§ 58-7-31. Life and health reinsurance agreements.
§ 58‑7‑31. Lifeand health reinsurance agreements.
(a) Notwithstanding anyother provision of this Article, this section applies to every domestic lifeand accident and health insurer, to every other licensed life and accident andhealth insurer that is not subject to a substantially similar statute oradministrative rule in its domiciliary state, and to every licensed propertyand casualty insurer with respect to its accident and health business. Thissection does not apply to assumption reinsurance, yearly renewable termreinsurance, nor to certain nonproportional reinsurance, such as stop loss orcatastrophe reinsurance.
(b) No insurer shall,for reinsurance ceded, reduce any liability or establish any asset in anyfinancial statement filed with the Commissioner if, by the terms of thereinsurance agreement, in substance or effect, any of the following conditionsexist:
(1) Renewal expenseallowances provided or to be provided to the ceding insurer by the reinsurer inany accounting period, are not sufficient to cover anticipated allocablerenewal expenses of the ceding insurer on the portion of the businessreinsured, unless a liability is established for the present value of theshortfall, using assumptions equal to the applicable statutory reserve basis onthe business reinsured. Those expenses include commissions, premium taxes, anddirect expenses including, but not limited to, billing, valuation, claims, andmaintenance expected by the company at the time the business is reinsured.
(2) The ceding insurercan be deprived of surplus or assets at the reinsurer's option or automaticallyupon the occurrence of some event, such as the insolvency of the cedinginsurer; except that termination of the reinsurance agreement by the reinsurerfor nonpayment of reinsurance premiums or other amounts due, such as modifiedcoinsurance reserve adjustments, interest, and adjustments on funds withheld,and tax reimbursements, are not a deprivation of surplus or assets.
(3) The ceding insureris required to reimburse the reinsurer for negative experience under thereinsurance agreement; except that neither offsetting experience refundsagainst current and prior years' losses under the reinsurance agreement norpayment by the ceding insurer of an amount equal to the current and prioryears' losses under the reinsurance agreement upon voluntary termination of in‑forcereinsurance by the ceding insurer are a reimbursement to the reinsurer fornegative experience. Voluntary termination does not include situations wheretermination occurs because of unreasonable provisions that allow the reinsurerto reduce its risk under the reinsurance agreement.
(4) The ceding insurermust, at specific points in time scheduled in the reinsurance agreement,terminate or automatically recapture all or part of the reinsurance ceded.
(5) The reinsuranceagreement involves the possible payment by the ceding insurer to the reinsurerof amounts other than from income realized from the reinsured policies. Noceding company shall pay reinsurance premiums or other fees or charges to areinsurer that are greater than the direct premiums collected by the cedingcompany.
(6) The treaty does nottransfer all of the significant risk inherent in the business being reinsured.The following table identifies for a representative sampling of products ortype of business, the risks that are considered to be significant. For productsnot specifically included, the risks determined to be significant shall beconsistent with this table.
Risk Categories:
a.= Morbidity.
b.= Mortality.
c.= Lapse. (This is the risk that a policy willvoluntarily terminate before the recoupment of a statutory surplus strainexperienced at issue of the policy.)
d.= Credit Quality (C1). (This is the risk thatinvested assets supporting the reinsured business will decrease in value. Themain hazards are that assets will default or that there will be a decrease inearning power. It excludes market value declines due to changes in interestrate.)
e.= Reinvestment (C3). (This is the risk thatinterest rates will fall and funds reinvested [coupon payments or moniesreceived upon asset maturity or call] will therefore earn less than expected.If asset durations are less than liability durations, the mismatch willincrease.)
f.= Disintermediation (C3). (This is the risk thatinterest rates will rise and policy loans and surrenders increase or maturingcontracts do not renew at anticipated rates of renewal. If asset durations aregreater than the liability durations, the mismatch will increase. Policyholderswill move their funds into new products offering higher rates. The company mayhave to sell assets at a loss to provide for these withdrawals.)
+= Significant 0 = Insignificant
RISKCATEGORY a b c d e f
HealthInsurance other than LTC/LTD* + 0 + 0 0 0
HealthInsurance LTC/LTD* + 0 + + + 0
ImmediateAnnuities 0 + 0 + + 0
SinglePremium Deferred Annuities 0 0 + + + +
FlexiblePremium Deferred Annuities 0 0 + + + +
GuaranteedInterest Contracts 0 0 0 + + +
OtherAnnuity Deposit Business 0 0 + + + +
SinglePremium Whole Life 0 + + + + +
TraditionalNon‑Par Permanent 0 + + + + +
TraditionalNon‑Par Term 0 + + 0 0 0
TraditionalPar Permanent 0 + + + + +
TraditionalPar Term 0 + + 0 0 0
AdjustablePremium Permanent 0 + + + + +
IndeterminatePremium Permanent 0 + + + + +
UniversalLife Flexible Premium 0 + + + + +
UniversalLife Fixed Premium 0 + + + + +
UniversalLife Fixed Premium 0 + + + + +
(dump‑inpremiums allowed)
*LTC= Long‑Term Care Insurance
*LTD= Long‑Term Disability Insurance
(7) a. Thecredit quality, reinvestment, or disintermediation risk is significant for thebusiness reinsured and the ceding company does not (other than for the classesof business excepted in subdivision (7)b. of this section) either transfer theunderlying assets to the reinsurer or legally segregate such assets in a trustor escrow account or otherwise establish a mechanism satisfactory to theCommissioner that legally segregates, by contract or contractual provisions,the underlying assets.
b. Notwithstanding therequirements of subdivision (7)a. of this section, the assets supporting thereserves for the following classes of business and any classes of business thatdo not have a significant credit quality, reinvestment, or disintermediationrisk may be held by the ceding company without segregation of those assets:
Health Insurance LTC/LTD
Traditional Non‑ParPermanent
Traditional ParPermanent
Adjustable PremiumPermanent
Indeterminate PremiumPermanent
Universal Life Fixed Premium
(no dump‑in premiumsallowed)
Theassociated formula for determining the reserve interest rate adjustment mustuse a formula that reflects the ceding company's investment earnings andincorporates all realized and unrealized gains and losses reflected in thestatutory statement. The following is an acceptable formula:
Rate = 2 (I + CG)
X + Y I CG
Where: I is the net investmentincome.
CG iscapital gains less capital losses.
X isthe current year cash and invested assets plus investment income due andaccrued less borrowed money.
Y isthe same as X but for the prior year.
(8) Settlements are madeless frequently than quarterly or payments due from the reinsurer are not madein cash within 90 days after the settlement date.
(9) The ceding insureris required to make representations or warranties not reasonably related to thebusiness being reinsured.
(10) The ceding insurer isrequired to make representations or warranties about future performance of thebusiness being reinsured.
(11) The reinsuranceagreement is entered into for the principal purpose of producing significantsurplus aid for the ceding insurer, typically on a temporary basis, while nottransferring all of the significant risks inherent in the business reinsuredand, in substance or effect, the expected potential liability to the cedinginsurer remains basically unchanged.
(c) Notwithstandingsubsection (b) of this section, an insurer may, with the prior approval of theCommissioner, take such reserve credit or establish such asset as theCommissioner deems to be consistent with the insurance laws or rules of thisState, including actuarial interpretations or standards adopted by theCommissioner.
(d) (1) Reinsuranceagreements entered into after October 1, 1993, that involve the reinsurance ofbusiness issued prior to the effective date of the reinsurance agreements,along with any subsequent amendments thereto, shall be filed by the cedingcompany with the Commissioner within 30 days after its date of execution. Eachfiling shall include data detailing the financial impact of the transaction.The ceding insurer's actuary who signs the financial statement actuarialopinion with respect to valuation of reserves shall consider this statute andany applicable actuarial standards of practice when determining the propercredit in financial statements filed with the Commissioner. The actuary shouldmaintain adequate documentation and be prepared upon request to describe theactuarial work performed for inclusion in the financial statements and todemonstrate that such work conforms to this statute.
(2) Any increase insurplus net of federal income tax resulting from arrangements described insubdivision (d)(1) of this section shall be identified separately on theinsurer's statutory financial statement as a surplus item (aggregate write‑insfor gains and losses in surplus in the Capital and Surplus Account, page 4 ofthe Annual Statement) and recognition of the surplus increase as income shallbe reflected on a net of tax basis in the "Reinsurance Ceded" line,page 4 of the Annual Statement as earnings emerge from the business reinsured.
(e) No reinsuranceagreement or amendment to any reinsurance agreement may be used to reduce anyliability or to establish any asset in any financial statement filed with theCommissioner, unless the reinsurance agreement, amendment, or a binding letterof intent has been duly executed by both parties no later than the "as ofdate" of the financial statement.
(f) In the case of aletter of intent, a reinsurance agreement or an amendment to a reinsuranceagreement must be executed within a reasonable period of time, not exceeding 90days after the execution date of the letter of intent, in order for credit tobe granted for the reinsurance ceded.
(g) The reinsuranceagreement shall contain provisions that provide that:
(1) The reinsuranceagreement shall constitute the entire reinsurance agreement between the partieswith respect to the business being reinsured thereunder and that there are nounderstandings between the parties other than as expressed in the reinsuranceagreement; and
(2) Any change ormodification to the reinsurance agreement shall be null and void unless made byamendment to the reinsurance agreement and signed by both parties.
(h) Insurers subject tothis section shall reduce to zero by December 31, 1994, any reserve credits orassets established with respect to reinsurance agreements entered into prior toOctober 1, 1993, that, under the provisions of this section, would not beentitled to recognition of such reserve credits or assets; provided, however,that such reinsurance agreements shall have been in compliance with laws orregulations in existence immediately preceding October 1, 1993. (1993, c. 452, s. 4; 1993(Reg. Sess., 1994), c. 678, s. 9; 1995, c. 193, ss. 15, 16; 2001‑223, ss.3.4, 3.5.)