Current through Supplement No. 394, October, 2024
1. An
insurer subject to this chapter, for reinsurance ceded, does not reduce any
liability or establish any asset in any financial statement filed with the
insurance department if, by the terms of the reinsurance agreement, in
substance or effect, any of the following conditions exist:
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
billing, valuation, claims, and maintenance expected by the company at the time
the business is reinsured.
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, may not be considered to be such a
deprivation of surplus or assets.
c. The ceding insurer shall 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 must be considered a
reimbursement to the reinsurer for negative experience. Voluntary termination
does not include situations when 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.
d. At specific points in time scheduled in
the agreement, the ceding insurer must terminate or automatically recapture all
or part of the reinsurance ceded.
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.
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 that are considered to be significant. For products
not specifically included, the risks determined to be significant must 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. 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. This is
the risk that interest rates will fall and funds reinvested, coupon payments or
moneys 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. 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.
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g.
(1) 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 paragraph 2, either transfer the underlying assets to
the reinsurer or legally segregate the assets in a trust or escrow account or
otherwise establish a mechanism satisfactory to the commissioner which legally
segregates, by contract or contract provision, the underlying assets.
(2) Notwithstanding the
requirements of paragraph 1, 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 the assets:
(a) Health insurance - Long-term care
insurance and long-term disability insurance.
(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.
The associated formula for determining the reserve interest
rate adjustment must 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
Where: I is the net investment income.
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.
h.
Settlements are made less frequently than quarterly or payments due from the
reinsurer are not made in cash within ninety days of the settlement date.
i. The ceding insurer is required
to make representations or warranties not reasonably related to the business
being reinsured.
j. The ceding
insurer is required to make representations or warranties about future
performance of the business being reinsured.
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.
2.
Notwithstanding subsection 1, an insurer subject to this rule, with the prior
approval of the commissioner, may take the reserve credit or establish the
asset as the commissioner may deem consistent with North Dakota Century Code
title 26.1 or the North Dakota Administrative Code, including actuarial
interpretations or standards adopted by the insurance department.
3.
a.
Agreements entered into after October 1, 1995, which involve the reinsurance of
business issued prior to October 1, 1995, along with any subsequent amendments
thereto, shall be filed by the ceding company with the commissioner within
thirty 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 chapter 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 the work conforms to this
chapter.
b. Any increase in
surplus net of federal income tax resulting from arrangements described in
subdivision a must 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 percent 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 percent 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 percent 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.]
