TITLE 27
Insurance
CHAPTER 27-4.2
Life and Health Reinsurance Agreements Act
SECTION 27-4.2-3
§ 27-4.2-3 Accounting requirements.
(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
department if, by the terms of the reinsurance agreement, in substance or
effect, any of the following conditions exist:
(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 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;
(2) 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, shall not
be considered to be a deprivation of surplus or assets;
(3) 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 the ceding insurer shall be considered a reimbursement
to the reinsurer for negative experience. Voluntary termination does not
include situations where termination occurs because of unreasonable provisions
that allow the reinsurer to reduce its risk under the agreement. An example of
this 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;
(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
that are greater than the direct premiums collected by the ceding company;
(6) The treaty does not transfer all of the significant risk
inherent in the business being reinsured. The risk categories considered shall
be morbidity, mortality, lapse, credit quality, reinvestment, and
disintermediation. These categories are further defined in the regulation
promulgated pursuant to this chapter;
(7)(i) The credit quality, reinvestment, or disintermediation
risk is significant for business reinsured and the ceding company does not
(other than for the classes of business excepted in subdivision (a)(7)(ii) of
this section) either transfer the underlying assets to the reinsurer or legally
segregate these assets in a trust or escrow account or establish a mechanism
satisfactory to the commissioner which legally segregates, by contract or
contract provision, the underlying assets;
(ii) Notwithstanding the requirements of subdivision
(a)(7)(i) of this section, 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 these assets:
(A) Health insurance long term care insurance/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);
(iii) 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. An acceptable formula shall be set
forth in regulations promulgated pursuant to this chapter;
(8) 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;
(9) The ceding insurer is required to make representations or
warranties not reasonably related to the business being reinsured;
(10) The ceding insurer is required to make representations
or warranties about future performance of the business being reinsured; and
(11) 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 subsection (a), an insurer subject to
this chapter may, with the prior approval of the commissioner, take a reserve
credit or establish any asset the commissioner may deem consistent with chapter
1.1 of this title and regulations promulgated under that chapter, including
actuarial interpretations or standards adopted by the insurance division of the
department of business regulation.
(c)(1) Agreements entered into after the effective date of
this chapter which involve the reinsurance of business issued prior to the
effective date of the agreements, along with any subsequent amendments to it,
shall be filed by the ceding company with the commissioner within thirty (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 consider this chapter and any applicable actuarial standards of practice
when determining the proper credit in financial statements filed with the
insurance division of the department of business regulation. 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 regulation.
(2) Any increase in surplus net of federal income tax
resulting from arrangements described in subsection (c)(1) 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, of the annual statement) and recognition of the surplus increase as
income shall be reflected on a net of tax basis in the annual statement as
earnings emerge from the business reinsured.
History of Section.
(P.L. 1995, ch. 111, § 2.)