01.
Standards
for Credit on Financial Statement. No insurer subject to this rule will,
for reinsurance ceded, reduce any liability or establish any asset in any
financial statement filed with the Department if, by the terms of the
reinsurance agreement, in substance or effect, any of the following conditions
exist: (3-31-22)
a. Renewal expense allowances
provided or to be provided to the ceding insurer by the reinsurer in any
accounting period, are not sufficient to cover anticipated allocable renewal
expenses of the ceding insurer on the portion of the business reinsured, unless
a liability is established for the present value of the shortfall (using
assumptions equal to the applicable statutory reserve basis on the business
reinsured). Those expenses include commissions, premium taxes and direct
expenses including, but not limited to, billing, valuation, claims and
maintenance expected by the company at the time the business is reinsured;
(3-31-22)
b. The ceding insurer can
be deprived of surplus or assets at the reinsurer's option or automatically
upon the occurrence of some event, such as the insolvency of the ceding
insurer, except that termination of the reinsurance agreement by the reinsurer
for nonpayment of reinsurance premiums or other amounts due, such as modified
coinsurance reserve adjustments, interest and adjustments on funds withheld,
and tax reimbursements, will not be considered to be such a deprivation of
surplus or assets; (3-31-22)
c. The
ceding insurer needs to reimburse the reinsurer for negative experience under
the reinsurance agreement, except that neither offsetting experience refunds
against current and prior years' losses under the agreement nor payment by the
ceding insurer of an amount equal to the current and prior years' losses under
the agreement upon voluntary termination of in force reinsurance by the ceding
insurer will be considered such a reimbursement to the reinsurer for negative
experience. Voluntary termination does not include situations where termination
occurs because of unreasonable provisions which allow the reinsurer to reduce
its risk under the agreement. An example of such a provision is the right of
the reinsurer to increase reinsurance premiums or risk and expense charges to
excessive levels forcing the ceding company to prematurely terminate the
reinsurance treaty; (3-31-22)
d.
The ceding insurer needs to, at specific points in time scheduled in the
agreement, terminate or automatically recapture all or part of the reinsurance
ceded; (3-31-22)
e. The reinsurance
agreement involves the possible payment by the ceding insurer to the reinsurer
of amounts other than from income realized from the insured policies. For
example, it is improper for a ceding company to pay reinsurance premiums, or
other fees or charges to a reinsurer which are greater than the direct premiums
collected by the ceding company; (3-31-22)
f. The treaty does not transfer all of the
significant risk inherent in the business being reinsured. The following table
identified for a representative sampling of products or type of business, the
risks which are considered to be significant. For products not specifically
included, the risks determined to be significant will be consistent with this
table. (3-31-22)
i. Risk categories: (3-31-22)
(1) Morbidity. (3-31-22)
(2) Mortality. (3-31-22)
ii. Lapse. This is the risk that a policy
will voluntarily terminate prior to the recoupment of a statutory surplus
strain experienced at issue of the policy. (3-31-22)
iii. Credit Quality (C1). This is the risk
that invested assets supporting the reinsured business will decrease in value.
The main hazards are that assets will default or that there will be a decrease
in earning power. It excludes market value declines due to changes in interest
rate. (3-31-22)
iv. Reinvestment
(C3). This is the risk that interest rates will fall and funds reinvested
(coupon payments or monies received upon asset maturity or call) will therefore
earn less than expected. If asset durations are less than liability durations,
the mismatch will increase. (3-31-22)
v. Disintermediation (C3). This is the risk
that interest rates rise and policy loans and surrenders increase or maturing
contracts do not renew at anticipated rates of renewal. If asset durations are
greater than the liability durations, the mismatch will increase. Policyholders
will move their funds into new products offering higher rates. The company may
have to sell assets at a loss to provide for these withdrawals.
Risk Category
Key: + - Significant
0 - Insignificant
|
i. |
ii. |
iii. |
iv. |
v. |
vi. |
|
Health Insurance - other than
LTC/LTD* |
+ |
0 |
+ |
0 |
0 |
0 |
|
Health Insurance - LTC/LTD* |
+ |
0 |
+ |
+ |
+ |
0 |
|
Immediate Annuities |
0 |
+ |
0 |
+ |
+ |
0 |
|
Single Premium Deferred Annuities |
0 |
0 |
+ |
+ |
+ |
+ |
|
Flexible Premium Deferred Annuities |
0 |
0 |
+ |
+ |
+ |
+ |
|
Guaranteed Interest Contracts |
0 |
0 |
0 |
+ |
+ |
+ |
|
Other Annuity Deposit Business |
0 |
0 |
+ |
+ |
+ |
+ |
|
Single Premium Whole Life |
0 |
+ |
+ |
+ |
+ |
+ |
|
Traditional Non-Par Permanent |
0 |
+ |
+ |
+ |
+ |
+ |
|
Traditional Non-Par Term |
0 |
+ |
+ |
0 |
0 |
0 |
|
Traditional Par Permanent |
0 |
+ |
+ |
+ |
+ |
+ |
|
Traditional Par Term |
0 |
+ |
+ |
0 |
0 |
0 |
|
Adjustable Premium Permanent |
0 |
+ |
+ |
+ |
+ |
+ |
|
Indeterminate Premium Permanent |
0 |
+ |
+ |
+ |
+ |
+ |
|
Universal Life Flexible Premium |
0 |
+ |
+ |
+ |
+ |
+ |
|
Universal Life Fixed Premium |
0 |
+ |
+ |
+ |
+ |
+ |
|
Universal Life Fixed Premium dump-in premiums
allowed |
0 |
+ |
+ |
+ |
+ |
+ |
*LTC = Long Term Care Insurance
*LTD = Long Term Disability Insurance
(3-31-22)
g.
Significant Risk. (3-31-22)
i. The credit
quality, reinvestment, or disintermediation risk is significant for the
business reinsured and the ceding company does not (other than for the classes
of business excepted in IDAPA 18.07.06.011.01.g.ii.) either transfer the
underlying assets to the reinsurer or legally segregate such assets in a trust
or escrow account or otherwise establish a mechanism satisfactory to the
Director which legally segregates, by contract or contract provision, the
underlying assets. (3-31-22)
ii.
Notwithstanding the requirements of IDAPA 18.07.06.011.01.g.i., the assets
supporting the reserves for the following classes of business and any classes
of business which do not have a significant credit quality, reinvestment or
disintermediation risk may be held by the ceding company without segregation of
such assets:
- Health Insurance
- LTC/LTD - Traditional Non-Par Permanent
- Traditional Par Permanent
- Adjustable Premium Permanent
- Indeterminate Premium Permanent
- Universal Life Fixed Premium (no dump-in premiums
allowed)
The associated formula for determining the reserve interest
rate adjustment needs to use a formula that reflects the ceding company's
investment earnings and incorporates all realized and unrealized gains and
losses reflected in the statutory statement. The following is an acceptable
formula:
Click
here to view image
Where: "I" is the net investment income as reported in Annual
Statement
"CG" is capital gains less capital losses as reported in Annual
Statement
"X" is the current year cash and invested assets plus
investment income due and accrued less borrowed money as reported in Annual
Statement
"Y" is the same as X but for the prior year
(3-31-22)
h.
Settlements are made less frequently than quarterly or payments due from the
reinsurer are not made in cash within ninety (90) days of the settlement date.
(3-31-22)
i. The ceding insurer
needs to make representations or warranties not reasonably related to the
business being reinsured. (3-31-22)
j. The ceding insurer needs to make
representations or warranties about future performance of the business being
reinsured. (3-31-22)
k. The
reinsurance agreement is entered into for the principal purpose of producing
significant surplus aid for the ceding insurer, typically on a temporary basis,
while not transferring all of the significant risks inherent in the business
reinsured and, in substance or effect, the expected potential liability to the
ceding insurer remains basically unchanged. (3-31-22)
02.
Director's Approval. An
insurer subject to this Rule may, with the prior approval of the Director, take
such reserve credit or establish such asset as the Director may deem consistent
with the Insurance Code and Rules, including actuarial interpretations or
standards adopted by the Department. (3-31-22)
03.
Filing of Reinsurance
Agreements. (3-31-22)
a. Agreements
entered into after the effective date of this Rule which involve the
reinsurance of business issued prior to the effective date of the agreements,
along with any subsequent amendments thereto, will be filed by the ceding
company with the Director within thirty (30) days from its date of execution.
Each filing will include data detailing the financial impact of the
transaction. The ceding insurer's actuary who signs the financial statement
actuarial opinion with respect to valuation of reserves will consider his Rule
and any applicable actuarial standards of practice when determining the proper
credit in financial statements filed with this Department. The actuary should
maintain adequate documentation and be prepared upon request to describe the
actuarial work performed for inclusion in the financial statements and to
demonstrate that such work conforms to this Rule. (3-31-22)
b. Any increase in surplus net of federal
income tax resulting from arrangements described in Subsection
011.03.a. will be identified
separately on the insurer's statutory financial statement as a surplus item
(aggregate write-ins for gains and losses in surplus in the Capital and Surplus
Account line of the Annual Statement) and recognition of the surplus increase
as income will be reflected on a net of tax basis in the "Reinsurance ceded"
line of the annual statement as earnings emerge from the business reinsured.
(3-31-22)
i. For example: On the last day of
calendar year N, company XYZ pays a twenty ($20) million initial commission and
expense allowance to company ABC for reinsuring an existing block of business.
Assuming a thirty-four percent (34%) tax rate, the net increase in surplus at
inception is thirteen point two ($13.2) million (twenty ($20) million - six
point eight ($6.8) million) which is reported on the "Aggregate write-ins for
gains and losses in surplus" line in the Capital and Surplus account. Six point
eight ($6.8) million (thirty-four (34%) of twenty ($20) million) is reported as
income on the "Commissions and expense allowances on reinsurance ceded" line of
the Summary of Operations. (3-31-22)
ii. At the end of year N+1 the business has
earned four ($4) million. ABC has paid point five ($.5) million in profit and
risk charges in arrears for the year and has received a one million ($1)
million experience refund. Company ABC's annual statement would report one
point six five ($1.65) million (sixty-six percent (66%) of (four ($4) million -
one ($1) million - point five ($.5) million) up to a maximum of thirteen point
two ($13.2) million) on the "Commissions and expense allowance on reinsurance
ceded" line of the Summary of Operations, and -one point sixty five ($1.65)
million on the "Aggregate write-ins for gains and losses in surplus" line of
the Capital and Surplus account. The experience refund would be reported
separately as a miscellaneous income item in the Summary of Operations.
(3-31-22)
