Current through Register Vol. 46, No. 39, September 25, 2024
(a) No
insurer subject to this Part shall, for reinsurance ceded, take reserve credit
by reducing a liability or establishing an asset in any financial statement
filed with the superintendent if, by the terms of the reinsurance agreement, in
substance or effect, any of the following conditions exists:
(1) renewal expense allowances, provided or
to be provided to the ceding insurer by the assuming insurer in any accounting
period, are not sufficient to cover anticipated allocable renewal expenses of
the ceding insurer on the portion of 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 ceding
insurer at the time the business is reinsured;
(2) the ceding insurer can be deprived of
surplus or assets at the assuming insurer'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 assuming insurer 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 a deprivation of surplus
or assets;
(3) the ceding insurer
is required to reimburse the assuming reinsurer for negative experience under
the reinsurance agreement, except that offsetting experience refunds against
current and prior years' losses under the agreement or 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 not be considered a reimbursement to the reinsurer for negative
experience. Voluntary termination does not include terminations that occur
because of provisions which allow the assuming insurer to reduce its risk under
the agreement; for example, a provision allowing the assuming insurer to
increase reinsurance premiums or risk and expense charges;
(4) the interest rate applied to current and
prior years' losses exceeds the rate calculated according to the formula set
forth in subparagraph (8)(iii) of this subdivision, or, if assets are
segregated in accordance with subparagraph (8)(i) of this subdivision, the
interest rate reflecting the segregated portfolio's investment earnings
including all realized and unrealized gains and losses. For purposes of this
paragraph, the application of a negative interest rate is not
required;
(5) the ceding insurer
must, at specific points in time scheduled in the agreement, terminate or
automatically recapture all or part of the reinsurance ceded;
(6) the ceding insurer may be obligated to
pay to the assuming insurer amounts other than from income realized from the
insured policies. For example, a ceding insurer pays reinsurance premiums, or
other fees or charges to an assuming insurer which are greater than the direct
premiums collected by the ceding insurer on the insurance policies or contracts
reinsured;
(7) the ceding insurer
does not transfer to the assuming insurer all of the significant risks inherent
in the insurance policies or contracts reinsured. The following table
identifies, for a representative sampling of types of insurance policies or
contracts, the risks which are considered to be significant. For policies or
contracts 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 an insurance policy or contract 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.....................................................
Risk Category
+ = Significant, 0 =
Insignificant
|
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-dump-in premiums
allowed |
0 |
+ |
+ |
+ |
+ |
+ |
* LTC = Long Term Care
Insurance, LTD = Long Term Disability Insurance
(8)
(i) the
ceding insurer does not transfer the underlying assets to the assuming insurer
or otherwise establish a mechanism satisfactory to the superintendent which
legally segregates, by contract or contract provision, the underlying assets,
except as provided in subparagraph (ii) of this paragraph;
(ii) the assets supporting the reserves for
the following classes of insurance policies or contracts and any classes of
insurance policies or contracts which do not have a significant credit quality,
reinvestment or disintermediation risk may be held by the ceding insurer
without segregation of the underlying assets:
(a) Health insurance-LTC/LTD
(b) Traditional non-par permanent
(c) Traditional par permanent
(d) Adjustable premium permanent
(e) Indeterminate premium permanent
(f) Universal life fixed premium-no dump-in
premiums allowed
(iii)
when assets are held by the ceding insurer pursuant to subparagraph (ii) of
this paragraph, the associated formula for determining the reserve interest
rate adjustment must reflect the ceding insurer's investment earnings and
incorporate all realized and unrealized gains and losses reflected in its
statutory statement. The following is an acceptable formula:
Rate = 2(I + CG)/X +
Y - I - CG
Where:
I is the net investment income earned, CG is capital gains
less capital losses
X is the current year cash and invested assets plus
investment income due and accrued less borrowed money
Y is the same as X but for the prior year
(9) settlements are:
(i) made less frequently than quarterly or
payments due from the assuming insurer are not made in cash within 90 days of
the settlement date; or
(ii) not
based on actual experience of the insurance policies being reinsured (including
all components of the formula set forth in subparagraph [8][iii] of this
subdivision) or reasonable estimates thereof; provided, however, any
settlements based on reasonable estimates must be recalculated at least
annually to reflect the actual experience of the year;
(10) the ceding insurer is required to make
representations or warranties not reasonably related to the business being
reinsured;
(11) the ceding insurer
is required to make representations or warranties about future performance of
the business being reinsured;
(12)
the assuming insurer is not required to fully reimburse the ceding insurer for
its share of dividends paid on participating policies or additional amounts
paid or credited arising from the declaration of interest, mortality or expense
more favorable than guaranteed on policies subject to the reinsurance
agreement, unless the agreement contains another provision relating to the
reimbursement of dividends and/or additional amounts paid or credited which is
approved by the superintendent pursuant to subdivision (b) of this section;
or
(13) the ceding insurer does not
transfer all of the significant risks inherent in the insurance policies or
contracts reinsured, and, in substance or effect, the expected potential
liability to the ceding insurer remains basically unchanged.
(b) Notwithstanding that the
reinsurance agreement provides for one or more of the conditions specified
subdivision (a) of this section, an insurer subject to this Part may take
reserve credit in such amount as the superintendent may deem consistent with
the Insurance Law or this Title, if the insurer obtains the prior approval of
the superintendent. In reviewing a request for approval, the superintendent
shall consider, among other things:
(1)
whether, and the extent that, the terms of the reinsurance agreement provide
for the transfer of all significant risks to the assuming insurer;
(2) whether taking the reserve credit by
reducing liabilities or establishing assets would distort the annual statement
of the ceding insurer; and
(3)
whether approval to take such reserve credit would create a situation that may
be hazardous to policyholders and the people of this State.
(c) Any reinsurance agreement
entered into after the effective date of this Part which involves the
reinsurance of insurance policies issued prior to the effective date of the
agreement, and every amendment thereto, shall be filed by the ceding insurer
with the superintendent within 30 days from its date of execution. Each filing
shall include data detailing the financial impact of the transaction.
(d) Any increase in surplus net of Federal
income tax resulting from arrangements described in subdivision (c) of this
section 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).
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.
(e) 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
superintendent. 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 the work conforms to this
Part.
Footnotes
* LTC = Long Term Care Insurance, LTD = Long Term
Disability Insurance
