwriting
limitation. Within the 45-day period, the direct writing company shall
furnish to the Federal agency any requested reinsurance agreements.
However, a Federal agency may, in its discretion, require that the
direct writing company obtain reinsurance within a lesser period than
45 days, and may require the direct writing company to provide
completely executed reinsurance agreements before making a final
determination that any bond is acceptable.
(ii) For bonds required to be furnished to the United States by the
Miller Act (40 U.S.C. 3131, as amended), in addition to complying with
the requirements of paragraph (b)(1)(i) of this section, the direct
writing company must execute the following reinsurance agreement forms:
Standard Form 273 (Reinsurance Agreement for a Bonds Statute
Performance Bond), Standard Form 274 (Reinsurance Agreement for a Bonds
Statute Payment Bond), and Standard Form 275 (Reinsurance Agreement in
Favor of the United States). These forms are available on the General
Services Administration website at <a href="http://www.gsa.gov">www.gsa.gov</a>.
(2) Bonds not running to the United States. A company holding a
certificate of authority from Treasury writing risks covered by bonds
or policies not running to the United States, to the extent that its
excess liability is not addressed through another protective method
specified in this section, must reinsure liability in excess of its
underwriting limitation within 45 days from the date of execution and
delivery of the bond or policy with any of:
(i) One or more companies holding a certificate of authority from
Treasury;
(ii) One or more companies recognized as a reinsurer in accordance
with Sec. 223.12, except for any reinsurer who is required by a U.S.
state to post 100 percent collateral;
(iii) A pool, association, etc., to the extent that it is composed
of such companies; or
(iv) An instrumentality or agency of the United States that is
permitted by Federal law or regulation to execute reinsurance
contracts.
(3) Limitation. No certificate-holding company may cede to a
reinsuring company recognized under Sec. 223.12 any single risk in
excess of 10 percent of the latter company's paid-up capital and
surplus.
(c) Other methods. With respect to all risks other than bonds
required to be furnished to the United States by the Miller Act (40
U.S.C. 3131, as amended), which must be either coinsured or reinsured
in accordance with paragraph (a) or (b)(1)(ii) of this section
respectively, the excess liability may be protected:
(1) By the deposit with the company in pledge, or by conveyance to
it in trust for its protection, of assets admitted by Treasury, the
current market value of which is at least equal to the liability in
excess of its underwriting limitation. Treasury may, on a case-by-case
basis, consider a letter of credit provided by a financial institution
to be adequate security under this paragraph (c) if Treasury can verify
that the assets referenced in the letter of credit are pledged
exclusively to secure the excess risk, and if the letter of credit
meets other requirements Treasury might prescribe. Assets used to
protect excess liability pursuant to this paragraph (c) cannot also be
used to obtain credit for reinsurance pursuant to Sec. 223.9(c).; or
(2) If such obligation was incurred on behalf of or on account of a
fiduciary holding property in a trust capacity, by a joint control
agreement providing that the whole or a sufficient portion of the
property so held may not be disposed of or pledged in any way without
the consent of the insuring company.
0
13. Revise Sec. 223.12 to read as follows:
Sec. 223.12 Recognition as reinsurer.
(a) Use of recognized reinsurers. Companies holding a certificate
of authority may:
(1) Receive credit for reinsurance ceded to a reinsurer recognized
pursuant to this section, as described in Sec. 223.9(c); and
(2) Protect liability in excess of their underwriting limit on
risks not running to the United States by reinsuring excess liability
with a reinsurer recognized pursuant to this section.
(b) Application. Every company applying for recognition by Treasury
as one of the categories of reinsurers in paragraphs (c) through (j) of
this section, or annual renewal of such recognition, shall submit an
application to Treasury, c/o Surety Bonds Program, to the location, and
in the manner, specified online at <a href="https://www.fiscal.treasury.gov/surety-bonds/">https://www.fiscal.treasury.gov/surety-bonds/</a>. The applicant company must submit the documentation and
must meet the requirements as outlined in this section and in
supplemental guidance published by Treasury on its website.
(c) Treasury recognition. Recognition by Treasury will be effective
for a term that expires on the last day of the following October. A
list of reinsuring companies so recognized by Treasury will be
published online at <a href="https://www.fiscal.treasury.gov/surety-bonds/">https://www.fiscal.treasury.gov/surety-bonds/</a>.
(d) Notice to Treasury. Each company recognized pursuant to this
section shall immediately notify Treasury if a U.S. state takes action
to suspend or revoke the company's license or its status or eligibility
as an Accredited Reinsurer, Certified Reinsurer, or Reciprocal
Jurisdiction Reinsurer, or if the company notifies a U.S. state that a
supervisory authority in its domiciliary jurisdiction takes regulatory
action against it for serious noncompliance with applicable law (as
determined by the supervisory authority in its domiciliary
jurisdiction).
(e) Eligibility. A company is not eligible for recognition under
this section if it only insures or reinsures risks of its parent,
affiliated, or controlled unaffiliated business, or is deemed by
Treasury to be primarily engaged in self-insurance.
(f) Guidance. Treasury may issue supplemental guidance regarding
the timing, form, content, and its analysis of the submissions required
pursuant to this section. Such guidance will be posted on its website.
(g) Noncompliance. Noncompliance with the requirements of this
section may result in a company's application for recognition, or for
renewal of its recognition, being denied.
[[Page 48836]]
(h) Admitted reinsurers--(1) Application for recognition by U.S.
company. Any company organized under the laws of the United States or
of any state thereof, wishing to apply for recognition as an admitted
reinsurer of surety companies doing business with the United States,
shall submit an application to Treasury, c/o Surety Bonds Program, to
the location, and in the manner, specified online at <a href="https://www.fiscal.treasury.gov/surety-bonds/">https://www.fiscal.treasury.gov/surety-bonds/</a>. The company shall file the
following data with Treasury and shall transmit therewith the fee in
accordance with the provisions of Sec. 223.22:
(i) Payment of the application fee in accordance with the
provisions of Sec. 223.22;
(ii) A written request for recognition as an admitted reinsurer,
signed by an officer of the company. This request must indicate:
(A) The reason for applying for recognition;
(B) Whether the company has ever previously applied for recognition
as an admitted reinsurer, whether Treasury approved the application,
and the applicable dates; and
(C) If Treasury previously approved the company for recognition as
an admitted reinsurer, the reason for termination of its recognition
and the applicable date;
(iii) A certified copy of its charter or articles of incorporation
with all amendments as of the date of application showing the legal
name of the company and that it is authorized to write reinsurance;
(iv) A listing of the names of the company's current officers and
directors as of the date of application, including a biographical
affidavit of each officer and director per instructions online at
<a href="https://www.fiscal.treasury.gov/surety-bonds/">https://www.fiscal.treasury.gov/surety-bonds/</a>;
(v) A certified copy of a license from any one state in which it
has been authorized to do business showing its authority to write
reinsurance and/or other lines of insurance;
(vi) A copy of the latest available report of its examination by
its domiciliary State Insurance Department including a copy of company
responses to any significant findings or recommendations;
(vii) Annual statements of its financial condition, as of the close
of the last two full years preceding the date of application, on the
annual statement form of the NAIC with all Schedules and Exhibits
completed, including copies of the NAIC File Upload, showing that it
has paid-up capital of at least $250,000 in cash or its equivalent, in
the case of a stock insurance company, or has net assets of not less
than $500,000 over and above all liabilities, in the case of a mutual
insurance company. The Annual Financial Statement's Jurat Page (only)
is to be signed (facsimile signatures are acceptable) by the company
President, Secretary, and a Notary Public who shall also affix a notary
seal;
(viii) IRIS ratio results, and an explanation for any ratios
outside the normal ranges as established by the NAIC for the last two
years preceding the date of application;
(ix) A memorandum setting forth the company's method of operation,
including lines of business written, the company's underwriting and
claims philosophy, and significant changes in the company's operations
or corporate structure that impact its financial statements;
(x) A completed Treasury Schedule F (Form No. TFS 6314), as
referenced in Sec. 223.9(c) for two years preceding the date of
application;
(xi) A Statement of Actuarial Opinion as of the close of the last
two years preceding the date of application provided by a qualified
actuary, as defined by the NAIC, on the adequacy of all loss reserves
with the scope and format of the statement also conforming to the
requirements of the NAIC; and
(xii) Such other evidence as Treasury may request to establish that
the company is solvent and able to meet the continuing obligation to
carry out its contracts. Treasury will publish supplemental guidance
annually regarding evidence it may require, submission methods, and
format of the data listed in paragraphs (h)(1)(i) through (xi) of this
section.
(2) Application by a U.S. branch. A U.S. branch of a non-U.S.
company applying for recognition as an admitted reinsurer must file the
following data with Treasury, and shall transmit therewith the fee in
accordance with the provisions of Sec. 223.22:
(i) The submissions listed in paragraphs (h)(1)(i) through (xii) of
this section, except that the financial statement of such branch shall
show that it has net assets of not less than $250,000 over and above
all liabilities; and
(ii) Evidence satisfactory to Treasury to establish that it has on
deposit in the United States not less than $250,000 available to its
policyholders and creditors in the United States.
(3) Application for renewal of recognition as an admitted
reinsurer. Any company recognized pursuant to paragraph (h)(1) or (2)
of this section wishing to apply for renewal of its recognition shall
submit an application to Treasury, c/o Surety Bonds Program, to the
location, and in the manner, specified online at <a href="https://www.fiscal.treasury.gov/surety-bonds/">https://www.fiscal.treasury.gov/surety-bonds/</a>. The company must file the
following data with Treasury and shall transmit therewith the fee in
accordance with the provisions of Sec. 223.22:
(i) Payment of the application fee in accordance with the
provisions of Sec. 223.22;
(ii) A copy of the latest available report of its examination by
its domiciliary State Insurance Department including a copy of company
responses to any significant findings or recommendations;
(iii) Annual statements of its financial condition, as of the close
of the preceding year, on the annual statement form of the NAIC with
all Schedules and Exhibits completed, including copies of the NAIC File
Upload, showing that it has paid-up capital of at least $250,000 in
cash or its equivalent, in the case of a stock insurance company, or
has net assets of not less than $500,000 over and above all
liabilities, in the case of a mutual insurance company. The Annual
Financial Statement's Jurat Page (only) is to be signed (facsimile
signatures are acceptable) by the company President, Secretary, and a
Notary Public who shall also affix a notary seal;
(iv) IRIS ratio results, and an explanation for any ratios outside
the normal ranges as established by the NAIC as of the close of the
preceding year;
(v) A completed Treasury Schedule F (Form No. TFS 6314), as
referenced in Sec. 223.9(c) as of the close of the preceding year;
(vi) A Statement of Actuarial Opinion as of the close of the
preceding year provided by a qualified actuary, as defined by the NAIC,
on the adequacy of all loss reserves with the scope and format of the
statement also conforming to the requirements of the NAIC;
(vii) A listing of the names of the company's current officers and
directors as of the close of the preceding year, including a
biographical affidavit of each new officer and director per
instructions online at <a href="https://www.fiscal.treasury.gov/surety-bonds/">https://www.fiscal.treasury.gov/surety-bonds/</a>;
and
(viii) Such other evidence as Treasury may request to establish
that the company is solvent and able to meet the continuing obligation
to carry out its contracts. Treasury will publish supplemental guidance
annually regarding evidence it may require, submission methods, and
format of the data listed in paragraphs (h)(3)(i) through (vii) of this
section.
[[Page 48837]]
(i) Complementary reinsurers. Any company may apply for recognition
as a complementary reinsurer or annual renewal of such recognition
provided the company is licensed to write reinsurance by and has its
head office in (or is domiciled in) a non-U.S. jurisdiction that is
subject to an in-force Covered Agreement entered into with the United
States pursuant to 31 U.S.C. 313-314, which Covered Agreement addresses
the elimination, under specified conditions, of collateral requirements
as a condition for entering into any reinsurance agreement with a
ceding insurer domiciled in a U.S. state or for allowing the ceding
insurer to recognize credit for reinsurance. To obtain recognition as a
complementary reinsurer, the company must submit to Treasury the fee in
accordance with the provisions of Sec. 223.22 and must:
(1) Meet and maintain all capital and surplus, solvency, and market
conduct requirements under the applicable Covered Agreement;
(2) Be recognized by at least one U.S. state as a Reciprocal
Jurisdiction Reinsurer, as defined by the state's credit for
reinsurance law or regulation based on the NAIC's Credit for
Reinsurance Model Law and Regulation, and submit proof of such
recognition; and
(3) Submit to Treasury:
(i) For initial applications for recognition, all information
provided by the company or by the supervisory authority of the
company's domiciliary jurisdiction to any U.S. state regulator in the
two most recently completed calendar years.
(ii) For applications for renewal of recognition, all semi-annual
and annual filing information provided by the company or by the
supervisory authority of the company's domiciliary jurisdiction to any
U.S. state regulator in the most recently completed calendar year.
(iii) Payment of the application fee in accordance with the
provisions of Sec. 223.22.
(j) Alien reinsurers. Any company may apply for recognition or
annual renewal of such recognition as an alien reinsurer, provided it
is licensed to write reinsurance by, and has its head office or
domicile in, a non-U.S. jurisdiction that is recognized by a U.S. state
as a Qualified Jurisdiction or as a Reciprocal Jurisdiction, provided
that the Reciprocal Jurisdiction is not party to an in-force Covered
Agreement as described in paragraph (i) of this section. Treasury may
also consider, if it deems appropriate, the lists of Qualified and
Reciprocal Jurisdictions most recently published through the relevant
NAIC committee when determining a company's eligibility for recognition
pursuant to this paragraph (j). To obtain such recognition, the company
must submit to Treasury the fee in accordance with the provisions of
Sec. 223.22 and must:
(1) Be recognized by at least one U.S. state as an ``Accredited
Reinsurer,'' ``Certified Reinsurer,'' or a ``Reciprocal Jurisdiction
Reinsurer,'' as defined by the state's credit for reinsurance law or
regulation based on the NAIC's Credit for Reinsurance Model Law and
Regulation, and submit proof of such recognition;
(2) Meet and maintain all capital and surplus, market conduct, and
other requirements for eligibility as an ``Accredited Reinsurer,''
``Certified Reinsurer,'' or ``Reciprocal Jurisdiction Reinsurer'' in
accordance with the law and regulation of all U.S. states granting it
such recognition; and
(3) Submit to Treasury:
(i) For initial applications for recognition, all information
provided to any U.S. state regulator in the two most recently completed
calendar years.
(ii) For applications for renewal of such recognition, all annual
filing information provided to any U.S. state regulator in the most
recently completed calendar year.
(iii) Payment of the application fee in accordance with the
provisions of Sec. 223.22.
Sec. 223.13 [Removed and Reserved]
0
14. Remove and reserve Sec. 223.13.
Sec. 223.14 [Removed and Reserved]
0
15. Remove and reserve Sec. 223.14.
0
16. Revise Sec. 223.15 to read as follows:
Sec. 223.15 Paid-up capital and surplus for Treasury rating purposes;
how determined.
Treasury determines the amount of paid-up capital and surplus of
any company holding or seeking a certificate of authority or recognized
(or seeking recognition) as an admitted reinsurer pursuant to Sec.
223.12(h) on an insurance accounting basis under the regulations in
this part, from the company's financial statements and other
information, or by such examination of the company at its own expense
as Treasury may deem appropriate.
0
17. Amend Sec. 223.16 by revising the first three sentences to read as
follows:
Sec. 223.16 List of certificate holding companies.
A list of certificate holding companies is published annually as of
August 1 in Department Circular No. 570, Companies Holding Certificates
of Authority as Acceptable Sureties on Federal Bonds and as Acceptable
Reinsuring Companies, with information as to underwriting limitations,
areas in which listed sureties are licensed to transact surety
business, and other details. If Treasury shall take any exceptions to
the financial statements submitted by a company or other information
pertinent to the company's financial solvency, before issuing
Department Circular 570, Treasury shall give a company due notice of
such exceptions. Copies of the Circular are available at <a href="https://www.fiscal.treasury.gov/surety-bonds/list-certified-companies.html">https://www.fiscal.treasury.gov/surety-bonds/list-certified-companies.html</a>, or
from the Surety Bonds Program, upon request. * * *
0
18. Amend Sec. 223.17 by revising paragraphs (b)(1)(iii) and (iv) to
read as follows:
Sec. 223.17 Acceptance and non-acceptance of bonds.
* * * * *
(b) * * *
(1) * * *
(iii) Provide the company with an opportunity to rebut the stated
reasons or cause; and
(iv) Provide the company with an opportunity to cure the stated
reasons or cause.
* * * * *
0
19. Amend Sec. 223.18 by revising paragraphs (a) introductory text and
(a)(1) to read as follows:
Sec. 223.18 Revocation.
(a) Treasury may initiate a revocation proceeding against a
Treasury-certified company in one of two ways:
(1) Treasury, of its own accord, under Sec. 223.19, may initiate
revocation proceedings against the company when it has reason to
believe that the company is not complying with 31 U.S.C. 9304-9308 and/
or the regulations under this part; or
* * * * *
0
20. Amend Sec. 223.19 by revising the introductory text and paragraph
(b)(2) to read as follows:
Sec. 223.19 Treasury-initiated revocation proceedings.
Whenever Treasury has reason to believe that a company is not
complying with the requirements of 31 U.S.C. 9304-9308 and/or the
regulations under this part, including but not limited to a failure to
satisfy corporate and financial standards, Treasury shall:
* * * * *
(b) * * *
(2) The company responded, was provided an opportunity to
demonstrate or achieve compliance, and failed to do so.
[[Page 48838]]
0
21. Amend Sec. 223.20 by revising paragraphs (b)(1) and (h)(8) and (9)
to read as follows:
Sec. 223.20 Revocation proceedings initiated by Treasury upon receipt
of an agency complaint.
* * * * *
(b) * * *
(1) The agency has determined, consistent with agency authorities,
the principal is in default on the obligation covered by the bond.
Alternatively, if the default has been litigated, documentation
indicating a court of competent jurisdiction has determined the
principal is in default;
* * * * *
(h) * * *
(8) The formal adjudication standards under the Administrative
Procedure Act, 5 U.S.C. 554, 556, and 557, do not apply to the informal
hearing or adjudication process.
(9) Treasury may promulgate additional procedural guidance
governing the conduct of informal hearings.
* * * * *
0
22. Revise Sec. 223.21 to read as follows:
Sec. 223.21 Reinstatement.
If, after one year from the date that Treasury notifies the company
of its decision to decline to renew or revoke the certificate of
authority of a company under this part, the company can demonstrate
that the basis for the non-renewal or revocation has been cured, as
determined by Treasury in its discretion, and that it can comply with,
and does meet, all continuing requirements for certification under 31
U.S.C. 9304-9308 and this part, the company may submit an application
to Treasury for reinstatement or reissuance of a certificate of
authority, which will be granted without prejudice if all such
requirements are met. Treasury may waive the one year waiting period
for good cause shown, as determined by Treasury in its sole discretion.
0
23. Revise Sec. 223.22 to read as follows:
Sec. 223.22 Fees for service of the Treasury Department.
(a) Fees shall be imposed and collected, for the services listed in
paragraphs (a)(1) through (6) of this section that are performed by
Treasury, regardless of whether the action requested is granted or
denied. An online payment portal is provided at <a href="https://www.fiscal.treasury.gov/surety-bonds/">https://www.fiscal.treasury.gov/surety-bonds/</a>. The amount of the fee will be
based on which of the following categories of service is requested:
(1) Examination of a company's application for a certificate of
authority as an acceptable surety on Federal bonds or for a certificate
of authority as an acceptable reinsuring company on such bonds (see
Sec. 223.2(a));
(2) Examination of a company's application for recognition as an
admitted reinsurer of surety companies doing business with the United
States (see Sec. 223.12(h));
(3) Examination of a company's application for recognition as a
complementary reinsurer of surety companies doing business with the
United States (see Sec. 223.12(i));
(4) Examination of a company's application for recognition as an
alien reinsurer of surety companies doing business with the United
States (see Sec. 223.12(j));
(5) Determination of a company's continuing qualifications for
annual renewal of its certificate of authority (see Sec. 223.2(b)); or
(6) Determination of a company's continuing qualifications for
annual renewal of its recognition as an admitted reinsurer,
complementary reinsurer, or alien reinsurer (see Sec. 223.12).
(b) In a given year a uniform fee will be collected from every
company requesting a particular category of service, e.g.,
determination of a company's continuing qualifications for annual
renewal of its certificate of authority. However, Treasury reserves the
right to redetermine the amounts of fees annually. Fees are determined
in accordance with Office of Management and Budget Circular A-25, as
amended.
(c) Specific fee information may be obtained from the Surety Bonds
Program, or online at <a href="https://www.fiscal.treasury.gov/files/surety-bonds/user-fees.pdf">https://www.fiscal.treasury.gov/files/surety-bonds/user-fees.pdf</a>. In addition, a notice of the amount of a fee
referred to in paragraphs (a)(1) through (6) of this section will be
published in the Federal Register as each change in such fee is made.
By the Department of the Treasury.
David Lebryk,
Fiscal Assistant Secretary.
[FR Doc. 2024-12491 Filed 6-7-24; 8:45 am]
BILLING CODE 4810-AS-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.