December 13, 1982

Mr. Henry J. Lussem, Jr. 
Director of the Division of Insurance 
State of South Dakota 
Pierre, South Dakota 57501

Official Opinion No. 82-65

South Dakota's Regulation of Reinsurance

Dear Mr. Lussem:

You have requested an official opinion from this office in regard to the following factual situation:

FACTS: 

'I,' an insurer, writes policies on South Dakota risks and reinsures all, or a part thereof, with 'R1,' an unlicensed reinsurer who meets the South Dakota statutory qualifications.  'R1' wishes to reinsure the same risk with 'R2,' a reinsurer who does not meet those same standards.

Based on the above facts, you have asked the following question:

QUESTION: 

Is the South Dakota Division of Insurance correct in requiring a retrocessionaire (reinsurer of a reinsurer), to meet the same surplus to policyholders requirements as the reinsurer of the direct writing company?

The key statute in addressing your question is SDCL 58-14-2 which provides: 

Except as provided in § §  58-5-120 to 58-5-122, inclusive, an insurer may reinsure all or any part of any South Dakota risk with an insurer having surplus to policyholders not less in amount than the paid-in capital required by this title of a domestic stock insurer, authorized to transact like kinds of insurance, or in any other solvent insurer meeting the same tests approved by the director.  The director shall not approve such reinsurance by a ceding  domestic insurer in an unauthorized insurer if he finds it would be contrary to the interests of the policyholders or stockholders of such domestic insurers.

Reinsurance is defined in SDCL 58-14-1 as follows: 

'Reinsurance' is a contract under which an originating insurer, called the 'ceding insurer,' procures insurance for itself in another insurer, called the 'assuming insurer' or the 'reinsurer,' with respect to part or all of any insurance risk of the originating insurer.

There can be no question from a reading of the above statutes that the contract between 'I' and 'R1' is valid only if 'R1' has a surplus to policy- holders not less in amount than the paid-in capital required of a domestic stock insurer.  Whether that requirement applies to the reinsurance agreement between 'R1' and 'R2,' however, is not as clear.

A literal interpretation of SDCL 58-14-2 would apply the requirement to the second reinsurance agreement.  But SDCL 58‑14‑2 must be read in conjunction with the definition of reinsurance contained in SDCL 58-14-1.  That definition applies only between an 'originating insurer' and another insurer.  It does not cover the situation where the first reinsurer contracts with a second reinsurer.  'Whenever the meaning of a word or phrase is defined in any statute such definition is applicable to the same word or phrase wherever it occurs except where a contrary intention plainly appears.'  SDCL 2-14-4.  

Consequently, the second reinsurer is not subject to the surplus to policyholders requirement contained in SDCL 58-14-2.  Therefore, the answer to your question is NO.

Respectfully submitted,

Mark V. Meierhenry
Attorney General