004.01 No insurer
subject to this regulation shall, 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:
004.01(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;
004.01(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, shall not be considered to be such a
deprivation of surplus or assets;
004.01(c) 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 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 shall
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;
004.01(d) The
ceding insurer must, at specific points in time scheduled in the agreement,
terminate or automatically recapture all or part of the reinsurance
ceded;
004.01(e) 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 which are greater than the direct premiums
collected by the ceding company;
004.01(f) The treaty does not transfer all of
the significant risk inherent in the business being reinsured. The following
table identifies 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 shall be consistent with this
table.
Risk categories:
a.
Morbidity
b. Mortality
c. 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.
d. 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.
e. 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.
f. 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.
+ - Significant 0 - Insignificant
RISK CATEGORY
a b c d e f
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 0 + + + + +
dump-in premiums allowed
*LTC = Long Term Care Insurance
LTD = Long Term Disability Insurance
004.01(g)(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 Section 004.01(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.
004.01(g)(ii)
Notwithstanding the requirements of Section
004.01(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:
How much time has passed since the planning studies
and corresponding decisions were made?
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 must use a formula which 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
Where: I is the net investment income (Exhibit 2, Line 15,
Column 7)
CG is capital gains less capital losses (Exhibit 3, Line 11,
Column 6, less Exhibit 4, Line 9, Column 4)
X is the current year cash and invested assets (Page 2, Line
11, Column 4) plus investment income due and accrued (Page 2, Line 17, Column
4) less borrowed money (Page 3, Line 22, Column 1)
Y is the same as X but for the prior year
004.01(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.
004.01(i) The ceding insurer is required to
make representations or warranties not reasonably related to the business being
reinsured.
004.01(j) The ceding
insurer is required to make representations or warranties about future
performance of the business being reinsured.
004.01(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.
004.02 Notwithstanding subsection
004.01, an insurer subject to this
regulation may, with the prior approval of the Director, take such reserve
credit or establish such asset as the Director may deem consistent with
Nebraska insurance statutes, rules, or regulations, including actuarial
interpretations or standards adopted by the Department.
004.03(a) Agreements entered into after the
effective date of this regulation which involve the reinsurance of business
issued prior to the effective date of the agreements, along with any subsequent
amendments thereto, shall be filed by the ceding company with the Director
within thirty (30) days from its date of execution. 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 regulation 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 regulation.
004.03(b) Any increase in surplus net of
federal income tax resulting from arrangements described in Section
004.03(a)shall 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, page 4 of the Annual Statement) and recognition of
the surplus increase as income shall be reflected on a net of tax basis in the
"Reinsurance ceded" line, page 4 of the Annual Statement as earnings emerge
from the business reinsured.
[For example, on the last day 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) which is reported on the "Aggregate write-ins for gains and losses in
surplus" line in the Capital and Surplus account. $ 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 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 allowance on
reinsurance ceded" line of the Summary of Operations, and -$ 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.]
