Current through Register Vol. 48, No. 12, March 22, 2024
a) No
insurer subject to this Part shall, for reinsurance ceded, reduce any liability
or establish any asset in any financial statement filed with the Division if,
by the terms of the reinsurance agreement, in substance or effect, any of the
following conditions exist:
1) 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 bases 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;
2) 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, including but not
limited to modified coinsurance reserve adjustments, interest and adjustments
on funds withheld, and tax reimbursements, shall not be considered to be a
deprivation of surplus;
3) The
ceding insurer is required to reimburse the reinsurer for negative experience
under the reinsurance agreement, except that neither offsetting experience
refunds against current and prior years' losses nor payment by the ceding
insurer of an amount equal to the current and prior years' losses under the
agreement upon voluntary terminations of in-force reinsurance by ceding insurer
shall be considered a reimbursement to the reinsurer for negative experience.
Voluntary termination does not include situations where termination occurs
because of unreasonable provisions that 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;
4) The ceding
insurer shall, at specific points in time scheduled in the agreement, terminate
or automatically recapture all or part of the reinsurance ceded;
5) The reinsurance agreement involves the
possible payment by the ceding insurer to the reinsurer of amounts other than
from income realized from the reinsured policies. For example, it is improper
for a ceding company to pay reinsurance premiums or other fees or charges to a
reinsurer that are greater than the direct premiums collected by the ceding
company;
6) The treaty does not
transfer all of the significant risk inherent in the business being reinsured.
Exhibit A of this Part identifies, for a representative sampling of products or
type of business, the risks considered to be significant. For products not
specifically included, the risks determined to be significant shall be
consistent with Exhibit A;
7)
Requirements concerning credit quality, reinvestment or disintermediation risk.
A) 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 subsection
(a)(7)(B)) either transfer the underlying assets to the reinsurer or legally
segregate such assets in a trust account or escrow account or otherwise
establish a mechanism that segregates, by contract or contract provision, the
underlying assets.
B)
Notwithstanding the requirements of subsection (a)(7)(A), the assets supporting
the reserves for the following classes of business and any classes of business
that do not have a significant credit quality, reinvestment or
disintermediation risk may be held by the ceding company without segregation of
those 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 shall
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:
Rate
|
=
|
2(I + CG)
|
(X + Y - I - CG)
|
i) I is the net
investment income
ii) CG is capital
gains less capital losses
iii) X is
the current year cash and invested assets plus investment income due and
accrued less borrowed money
iv) Y
is the same as X but for the prior year;
8) Settlements are made less frequently than
quarterly or payments due from the reinsurer are not made in cash within 90
days after the settlement date;
9)
The ceding insurer is required to make representations or warranties not
reasonably related to the business being reinsured;
10) The ceding insurer is required to make
representations or warranties about future performance of the business being
reinsured;
11) The amount of the
total admitted assets of the ceding insurance company less the amount of all
funds withheld by any reinsurer as a result of all reinsurance treaties is less
than the total gross amount available to policyholders either through the
exercise of policy cash surrender or loan provisions;
12) The reinsurance agreement is entered into
for the principal purpose of producing significant surplus aid for the ceding
company typically on a temporary basis, while not transferring all of the
significant risks inherent in the business reinsured, and the remaining
liability to the ceding insurer remains basically unchanged.
b) Requirements for reinsurance of
in-force business.
1) Agreements entered into
after January 5, 1994, along with any subsequent amendments to those
agreements, that involve the reinsurance of business issued prior to the
effective date of the agreements or amendments must meet the requirements of
Section 174 of the Illinois Insurance Code [215 ILCS
5/174 ]. Each filing shall 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
shall consider this Part and any applicable actuarial standards of practice
when determining the proper credit in financial statements filed with the
Division. The actuary shall maintain documentation and be prepared to describe
the actuarial work performed for inclusion in the financial statements and to
demonstrate that such work conforms to this Part.
2) As earnings emerge from the business
reinsured, any increase in surplus net of federal income tax resulting from
arrangements described in subsection (b)(1) shall be identified separately on
the insurer's statutory financial statements as a surplus item in the "Change
in Surplus as a result of Reinsurance" line for companies filing on the Life,
Accident and Health blank and in the "Aggregate write-ins for gains (or losses)
in Surplus" line for companies filing on the Property and Casualty blank and
Health blank and recognition of the surplus increase as income shall be
reflected on a net of tax basis in the "Commissions and Expense allowances on
reinsurance ceded" line for companies filing on the Life, Accident and Health
blank and in the "Aggregate write-in for miscellaneous income" for companies
filing on the Property and Casualty blank.
For example, on the last date of calendar year N, company XYZ
pays a $20 million initial commission and expense allowance to company ABC for
reinsuring an existing block of business. Assuming a 34% tax rate, the net
increase in surplus at inception is $13.2 million ($20 million - $6.8 million)
that is reported on the "Change in Surplus as a result of Reinsurance" line of
the Summary of Operations. $6.8 million (34% of $20 million) is reported as
income on the "Commissions and Expense allowances on reinsurance ceded" line of
the Summary of Operations. At the end of the year N + 1 the business has earned
$4 million. ABC has paid $.5 million in profit and risk charges in arrears for
the year and has received a $1 million experience refund. Company ABC's annual
statement would report $1.65 million
(66% of ($4 million - $1 million - $.5 million) up to a maximum of $13.2
million) on the "Commissions and Expense allowances on reinsurance ceded" line
of the Summary of Operations, and - $1.65 million on the
"Change in Surplus as a result of Reinsurance" line of the Summary of
Operations. The experience refund would be reported separately as an "Aggregate
write-in for miscellaneous income" item in the Summary of
Operations.