SENATE BILL No. 1219

April 13, 2000, Introduced by Senator BULLARD and referred to the Committee on Financial Services.

A bill to amend 1956 PA 218, entitled

"The insurance code of 1956,"

by amending sections 1101, 1103, 1105, 1125, and 8132

(MCL 500.1101, 500.1103, 500.1105, 500.1125, and 500.8132),

sections 1101, 1105, and 1125 as added by 1994 PA 226,

section 1103 as amended by 1994 PA 443, and section 8132 as added

by 1989 PA 302.

THE PEOPLE OF THE STATE OF MICHIGAN ENACT:

1 Sec. 1101. For purposes of this chapter, a "qualified

2 United States financial institution" means an institution that

3 meets either subdivision (a) or (b):

4 (a) Is organized, or in the case of a United States office

5 of a foreign banking organization, is licensed, under federal or

6 state law THE LAWS OF THE UNITED STATES OR ANY STATE IN THE

7 UNITED STATES, is regulated, supervised, and examined by federal

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1 or state authorities having regulatory authority over banks and

2 trust companies, and has been determined by the commissioner to

3 meet such standards of financial condition and standing as are

4 considered necessary and appropriate to regulate the quality of

5 financial institutions whose letters of credit will be acceptable

6 to the commissioner.

7 (b) For those institutions that are eligible to act as a

8 fiduciary of a trust, is organized, or in the case of a United

9 States branch or agency office of a foreign banking organization,

10 is licensed, under federal or state law THE LAWS OF THE UNITED

11 STATES OR ANY STATE IN THE UNITED STATES, has been granted

12 authority to operate with fiduciary powers, and is regulated,

13 supervised, and examined by federal or state authorities having

14 regulatory authority over banks and trust companies.

15 Sec. 1103. (1) A ceding insurer shall be allowed credit for

16 reinsurance as either an asset or a deduction REDUCTION from

17 liability on account of reinsurance ceded only if the reinsurance

18 is ceded to an assuming insurer that is authorized to transact

19 insurance OR REINSURANCE in this state or that meets the require-

20 ments of subsection (2), or (3), OR (4). Credit for reinsur-

21 ance shall be allowed only to the extent that the amounts recov-

22 erable are verified by the assuming insurer in statements filed

23 with the commissioner pursuant to section 438. FOR AN ASSUMING

24 INSURER THAT IS LICENSED TO TRANSACT INSURANCE OR REINSURANCE IN

25 THIS STATE OR THAT MEETS THE REQUIREMENTS OF SUBSECTION (2) OR

26 (3), CREDIT SHALL BE ALLOWED ONLY FOR CESSIONS OF THOSE KINDS OR

27 CLASSES OF BUSINESS THAT THE ASSUMING INSURER IS LICENSED OR

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1 OTHERWISE PERMITTED TO WRITE OR ASSUME IN ITS STATE OF DOMICILE

2 OR, FOR A UNITED STATES BRANCH OF AN ALIEN INSURER, IN THE STATE

3 THROUGH WHICH IT IS ENTERED AND IS LICENSED TO TRANSACT INSURANCE

4 OR REINSURANCE.

5 (2) A CEDING INSURER SHALL BE ALLOWED CREDIT FOR REINSURANCE

6 CEDED AS EITHER AN ASSET OR A REDUCTION FROM LIABILITY ON ACCOUNT

7 OF REINSURANCE CEDED IF THE REINSURANCE IS CEDED TO AN ASSUMING

8 INSURER THAT IS ACCREDITED AS A REINSURER IN THIS STATE. CREDIT

9 FOR REINSURANCE CEDED IS NOT ALLOWED IF THE ASSUMING INSURER'S

10 ACCREDITATION HAS BEEN REVOKED BY THE COMMISSIONER AFTER NOTICE

11 AND HEARING. AN ACCREDITED REINSURER UNDER THIS SUBSECTION IS A

12 REINSURER THAT MEETS ALL OF THE FOLLOWING:

13 (A) FILES WITH THE COMMISSIONER EVIDENCE OF THE REINSURER'S

14 SUBMISSION TO THIS STATE'S JURISDICTION.

15 (B) SUBMITS TO THIS STATE'S AUTHORITY TO EXAMINE ITS BOOKS

16 AND RECORDS.

17 (C) IS LICENSED TO TRANSACT INSURANCE OR REINSURANCE IN AT

18 LEAST 1 STATE OR FOR A UNITED STATES BRANCH OF AN ALIEN ASSUMING

19 INSURER IS ENTERED THROUGH AND LICENSED TO TRANSACT INSURANCE OR

20 REINSURANCE IN AT LEAST 1 STATE.

21 (D) FILES ANNUALLY WITH THE COMMISSIONER A COPY OF ITS

22 ANNUAL STATEMENT FILED WITH THE INSURANCE DEPARTMENT OF ITS STATE

23 OF DOMICILE AND A COPY OF ITS MOST RECENT AUDITED FINANCIAL

24 STATEMENT AND MEETS 1 OF THE FOLLOWING:

25 (i) MAINTAINS A SURPLUS AS REGARDS POLICYHOLDERS OF

26 $20,000,000.00 OR MORE AND WHOSE ACCREDITATION HAS NOT BEEN

27 DENIED BY THE COMMISSIONER WITHIN 90 DAYS OF ITS SUBMISSION.

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1 (ii) MAINTAINS A SURPLUS AS REGARDS POLICYHOLDERS OF LESS

2 THAN $20,000,000.00 AND WHOSE ACCREDITATION HAS BEEN APPROVED BY

3 THE COMMISSIONER.

4 (3) (2) Credit A CEDING INSURER shall be allowed when

5 CREDIT FOR REINSURANCE CEDED AS EITHER AN ASSET OR A REDUCTION

6 FROM LIABILITY ON ACCOUNT OF REINSURANCE CEDED IF the reinsurance

7 is ceded to an assuming insurer which THAT maintains a trust

8 fund in a qualified United States financial institution for the

9 payment of the valid claims of its United States policyholders

10 and ceding insurers, their assigns, and successors in interest,

11 THE TRUST AGREEMENT COMPLIES WITH SUBSECTION (7), and THE ASSUM-

12 ING INSURER submits to the commissioner's authority to examine

13 its books and records and bears the expense of the examination.

14 The assuming insurer shall report annually to the commissioner

15 information substantially the same as that required to be

16 reported by authorized insurers pursuant to section 438 to enable

17 the commissioner to determine the sufficiency of the trust fund.

18 (a) The trust fund shall consist MEET ALL of the following:

19 (A) (i) In the case of FOR a single assuming insurer, the

20 trust shall consist of a trusteed account representing the assum-

21 ing insurer's liabilities attributable to business written in

22 the REINSURANCE CEDED BY United States CEDING INSURERS and, in

23 addition, the assuming insurer shall maintain a trusteed surplus

24 of an amount sufficient in the opinion of the commissioner to

25 maintain compliance with section 403 as respects business writ-

26 ten in the REINSURANCE CEDED BY United States CEDING INSURERS

27 but not less than $20,000,000.00.

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1 (B) (ii) In the case of FOR a group including incorporated

2 and individual unincorporated underwriters: , the trust shall

3 consist of a trusteed account representing the group's liabili-

4 ties attributable to business written in the United States and,

5 in

6 (i) FOR REINSURANCE CEDED UNDER REINSURANCE AGREEMENTS WITH

7 AN INCEPTION DATE, AMENDMENT, OR RENEWAL DATE ON OR AFTER

8 AUGUST 1, 1995, THE TRUST SHALL CONSIST OF A TRUSTEED ACCOUNT IN

9 AN AMOUNT NOT LESS THAN THE GROUP'S SEVERAL LIABILITIES ATTRIBUT-

10 ABLE TO BUSINESS CEDED BY UNITED STATES DOMICILED CEDING INSURERS

11 TO ANY GROUP MEMBER.

12 (ii) FOR REINSURANCE CEDED UNDER REINSURANCE AGREEMENTS WITH

13 AN INCEPTION DATE ON OR BEFORE JULY 31, 1995, AND NOT AMENDED OR

14 RENEWED AFTER THAT DATE, NOTWITHSTANDING ANY OTHER PROVISION OF

15 THIS SECTION, THE TRUST SHALL CONSIST OF A TRUSTEED ACCOUNT IN AN

16 AMOUNT NOT LESS THAN THE GROUP'S SEVERAL INSURANCE AND REINSUR-

17 ANCE LIABILITIES ATTRIBUTABLE TO BUSINESS WRITTEN IN THE UNITED

18 STATES.

19 (iii) IN addition TO SUBPARAGRAPHS (i) AND (ii), the group

20 shall maintain a trusteed surplus of which an amount sufficient

21 in the opinion of the commissioner to maintain compliance with

22 section 403 as respects business written in the REINSURANCE

23 CEDED BY United States DOMICILED CEDING INSURERS but not less

24 than $100,000,000.00 shall be held jointly for the benefit of

25 United States DOMICILED ceding insurers of any member of the

26 group FOR ALL YEARS OF ACCOUNT. The incorporated members of the

27 group shall not be engaged in any business other than

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1 underwriting as a member of the group and shall be ARE subject

2 to the same level of solvency regulation and SOLVENCY control

3 by the group's domiciliary regulator as are the unincorporated

4 members. The WITHIN 90 DAYS AFTER ITS FINANCIAL STATEMENTS ARE

5 DUE TO BE FILED WITH THE GROUP'S DOMICILIARY REGULATOR, THE group

6 shall make available to PROVIDE the commissioner WITH an annual

7 certification of the solvency of each underwriter MEMBER by the

8 group's domiciliary regulator and its OR IF CERTIFICATION IS

9 UNAVAILABLE, FINANCIAL STATEMENTS PREPARED BY independent public

10 accountant ACCOUNTANTS FOR EACH UNDERWRITER GROUP MEMBER.

11 (iii) In the case of a group of incorporated insurers under

12 common administration which complies with the reporting require-

13 ments contained in this section, and which has continuously

14 transacted an insurance business outside the United States for at

15 least 3 years, and which has aggregate policyholders' surplus of

16 $10,000,000,000.00, the trust shall be in an amount equal to the

17 group's several liabilities attributable to business ceded by

18 United States ceding insurers to any member of the group pursuant

19 to reinsurance contracts issued in the name of such group. In

20 addition, the group shall maintain a joint trusteed surplus of

21 which an amount sufficient in the opinion of the commissioner to

22 maintain compliance with section 403 as respects business written

23 in the United States but not less than $100,000,000.00 shall be

24 held jointly for the benefit of United States ceding insurers of

25 any member of the group as additional security for any liabili-

26 ties, and each member of the group shall make available to the

27 commissioner an annual certification of the member's solvency by

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1 the member's domiciliary regulator and its independent public

2 accountant.

3 (c) (b) The trust AND ANY AMENDMENTS TO THE TRUST shall be

4 established in a form approved by the commissioner OF THE STATE

5 WHERE THE TRUST IS DOMICILED OR THE COMMISSIONER OF ANOTHER STATE

6 WHO PURSUANT TO THE TRUST INSTRUMENT TERMS HAS ACCEPTED PRINCIPAL

7 REGULATORY OVERSIGHT OF THE TRUST. The trust instrument shall

8 provide that contested claims shall be valid and enforceable upon

9 the final order of any court of competent jurisdiction in the

10 United States. The trust shall vest legal title to its assets in

11 the trustees of the trust for its United States policyholders

12 and ceding insurers , AND their assigns and successors in

13 interest. The trust shall be AND THE ASSUMING INSURER ARE

14 subject to examination as determined by the commissioner, and the

15 expense of the examination shall be borne by the assuming

16 insurer. The trust described herein must SHALL remain in

17 effect for as long as the assuming insurer has outstanding obli-

18 gations due under the reinsurance agreements subject to the

19 trust.

20 (d) (c) No later than February 28 of each year, the trust-

21 ees of the trust shall report to the commissioner in writing

22 setting forth the balance of the trust and listing the trust's

23 investments at the preceding year end and shall certify the date

24 of termination of the trust, if so planned, or certify that the

25 trust shall DOES not expire prior to the next following

26 December 31.

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1 (4) (3) Credit shall be allowed A CEDING INSURER SHALL BE

2 ALLOWED CREDIT FOR REINSURANCE CEDED AS EITHER AN ASSET OR A

3 REDUCTION FROM LIABILITY ON ACCOUNT OF REINSURANCE CEDED if rein-

4 surance is ceded to an assuming insurer not meeting the require-

5 ments of this section but only for the insurance of risks located

6 in jurisdictions where the reinsurance is required by applicable

7 law or regulation of that jurisdiction.

8 (5) (4) If the assuming insurer is not authorized

9 LICENSED OR ACCREDITED to transact insurance or reinsurance in

10 this state, the credit permitted by subsection (2) (3) shall

11 not be allowed unless the assuming insurer agrees in the reinsur-

12 ance agreements TO BOTH OF THE FOLLOWING:

13 (a) That in the event of the failure of IF the assuming

14 insurer FAILS to perform its obligations under the terms of the

15 reinsurance agreement, the assuming insurer, at the request of

16 the ceding insurer, shall submit to the jurisdiction of any court

17 of competent jurisdiction in any state of the United States, will

18 comply with all requirements necessary to give such THE court

19 jurisdictions JURISDICTION, and will abide by the final deci-

20 sion of such THE court or any appellate court in the event of

21 IF THERE IS an appeal.

22 (b) To designate the commissioner or a designated attorney

23 as its true and lawful attorney upon whom may be served any

24 lawful process in any action, suit, or proceeding instituted by

25 or on behalf of the ceding company INSURER.

26 (6) (5) The provisions of subsection (4) (5) are not

27 intended to conflict with or override the obligation of the

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1 parties to a reinsurance agreement to arbitrate their disputes,

2 if such an obligation is created in the agreement.

3 (6) The commissioner may allow credit for reinsurance that

4 does not otherwise meet the requirements of this section if all

5 of the following are met:

6 (a) The amount is not material to the ceding insurer's abil-

7 ity to meet the standards of section 901.

8 (b) The commissioner is satisfied that the assuming insurers

9 meet the requirements of section 403.

10 (c) The amounts are substantially confirmed in statements

11 filed with the commissioner pursuant to section 438 or in similar

12 statements filed in the assuming insurer's domiciliary jurisdic-

13 tion and available to the commissioner.

14 (7) THE CREDIT PERMITTED BY SUBSECTION (3) SHALL NOT BE

15 ALLOWED UNLESS THE ASSUMING INSURER AGREES IN THE TRUST AGREEMENT

16 TO ALL OF THE FOLLOWING:

17 (A) NOTWITHSTANDING ANY OTHER PROVISIONS IN THE TRUST

18 INSTRUMENT, IF THE TRUST FUND IS INADEQUATE BECAUSE IT CONTAINS

19 AN AMOUNT LESS THAN THE AMOUNT REQUIRED BY SUBSECTION (3), OR IF

20 THE TRUST GRANTOR HAS BEEN DECLARED OR PLACED INTO RECEIVERSHIP,

21 REHABILITATION, LIQUIDATION, OR SIMILAR PROCEEDINGS UNDER THE

22 LAWS OF ITS STATE OR COUNTRY OF DOMICILE, THE TRUSTEE SHALL

23 COMPLY WITH AN ORDER OF THE COMMISSIONER WITH REGULATORY OVER-

24 SIGHT OVER THE TRUST OR WITH AN ORDER OF A COURT OF COMPETENT

25 JURISDICTION DIRECTING THE TRUSTEE TO TRANSFER TO THE COMMIS-

26 SIONER WITH REGULATORY OVERSIGHT ALL OF THE ASSETS OF THE TRUST

27 FUND.

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1 (B) THE ASSETS SHALL BE DISTRIBUTED BY AND CLAIMS SHALL BE

2 FILED WITH AND VALUED BY THE COMMISSIONER WITH REGULATORY OVER-

3 SIGHT IN ACCORDANCE WITH THE LAWS OF THE STATE IN WHICH THE TRUST

4 IS DOMICILED THAT ARE APPLICABLE TO THE LIQUIDATION OF DOMESTIC

5 INSURANCE COMPANIES.

6 (C) IF THE COMMISSIONER WITH REGULATORY OVERSIGHT DETERMINES

7 THAT THE TRUST FUND ASSETS OR ANY PART OF THE TRUST FUND ASSETS

8 IS NOT NECESSARY TO SATISFY THE CLAIMS OF THE UNITED STATES

9 CEDING INSURERS OF THE TRUST GRANTOR, THE TRUST FUND ASSETS OR

10 ANY PART OF THE TRUST FUND ASSETS SHALL BE RETURNED BY THE COM-

11 MISSIONER WITH REGULATORY OVERSIGHT TO THE TRUSTEE FOR DISTRIBU-

12 TION IN ACCORDANCE WITH THE TRUST AGREEMENT.

13 (D) THE TRUST GRANTOR WAIVES ANY RIGHT OTHERWISE AVAILABLE

14 UNDER UNITED STATES LAWS INCONSISTENT WITH SUBDIVISIONS (A) TO

15 (C).

16 Sec. 1105. A AN ASSET OR A reduction from liability for

17 the reinsurance ceded by a ceding insurer to an assuming insurer

18 not meeting the requirements of section 1103 shall be allowed in

19 an amount not exceeding the liabilities carried by the ceding

20 insurer, and the reduction shall be in the amount of funds held

21 by or on behalf of the ceding insurer, including funds held in

22 trust for the ceding insurer, under a reinsurance contract with

23 the assuming insurer as security for the payment of obligations

24 thereunder, if the security is held in the United States subject

25 to withdrawal solely by, and under the exclusive control of, the

26 ceding insurer and, for a trust, held in a qualified United

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1 States financial institution. This security may be in the form

2 of any of the following:

3 (a) Cash.

4 (b) Securities that may be valued by the commissioner in

5 accordance with sections 841 and 842 and are approved for invest-

6 ment by insurers under chapter 9.

7 (c) Clean, irrevocable, unconditional letters of credit,

8 issued or confirmed by a qualified United States financial insti-

9 tution no later than December 31 of the year for which filing is

10 being made, and in the possession of the ceding insurer on or

11 before the filing date of its annual statement. Letters of

12 credit meeting applicable standards of issuer acceptability as of

13 the dates of their issuance or confirmation shall, notwithstand-

14 ing the issuing or confirming institution's subsequent failure to

15 meet applicable standards of issuer acceptability, continue to be

16 acceptable as security until their expiration, extension, renew-

17 al, modification, or amendment, whichever occurs first.

18 (D) ANY OTHER FORM OF SECURITY ACCEPTABLE TO THE

19 COMMISSIONER.

20 Sec. 1125. (1) Neither a reinsurance agreement nor any

21 amendment to that agreement shall be used to reduce any liability

22 or to establish any asset in any financial statement filed with

23 the commissioner unless the agreement, amendment, or a binding

24 letter of intent has been duly executed by both parties THE

25 APPROPRIATE PARTY no later than the "as of date" FILING DATE of

26 the financial statement.

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1 (2) For a letter of intent, a reinsurance agreement, or an

2 amendment to a reinsurance agreement shall be executed within a

3 reasonable period of time , not exceeding 90 days from the exe-

4 cution date of the letter of intent, in order for credit to be

5 granted for the reinsurance ceded. AS USED IN THIS SUBSECTION,

6 "REASONABLE PERIOD OF TIME" MEANS THAT PERIOD OF TIME AS PROVIDED

7 BY THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS ACCOUNTING

8 PRACTICES AND PROCEDURES MANUAL AND AS APPROVED BY THE

9 COMMISSIONER.

10 (3) A EXCEPT FOR FACULTATIVE CERTIFICATES DULY EXECUTED BY

11 A PROPERTY AND CASUALTY REINSURER OR ITS DULY APPOINTED AGENT, A

12 reinsurance agreement shall contain both of the following

13 provisions:

14 (a) That the agreement constitutes the entire agreement

15 between the parties with respect to the business being reinsured

16 thereunder and that there are no understandings between the par-

17 ties other than as expressed in the agreement.

18 (b) That IN SUBSTANCE A PROVISION THAT any change or modi-

19 fication to the agreement is null and void unless made by amend-

20 ment to the agreement and signed by both parties.

21 (4) A CEDING INSURER SHALL NOT BE ALLOWED CREDIT FOR REIN-

22 SURANCE CEDED AS EITHER AN ASSET OR A REDUCTION FROM LIABILITY ON

23 ACCOUNT OF REINSURANCE CEDED, UNLESS THE REINSURANCE CONTRACT

24 PROVIDES, IN SUBSTANCE, THAT IF THE CEDING INSURER BECOMES INSOL-

25 VENT, THE REINSURANCE SHALL BE PAYABLE PURSUANT TO THE TERMS OF

26 THE REINSURANCE CONTRACT BY THE ASSUMING INSURER ON THE BASIS OF

27 REPORTED CLAIMS ALLOWED BY THE LIQUIDATION COURT, WITHOUT

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1 DIMINUTION BECAUSE OF THE INSOLVENCY OF THE CEDING INSURER. THE

2 PAYMENTS SHALL BE MADE DIRECTLY TO THE CEDING INSURER OR ITS

3 DOMICILIARY LIQUIDATOR UNLESS THE REINSURANCE CONTRACT REQUIRES

4 OR AN ENDORSEMENT SIGNED BY THE REINSURER TO THE POLICIES REIN-

5 SURED REQUIRES THE REINSURER TO MAKE PAYMENT TO THE PAYEES UNDER

6 THE POLICIES REINSURED IF THE CEDING INSURER BECOMES INSOLVENT.

7 (5) THE REINSURANCE AGREEMENT MAY PROVIDE THAT THE DOMICILI-

8 ARY LIQUIDATOR OF AN INSOLVENT CEDING INSURER SHALL GIVE WRITTEN

9 NOTICE TO THE ASSUMING INSURER OF THE PENDENCY OF A CLAIM AGAINST

10 THE CEDING INSURER ON THE CONTRACT REINSURED WITHIN A REASONABLE

11 TIME AFTER THE CLAIM IS FILED IN THE LIQUIDATION PROCEEDING.

12 Sec. 8132. The amount recoverable by the liquidator from

13 reinsurers shall not be reduced as a result of the delinquency

14 proceedings, regardless of any provision in the reinsurance con-

15 tract or other agreement. THE REINSURANCE SHALL BE PAYABLE PUR-

16 SUANT TO THE TERMS OF THE REINSURANCE CONTRACT BY THE ASSUMING

17 INSURER ON THE BASIS OF REPORTED CLAIMS ALLOWED BY THE LIQUIDA-

18 TION COURT, WITHOUT DIMINUTION BECAUSE OF THE INSOLVENCY OF THE

19 CEDING INSURER. Payment made directly to an insured or other

20 creditor shall not diminish the reinsurer's obligation to the

21 insurer's estate unless the reinsurance contract provided for

22 direct coverage of a named insured and the payment was made in

23 discharge of that obligation UNLESS THE REINSURANCE CONTRACT

24 REQUIRES OR AN ENDORSEMENT SIGNED BY THE REINSURER TO THE POLI-

25 CIES REINSURED REQUIRES THE REINSURER TO MAKE PAYMENT TO THE

26 PAYEES UNDER THE POLICIES REINSURED IF THE CEDING INSURER BECAME

27 INSOLVENT.

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1 Enacting section 1. The legislature declares that the

2 provisions of this amendatory act are fundamental to the business

3 of insurance as provided in sections 1 and 2 of chapter 20, popu-

4 larly known as the McCarran-Ferguson act, 59 Stat. 33 and 34, 15

5 U.S.C. 1011 and 1012. It is the intent of this amendatory act

6 that upon the insolvency of an alien insurer or reinsurer that

7 provides security to fund its United States obligations under the

8 insurance code of 1956, 1956 PA 218, MCL 500.100 to 500.8302, the

9 assets representing the security shall be maintained in the

10 United States and claims shall be filed with and valued by the

11 state insurance commissioner with regulatory oversight, and the

12 assets shall be distributed under the insurance laws of the state

13 where the trust is domiciled that are applicable to the liquida-

14 tion of domestic United States insurance companies.

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