Current through Register Vol. 54, No. 12, March 23, 2024
(a) An
insurer subject to this chapter may not, for reinsurance ceded, reduce
liability or establish an asset in financial statements filed with the
Department if, by the terms of the reinsurance agreement, in substance or
effect, one or more of the following conditions exist:
(1) The reserve credit taken by the ceding
insurer is greater than the underlying reserve of the ceding insurer supporting
the policy obligations transferred under the reinsurance agreement.
(2) 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. Renewal
expenses include commissions, premium taxes and direct expenses including
billing, valuation, claims and maintenance expected by the ceding insurer at
the time the business is reinsured.
(3) 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.
However, 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, will not be considered to be a deprivation of surplus
or assets for purposes of this subsection.
(4) The ceding insurer is required to
reimburse the reinsurer for negative experience under the reinsurance
agreement. 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 will be
considered a reimbursement to the reinsurer for negative experience for
purposes of this subsection. In addition, voluntary termination does not
include termination as a result of unreasonable provisions which allow the
reinsurer to reduce its risk under the agreement. An example of an unreasonable
provision is the right of the reinsurer to increase reinsurance premiums or
risk and expense charges to excessive levels thereby forcing the ceding insurer
to prematurely terminate the reinsurance treaty.
(5) The ceding insurer shall, at specific
points in time scheduled in the agreement, terminate or automatically recapture
all or part of the reinsurance ceded.
(6) 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
the reinsurer which are greater than the direct premiums collected by the
ceding insurer.
(7) 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 the following table:
Risk Categories
(A) Morbidity.
(B) Mortality.
(C) Lapse-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-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. This risk category excludes market value declines due to changes
in interest rate.
(E)
Reinvestment-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-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.
Table of Risk Significance +- Significant 0 -
Insignificant
Risk Category |
A | B | C | D | E | F |
Health Insurance Other than Long Term Care/Long Term
Disability | + | 0 | + | 0 | 0 | 0 |
Health Insurance-Long Term Care/Long Term
Disability | + | 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 | + | + | + | + | + |
(8) 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
subparagraph (i), 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.
(i) Notwithstanding the provisions of this
paragraph, 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
insurer without segregation of the assets:
Health Insurance-Long Term Care/Long Term Disability
Insurance
Traditional Non-Par Permanent
Traditional Par Permanent
Adjustable Premium Permanent
Indeterminate Premium Permanent
Universal Life Fixed Premium (no dump-in premiums
allowed)
(ii) If the ceding
insurer elects to hold the assets supporting the reserves for the classes of
business stated in subparagraph (i) or for classes of business which do not
represent a significant risk as noted in subparagraph (i), the determination of
the modified coinsurance reserve interest rate adjustment shall conform to a
formula which reflects 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 |
Where: I = | the net investment income |
CG = | realized and unrealized capital gains
less realized and unrealized capital losses |
X = | the current year cash and invested assets
plus investment income due and accrued less borrowed money |
Y = | the same as X but for the prior year
|
(9) 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.
(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 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.
(b) Notwithstanding the provisions of
subsection (a), an insurer subject to this chapter may, with the prior written
approval of the Commissioner, take the reserve credit or establish the asset as
the Commissioner may deem consistent with statutes, regulations, orders or
rulings of the Commonwealth or the Department, including actuarial
interpretations or standards adopted by the Department.