806 KAR 3:160. Life and health reinsurance agreements.
RELATES TO: KRS 304.3-240, 304.5-120
STATUTORY AUTHORITY: KRS 304.2-110(1)
NECESSITY, FUNCTION, AND CONFORMITY: KRS 304.2-110
provides that the Executive Director of Insurance may promulgate administrative
regulations to implement the Kentucky Insurance Code, KRS Chapter 304. This
administrative regulation restricts the use of life and health reinsurance
agreements as "surplus relief" if the effect is to distort reporting
of the life and health insurer's true financial condition, take credit for or a
reduction from liability for reinsurance agreements which do not involve a
transfer of risk, and which conceal the fact that the insurer is in hazardous
financial condition.
Section 1. Purpose and Scope. (1) This
administrative regulation shall apply to all:
(a) Domestic life and health insurers;
(b) Other authorized life and health insurers that
are not subject to a substantially similar administrative regulation in their
domiciliary state; and
(c) Licensed property and casualty insurers with
respect to their health business.
(2) This administrative regulation shall not apply
to:
(a) Assumption reinsurance;
(b) Yearly renewable term reinsurance; or
(c) Certain nonproportional reinsurance such as
stop loss or catastrophe reinsurance.
Section 2. Accounting Requirements. (1) An insurer
shall not, for reinsurance ceded, reduce a liability or establish an asset in a
financial statement filed with the Office of Insurance if, by the terms of the
reinsurance agreement, in substance or effect, any of the following conditions
exist:
(a) The primary effect of the reinsurance agreement
is to transfer deficiency reserves or excess interest reserves to the books of
the reinsurer for a risk charge, and the agreement does not provide for
material participation by the reinsurer in one (1) or more of the following
risks: mortality, morbidity, investment, or surrender benefit;
(b) The reserve credit taken by the ceding insurer
does not comply with:
1. The Kentucky Insurance Code, KRS Chapter 304; or
2. Office of Insurance administrative regulations;
or
3. Actuarial Standards of Practice of the Actuarial
Standards Board;
(c) 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;
(d)1. Except as provided by subparagraphs 2 and 3
of this paragraph, the ceding insurer is required to reimburse the reinsurer
for negative experience under the reinsurance agreement;
2. Offsetting experience refunds against the
current and prior years' losses, or payment by the ceding insurer of an amount
equal to the current and prior years' losses upon voluntary termination of
in-force reinsurance by the ceding insurer shall not be considered a reimbursement
to the reinsurer for negative experience.
3. Voluntary termination shall not include a
termination that occurs because of unreasonable provisions which allow the
reinsurer to reduce its risk under the agreement.
(e)1. Except as provided by subparagraph 2 of this
paragraph, the ceding insurer may be deprived of surplus at the reinsurer's
option or automatically upon occurrence of some event, such as insolvency of
the ceding insurer.
2. 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 a deprivation
of surplus.
(f) The ceding insurer must, at specific points in
time scheduled in the agreement, terminate, or automatically recapture, all or
part of the reinsurance ceded;
(g) No cash payment is due from the reinsurer,
throughout the lifetime of the reinsurance agreement, with all settlements
prior to the termination date of the agreement made only in a "reinsurance
account", and no funds in this account are available for the payment of
benefits;
(h) The reinsurance agreement involves the possible
payment by the ceding insurer to the reinsurer of amounts other than from
income reasonably expected from the reinsured policies. A ceding company shall
not pay reinsurance premiums, or other fees or charges, to a reinsurer that are
greater than the direct premiums collected by the ceding company.
(i) The reinsurance agreement does not transfer all
of the significant risk inherent in the business being reinsured.
A risk shall be considered significant if it is:
1. Identified in the representative sampling of
products or types of businesses in the "Risk Categories Table"; or
2. Consistent with the representative sampling of
products or types of business identified in the "Risk Categories
Table".
(j)1. Except as provided by subparagraph 2 of this
paragraph, the credit quality, reinvestment, or disintermediation risk is
significant for the business reinsured, and the ceding company does not
transfer the underlying assets to the reinsurer, legally segregate the assets
in a trust or escrow account, or otherwise establish a mechanism satisfactory
to the executive director which legally segregates, by contract or contract
provision, the underlying assets.
2. 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 company without segregation:
a. Health insurance - LTC/LTD;
b. Traditional nonpar permanent;
c. Traditional par permanent;
d. Adjustable premium permanent;
e. Indeterminate premium permanent;
f. Universal life fixed premium excluding dump-in
premiums.
3. The formula for determining the reserve interest
rate adjustment shall:
a. Reflect the ceding company's investment
earnings;
b. Incorporate all realized and unrealized gains
and losses reflected in the statutory statement; and
c. Be calculated as follows:
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.
(k) Settlements are made less frequently than
quarterly, or payments due from the reinsurer are not made in cash within
ninety (90) days of the settlement date;
(l) The ceding insurer is required to make
representations or warranties not reasonably related to the business being
reinsured;
(m) The ceding insurer is required to make
representations or warranties about future performance of the business being
reinsured;
(n) The reinsurance agreement is entered into for
the principal purpose of producing significant surplus aid for the ceding
insurer. All of the significant risks inherent in the business reinsured are
not transferred and, in substance or effect, the expected potential liability
to the ceding insurer remains basically unchanged.
(o)1. 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 renewable expenses of the ceding
insurer on the portion of the business reinsured, unless a liability is established
for the present value of the shortfall.
2. The liability shall be established by using
assumptions equal to the applicable statutory reserve basis on the business
reinsured.
3. Anticipated allocable renewal expenses shall
include commissions, premium taxes and direct expenses such as billing,
valuation, claims and maintenance expected by the company at the time the business
is reinsured;
(2) An insurer may, with prior approval of the executive
director of Insurance, take reserve credit or establish any asset that the Executive
Director of Insurance has determined is consistent with the:
(a) Insurance code;
(b) Administrative regulations of the Office of
Insurance;
(c) Actuarial Standards of Practice of the
Actuarial Standards Board.
Section 3. (1)(a) An agreement, including a
subsequent amendment to an agreement, entered into after the effective date of
this administrative regulation that involves the reinsurance of business issued
prior to the effective date of the agreement shall be filed by the ceding
company with the executive director within thirty (30) days from its date of
execution.
(b) A filing shall include data detailing the
financial impact of the transaction.
(c) The ceding insurer's actuary who signs the
financial statement actuarial opinion in the annual statement with respect to
valuation of reserves shall consider this administrative regulation and any
applicable actuarial standards of practice when determining the proper credit
in financial statements filed with the office.
(d) The actuary shall:
1. Maintain adequate documentation;
2. Upon request, describe the actuarial work
performed for inclusion in the annual and quarterly financial statements; and
3. Upon request, demonstrate that such work
conforms to this administrative regulation.
(2)(a) An increase in surplus net of federal income
tax resulting from arrangements described in subsection (1) of this section
shall be identified separately on the insurer's statutory annual and quarterly
financial statement as a surplus item, "aggregate write-ins for gains and
losses in surplus in the Capital and Surplus Account".
(b) Recognition of the surplus increase as income
shall be reflected on a net of tax basis in the "reinsurance ceded"
line as earnings emerge from the business reinsured.
Section 4. Written Agreements. (1) If an agreement,
amendment, or letter of intent has not been duly executed by both parties no
later than the "as of date" of a financial statement, a reinsurance
agreement, or amendment to an agreement, shall not be used to reduce a
liability or establish an asset in a financial statement filed with the office.
(2) A reinsurance agreement or an amendment to a
reinsurance agreement shall be executed within a reasonable period of time not
exceeding ninety (90) days from the execution date of the letter of intent, in
order for credit to be granted for the reinsurance ceded.
(3) The reinsurance agreement shall contain
provisions which provide that:
1. The agreement shall constitute the entire
agreement between the parties with respect to the business being reinsured and
that there are no understandings between the parties other than as expressed in
the agreement; and
2. Any change or modification to the agreement
shall be null and void unless made by amendment to the agreement and signed by
both parties.
Section 5. Existing Agreements. An insurer may
continue to reduce liabilities or establish assets in financial statements
filed with the Office of Insurance for reinsurance ceded under types of reinsurance
agreements described in Sections 1(2) and 2 of this administrative regulation
if:
(1) The agreements were executed and in force prior
to the effective date of this administrative regulation;
(2) A new business is not ceded under the
agreements after the effective date of this administrative regulation;
(3) The reduction of the liability or the asset
established for the reinsurance ceded is reduced to zero:
(a) 1994 by December 31, 1994; or
(b) A later date approved by the Executive Director
of Insurance pursuant to an application made by the ceding insurer prior to
December 31 of the year in which this administrative regulation becomes
effective;
(4) The reduction of the liability or establishment
of the asset is otherwise permissible under all other applicable provisions of
the insurance code, administrative regulations of the Office of Insurance, or Actuarial
Standard of Practice of the Actuarial Standards Board; and
(5) The Office of Insurance is notified within
ninety (90) days following the effective date of this administrative regulation
of the existence of the reinsurance agreements and all corresponding credits taken
in the ceding insurer's 1990 annual statement.
Section 6. Risk Categories Table. (1) Significance
or risk categories shall be determined by the Risk Categories Table established
by this section.
(a) Morbidity.
(b) Mortality.
(c) Lapse.
(d) Credit Quality.
(e) Reinvestment.
(f) Disintermediation.
(2) Classes of Insurance Business
Risk Categories
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 Nonpar Permanent
0
+
+
+
+
+
Traditional Nonpar 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
+
+
+
+
+
Where:
+ = significant risk
0 = insignificant risk
*LTC = long-term care
*LTD = long-term disability
a. Lapse is the risk that a policy will voluntarily
terminate prior to the recoupment of a statutory surplus strain experienced at
issue of the policy.
b. Credit Quality is the risk that invested assets
supporting the reinsured business will decrease in value. Credit Quality does
not include market value declines due to changes in interest rates.
c. Reinvestment is the risk that interest rates
will fall and funds reinvested (coupon payments or monies received upon asset
maturity or call) will earn less than expected.
d. Disintermediation is the risk that policy loans
and surrenders increase, or maturing contracts do not renew at anticipated
rates of renewal, during a period of increasing interest rates. (18 Ky.R. 958;
eff. 11-8-91; Am. 22 Ky.R. 1741; 2033; 23 Ky.R. 137; eff. 7-5-96; TAm eff.
8-9-2007.)
