Current through Register 2024 Notice Reg. No. 38, September 20, 2024
(a) The Actuarial Method that is used to establish
the Required Level of Primary Security for each reinsurance treaty subject to
Sections 2303.23 through
2303.28 of this article shall be VM-20,
applied on a treaty-by-treaty basis, including all relevant definitions, from the
Valuation Manual as then in effect, applied as follows:
1. For Covered Policies described in Section
2303.2(i)1. of this
article, the Actuarial Method is the greater of the Deterministic Reserve or the Net
Premium Reserve (NPR) regardless of whether the criteria for exemption testing can
be met. However, if the Covered Policies do not meet the requirements of the
Stochastic Reserve exclusion test in the Valuation Manual, then the Actuarial Method
is the greatest of the Deterministic Reserve, the Stochastic Reserve, or the NPR. In
addition, if such Covered Policies are reinsured in a reinsurance treaty that also
contains Covered Policies described in Section
2303.2(i)2. of this
article, the ceding insurer may elect to instead use subdivision (a)2. of this
Section as the Actuarial Method for the entire reinsurance agreement. Regardless of
whether subdivision (a)1. or subdivision (a)2. are used, the Actuarial Method must
comply with any requirements or restrictions that the Valuation Manual imposes when
aggregating these policy types for purposes of principle-based reserve
calculations.
2. For Covered Policies
described in Section
2303.2(i)2. of this
article, the Actuarial Method is the greatest of the Deterministic Reserve, the
Stochastic Reserve, or the NPR regardless of whether the criteria for exemption
testing can be met.
3. Except as
provided in subdivision (a)4. of this Section, the Actuarial Method is to be applied
on a gross basis to all risks with respect to the Covered Policies as originally
issued or assumed by the ceding insurer.
4. If the reinsurance treaty cedes less than one
hundred percent (100%) of the risk with respect to the Covered Policies then the
Required Level of Primary Security may be reduced as follows:
A. If a reinsurance treaty cedes only a quota
share of some or all of the risks pertaining to the Covered Policies, the Required
Level of Primary Security, as well as any adjustment under subdivision (a)4.C. of
this Section, may be reduced to a pro rata portion in accordance with the percentage
of the risk ceded;
B. If the reinsurance
treaty in a non-exempt arrangement cedes only the risks pertaining to a secondary
guarantee, the Required Level of Primary Security may be reduced by an amount
determined by applying the Actuarial Method on a gross basis to all risks, other
than risks related to the secondary guarantee, pertaining to the Covered Policies,
except that for Covered Policies for which the ceding insurer did not elect to apply
the provisions of VM-20 to establish statutory reserves, the Required Level of
Primary Security may be reduced by the statutory reserve retained by the ceding
insurer on those Covered Policies, provided that the retained reserve of those
Covered Policies shall be reflective of any reduction pursuant to the cession of
mortality risk on a yearly renewable term basis in an exempt arrangement;
C. If a portion of the Covered Policy risk is
ceded to another reinsurer on a yearly renewable term basis in an exempt
arrangement, the Required Level of Primary Security may be reduced by the amount
resulting by applying the Actuarial Method including the reinsurance section of
VM-20 to the portion of the Covered Policy risks ceded in the exempt arrangement,
except that for Covered Policies issued prior to January 1, 2017, this adjustment is
not to exceed [Cx (2 * number of reinsurance premiums per year)] where Cx is
calculated using the same mortality table used in calculating the Net Premium
Reserve; and
D. For any other treaty
ceding a portion of risk to a different reinsurer, including but not limited to stop
loss, excess of loss and other non-proportional reinsurance treaties, there will be
no reduction in the Required Level of Primary Security.
It is possible for any combination of subdivision (a)4.A.,
subdivision (a)4.B., subdivision (a)4.C., and subdivision (a)4.D. of this Section to
apply. Such adjustments to the Required Level of Primary Security will be done in
the sequence that accurately reflects the portion of the risk ceded via the treaty.
The ceding insurer shall document the rationale and steps taken to accomplish the
adjustments to the Required Level of Primary Security due to the cession of less
than one hundred percent (100%) of the risk.
The Adjustments for other reinsurance will be made only with
respect to reinsurance treaties entered into directly by the ceding insurer. The
ceding insurer will make no adjustment as a result of a retrocession treaty entered
into by the assuming insurers.
5. In no event will the Required Level of Primary
Security resulting from application of the Actuarial Method exceed the amount of
statutory reserves ceded.
6. If the
ceding insurer cedes risks with respect to Covered Policies, including any riders,
in more than one reinsurance treaty subject to Sections
2303.23 through
2303.28 of this article, in no event
will the aggregate Required Level of Primary Security for those reinsurance treaties
be less than the Required Level of Primary Security calculated using the Actuarial
Method as if all risks ceded in those treaties were ceded in a single treaty subject
to Sections 2303.23 through
2303.28 of this article;
7. If a reinsurance treaty subject to Sections
2303.23 through
2303.28 of this article cedes risk on
both Covered and Non-Covered Policies, credit for the ceded reserves shall be
determined as follows:
A. The Actuarial Method
shall be used to determine the Required Level of Primary Security for the Covered
Policies, and Section
2303.27 of this article shall be used
to determine the reinsurance credit for the Covered Policy reserves; and
B. Credit for the Non-Covered Policy reserves
shall be granted only to the extent that security, in addition to the security held
to satisfy the requirements of subparagraph A., is held by or on behalf of the
ceding insurer in accordance with Code Sections 922.4 and 922.5. Any Primary
Security used to meet the requirements of this subparagraph may not be used to
satisfy the Required Level of Primary Security for the Covered
Policies.
(b) For
the purposes of both calculating the Required Level of Primary Security pursuant to
the Actuarial Method and determining the amount of Primary Security and Other
Security, as applicable, held by or on behalf of the ceding insurer, the following
shall apply:
1. For assets, including any such
assets held in trust, that would be admitted under the NAIC Accounting Practices and
Procedures Manual if they were held by the ceding insurer, the valuations are to be
determined according to statutory accounting procedures as if such assets were held
in theceding insurer's general account and without taking into consideration the
effect of any prescribed or permitted practices; and
2. For all other assets, the valuations are to be
those that were assigned to the assets for the purpose of determining the amount of
reserve credit taken. In addition, the asset spread tables and asset default cost
tables required by VM-20 shall be included in the Actuarial Method if adopted by the
NAIC's Life Actuarial (A) Task Force no later than the December 31st on or
immediately preceding the valuation date for which the Required Level of Primary
Security is being calculated. The tables of asset spreads and asset default costs
shall be incorporated into the Actuarial Method in the manner specified in
VM-20.
1. New section
filed 11-27-2017; operative 1-1-2018 (Register 2017, No. 48). For prior history, see
Register 2015, No. 13
Note: Authority cited: Sections
922.8,
922.85,
923 and
10489.94,
Insurance Code; CalFarm Insurance Company v. Deukmejian, 48 Cal. 3d 805 (1989); and
20th Century Insurance Company v. Garamendi, 8 Cal. 4th 216 (1994). Reference:
Sections
900,
922.4,
922.5,
922.85,
923,
10489.1,
10489.12,
10489.96 and
12921, Insurance
Code.
