Current through Register Vol. 41, No. 3, September 23, 2024
A. No insurer subject to this chapter shall,
for reinsurance ceded, reduce any liability or establish any asset in any
financial statement filed with the commission if, by the terms of the
reinsurance agreement, in substance or effect, any of the following conditions
exist:
1. The reserve credit taken by the
ceding insurer is not in compliance with the laws of this Commonwealth,
particularly the provisions of Title 38.2 of the Code of Virginia and related
rules, regulations and administrative pronouncements, including actuarial
interpretations or standards adopted by the commission.
2. 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 that 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.
3. The ceding
insurer can be deprived of surplus or assets (i) at the reinsurer's option; or
(ii) automatically upon the occurrence of some event, such as the insolvency of
the ceding insurer or the appointment of a receiver; or (iii) upon the
unilateral termination or reduction of reinsurance coverage by the reinsurer or
by the terms of the reinsurance contract. 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.
4. The ceding insurer must, at specific
points in time scheduled in the agreement, terminate or automatically recapture
all or part of the reinsurance ceded.
5. 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.
6. 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.
7. The terms or
operating effect of the reinsurance agreement are such that it does not
transfer all of the significant risk inherent in the business being reinsured.
The table at Exhibit 1 identifies for a representative sampling of products or
types 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.
8.
a. 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 subdivision 8 b of this subsection) 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
commission which legally segregates, by contract or contract provision, the
underlying assets.
b.
Notwithstanding the requirements of subdivision 8 a of this subsection, 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:
(1)
Health Insurance - Long Term Care/Long Term Disability
(2) Traditional Nonparticipating
Permanent
(3) Traditional
Participating Permanent
(4)
Adjustable Premium Permanent
(5)
Indeterminate Premium Permanent
(6)
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. An acceptable formula appears at
Exhibit 2.
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. Compliance with the conditions of
subsection A of this section is not to be interpreted to diminish the
requirement of Article 3.1 (§ 38.2-1316.1 et seq.) of Chapter 13 of Title
38.2 of the Code of Virginia that the reserve credits taken must be based upon
the actual liability assumed by the reinsurer to reimburse the ceding company
for benefits that the ceding company is obligated to pay under its direct
policies and which gave rise to the requirement of statutory
reserves.
C. The ceding insurer's
actuary responsible for the valuation of the reinsured business shall consider
this chapter and any applicable actuarial standards of practice when
determining the proper reinsurance credit in financial statements filed with
the commission. The actuary should maintain adequate documentation and be
prepared upon request to describe the actuarial work that substantiates the
reserves, reserve credits or any other reserve adjustments reported in the
financial statement and to demonstrate to the satisfaction of the commission
that such work conforms to the provisions of this chapter.
D. Notwithstanding subsection A of this
section, an insurer subject to this regulation may, with the prior approval of
the commission, take such reserve credit or establish such asset as the
commission may deem consistent with the laws of this Commonwealth, particularly
the provisions of Title 38.2 of the Code of Virginia and related rules,
regulations and administrative pronouncements, including actuarial
interpretations or standards adopted by the commission. All of the insurer's
financial statements filed with the commission pursuant to § 38.2-1300 or
38.2-1301 of the Code of Virginia shall thereafter disclose the reduction in
liability or the establishment of an asset.
E.
1. Each
agreement entered into after March 31, 1995, which 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
commission within 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 be subject to the standards set forth in subsection
C of this section.
2. Any increase
in surplus net of federal income tax resulting from arrangements described in
subdivision 1 of this subsection shall be identified separately on the
insurer's statutory financial statement as a surplus item (e.g., as part of the
aggregate write-ins for gains and losses in surplus in the Capital and Surplus
Account reported at 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" portions of the Annual Statement (e.g., Exhibit 1 and
Summary of Operations for the life insurer's blue blank and the Underwriting
Exhibit and Statement of Income for the property and casualty insurer's yellow
blank) as earnings emerge from the business reinsured.
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 life insurer's Summary of Operations or as "Other
underwriting expenses incurred" on the property and casualty insurer's
Statement of Income).
At the end of year N+1 the business has earned $4 million.
ABC has paid $0.5 million in profit and risk charges in arrears for the year
and has received a $1 million experience refund. Company ABC's annual statement
(blue blank) would report $1.65 million (66% of ($4 million - $1 million - $0.5
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. In addition, the experience refund would be
reported separately as a miscellaneous income item in a life insurer's Summary
of Operations and the "Other Income" segment of the property and casualty
insurer's Underwriting and Investment Exhibit, Statement of
Income.
