Oregon Administrative Rules
Chapter 836 - DEPARTMENT OF CONSUMER AND BUSINESS SERVICES, INSURANCE REGULATION
Division 12 - CREDIT FOR REINSURANCE
Section 836-012-0310 - Accounting Requirements
Universal Citation: OR Admin Rules 836-012-0310
Current through Register Vol. 63, No. 9, September 1, 2024
(1) An insurer that is subject to OAR 836-012-0300 to 836-012-0330 shall not, for reinsurance ceded, reduce any liability or establish any asset in any financial statement filed with the Director if by the terms of the reinsurance agreement, in substance or effect, one or more 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 but not limited to expenses for billing, valuation, claims
and maintenance expected by the ceding insurer at the time the business is
reinsured;
(b) 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 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 in which
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 insurer to prematurely
terminate the reinsurance treaty;
(c) 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 non-payment
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;
(d) The ceding insurer, at
specific points in time scheduled in the agreement, 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 insurer to pay reinsurance premiums or other fees or charges to a
reinsurer that are greater than the direct premiums collected by the ceding
insurer;
(f) The treaty does not
transfer all of the significant risk inherent in the business being reinsured.
The following table in this subsection 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. The risk categories are as
follows:
(A) Morbidity;
(B) Mortality;
(C) Lapse, which 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), which 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. Credit quality excludes market value declines due to changes
in interest rate;
(E) Reinvestment
(C3), which 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), which 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 insurer may have to sell assets at a loss
to provide for these withdrawals.
For purposes of the following chart: + - Significant 0 - Insignificant
RISK CATEGORY
A B C D E F
Health Insurance - other than long + 0 + 0 0 0
term care insurance and long term
disability insurance
Health Insurance - long term care + 0 + + + 0
insurance and long term disability
insurance
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
(g)
(A) The
credit quality, reinvestment or disintermediation risk is significant for the
business reinsured and the ceding insurer does not (other than for the classes
of business excepted in paragraph (B) of this subsection (g) 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 that legally segregates, by contract or contract provision, the
underlying assets;
(B)
Notwithstanding the requirements of paragraph (A) of this subsection (g), 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 insurer without segregation
of such assets:
(i) Health Insurance - long
term care insurance and long term disability insurance;
(ii) Traditional Non-Par Permanent;
(iii) Traditional Par Permanent;
(iv) Adjustable Premium Permanent;
(v) Indeterminate Premium Permanent;
and
(vi) Universal Life Fixed
Premium, (no dump-in premiums allowed).
(C) For assets that are not legally
segregated, the associated formula for determining the reserve interest rate
adjustment must reflect the ceding insurer'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
When: I -- is the net investment income;
CG -- is capital gains less capital losses;
X -- is the current year cash and
-- invested assets plus invest-
-- ment income due and accrued
-- less borrowed money; and
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 90
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; or
(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 section (1) of this rule, with the prior approval of the Director, an insurer that is subject to OAR 836-012-0300 to 836-012-0330 may take such reserve credit or establish such asset as the Director determines to be consistent with the Insurance Code or rules adopted thereunder, including actuarial interpretations or standards adopted by the Director.
(3)
(a) An
agreement entered into on or after November 9, 1995, that involves the
reinsurance of business issued prior to the effective date of the agreement,
along with any subsequent amendments thereto, shall be filed by the ceding
insurer with the Director not later than the 30th day after its date of
execution. Each filing must include data detailing the financial effect of the
transaction. The ceding insurer's actuary who signs the financial statement
actuarial opinion with respect to valuation of reserves shall consider OAR
836-012-0300 to 836-012-0330 and
any applicable actuarial standards of practice when determining the proper
credit in financial statements filed with the Director. The actuary shall
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 OAR
836-012-0300 to
836-012-0330.
(b) Any increase in
surplus net of federal income tax resulting from arrangements described in
subsection (a) 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) and recognition of
the surplus increase as income must be reflected on a net of tax basis in the
"Reinsurance ceded" line, as earnings emerge from the business reinsured. The
following example applies to this subsection:
(A) 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) that 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;
(B) 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 $13.2million) 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.
Stat. Auth.: ORS 731.244 & ORS 731.508
Stats. Implemented: ORS 731.508(6)
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