KRS 304.49-228: Establishment of protected cells by sponsored captive insurer --

Conditions.

A sponsored captive insurer may establish and maintain one (1) or more protected cells to

insure risks of one (1) or more participants, subject to the following conditions:

(1) The owners of a sponsored captive insurer shall be limited to its participants and

sponsors, provided that a sponsored captive insurer may issue nonvoting securities

or interests to other persons on terms approved by the commissioner;

(2) The assets of each protected cell shall be held and accounted for separately on the

books and records of the sponsored captive insurer to reflect the financial condition

and results of operations of the protected cell, net income or loss of the protected

cell, dividends or other distributions to participants of the protected cell, and other

factors regarding the protected cell as may be provided in the applicable participant

contract or required by the commissioner;

(3) The assets of a protected cell shall not be char geable with liabilities of any other

protected cell or, unless otherwise agreed in the applicable participant contract, of

the sponsored captive insurer generally;

(4) No sale or transfer of assets, or dividend or other distribution, may be made with

respect to a protected cell by such sponsored captive insurer without the consent of

the participants of each affected protected cell;

(5) No sale, exchange, or transfer of assets, or dividend or other distribution, other than

a payment to a sponsor in accordan ce with the applicable participant contract, may

be made with respect to a protected cell to a sponsor or a participant without the

commissioner's approval;

(6) Each sponsored captive insurer shall annually file with the commissioner financial

reports as t he commissioner shall require, which shall include, without limitation,

accounting statements detailing the financial experience of each protected cell;

(7) Each sponsored captive insurer shall notify the commissioner, in writing, within ten

(10) business days of any protected cell that has become insolvent or is otherwise

unable to meet its claim or expense obligations;

(8) No participant contract shall take effect without the commissioner's prior written

approval. The addition of each new protected cell and withdrawal of any participant

or termination of any existing protected cell shall constitute a change in the plan of

operation of the sponsored captive insurer requiring the commissioner's prior

written approval; and

(9) (a) The business written by a sp onsored captive insurer, with respect to each

protected cell, shall be:

1. Fronted by an insurance company licensed under the laws of this state or

any other state;

2. Reinsured by a reinsurer authorized or approved by this state;

3. Secured by a trust fund in this state for the benefit of policyholders and

claimants; or

4. Funded by an irrevocable letter of credit or other arrangement that is

approved in writing by the commissioner.

(b) The amount of security provided shall be no less than the reserves associated

with those liabilities which are neither fronted nor reinsured, including

reserves for losses, allocated loss adjustment expenses, incurred but not

reported losses, and unearned premiums for business written through the

protected cell.

(c) The commissioner may, for any reason, require the sponsored captive

insurance company to increase the funding of any security arrangement

established under this subsection in order to protect claimants or potential

claimants.

(d) If the form of security is a letter of credit, the letter of credit shall be

established, issued, or confirmed by a financial institution chartered by or

licensed or otherwise authorized to do banking business in this state, or by any

other financial institution approved by the commissioner.

(e) A trust maintained pursuant to this subsection shall be established in a form

and upon such terms as approved by the commissioner.