§ 27-4.2-3 - Accounting requirements.
SECTION 27-4.2-3
§ 27-4.2-3 Accounting requirements. –(a) No insurer subject to this chapter shall, for reinsurance ceded, reduce anyliability or establish any asset in any financial statement filed with thedepartment if, by the terms of the reinsurance agreement, in substance oreffect, any of the following conditions exist:
(1) Renewal expense allowances provided or to be provided tothe ceding insurer by the reinsurer in any accounting period are not sufficientto cover anticipated allocable renewal expenses of the ceding insurer on theportion of the business reinsured, unless a liability is established for thepresent value of the shortfall (using assumptions equal to the applicablestatutory reserve basis on the business reinsured). Those expenses includecommissions, premium taxes and direct expenses including, but not limited to,billing, valuation, claims and maintenance expected by the company at the timethe business is reinsured;
(2) The ceding insurer can be deprived of surplus or assetsat the reinsurer's option or automatically upon the occurrence of some event,such as the insolvency of the ceding insurer, except that termination of thereinsurance agreement by the reinsurer for nonpayment of reinsurance premiumsor other amounts due, such as modified coinsurance reserve adjustments,interest and adjustments on funds withheld, and tax reimbursements, shall notbe considered to be a deprivation of surplus or assets;
(3) The ceding insurer is required to reimburse the reinsurerfor negative experience under the reinsurance agreement, except that neitheroffsetting experience refunds against current and prior years' losses under theagreement nor payment by the ceding insurer of an amount equal to the currentand prior years' losses under the agreement upon voluntary termination ofin-force reinsurance by the ceding insurer shall be considered a reimbursementto the reinsurer for negative experience. Voluntary termination does notinclude situations where termination occurs because of unreasonable provisionsthat allow the reinsurer to reduce its risk under the agreement. An example ofthis provision is the right of the reinsurer to increase reinsurance premiumsor risk and expense charges to excessive levels forcing the ceding company toprematurely terminate the reinsurance treaty;
(4) The ceding insurer must, at specific points in timescheduled in the agreement, terminate or automatically recapture all or part ofthe reinsurance ceded;
(5) The reinsurance agreement involves the possible paymentby the ceding insurer to the reinsurer of amounts other than from incomerealized from the reinsured policies. For example, it is improper for a cedingcompany to pay reinsurance premiums, or other fees or charges to a reinsurerthat are greater than the direct premiums collected by the ceding company;
(6) The treaty does not transfer all of the significant riskinherent in the business being reinsured. The risk categories considered shallbe morbidity, mortality, lapse, credit quality, reinvestment, anddisintermediation. These categories are further defined in the regulationpromulgated pursuant to this chapter;
(7) The credit quality, reinvestment, or disintermediationrisk is significant for business reinsured and the ceding company does not(other than for the classes of business excepted in subdivision (a)(7)(ii) ofthis section) either transfer the underlying assets to the reinsurer or legallysegregate these assets in a trust or escrow account or establish a mechanismsatisfactory to the commissioner which legally segregates, by contract orcontract provision, the underlying assets;
(ii) Notwithstanding the requirements of subdivision(a)(7)(i) of this section, the assets supporting the reserves for the followingclasses of business and any classes of business which do not have a significantcredit quality, reinvestment or disintermediation risk may be held by theceding company without segregation of these assets:
(A) Health insurance – long term care insurance/longterm 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 premiumsallowed);
(iii) The associated formula for determining the reserveinterest rate adjustment must use a formula that reflects the ceding company'sinvestment earnings and incorporates all realized and unrealized gains andlosses reflected in the statutory statement. An acceptable formula shall be setforth in regulations promulgated pursuant to this chapter;
(8) Settlements are made less frequently than quarterly orpayments due from the reinsurer are not made in cash within ninety (90) days ofthe settlement date;
(9) The ceding insurer is required to make representations orwarranties not reasonably related to the business being reinsured;
(10) The ceding insurer is required to make representationsor warranties about future performance of the business being reinsured; and
(11) The reinsurance agreement is entered into for theprincipal purpose of producing significant surplus aid for the ceding insurer,typically on a temporary basis, while not transferring all of the significantrisks inherent in the business reinsured and, in substance or effect, theexpected potential liability to the ceding insurer remains basically unchanged.
(b) Notwithstanding subsection (a), an insurer subject tothis chapter may, with the prior approval of the commissioner, take a reservecredit or establish any asset the commissioner may deem consistent with chapter1.1 of this title and regulations promulgated under that chapter, includingactuarial interpretations or standards adopted by the insurance division of thedepartment of business regulation.
(c) Agreements entered into after the effective date of thischapter which involve the reinsurance of business issued prior to the effectivedate of the agreements, along with any subsequent amendments to it, shall befiled by the ceding company with the commissioner within thirty (30) days fromits date of execution. Each filing shall include data detailing the financialimpact of the transaction. The ceding insurer's actuary who signs the financialstatement actuarial opinion with respect to valuation of reserves shallconsider this chapter and any applicable actuarial standards of practice whendetermining the proper credit in financial statements filed with the insurancedivision of the department of business regulation. The actuary should maintainadequate documentation and be prepared upon request to describe the actuarialwork performed for inclusion in the financial statements and to demonstratethat the work conforms to this regulation.
(2) Any increase in surplus net of federal income taxresulting from arrangements described in subsection (c)(1) shall be identifiedseparately on the insurer's statutory financial statement as a surplus item(aggregate write-ins for gains and losses in surplus in the capital and surplusaccount, of the annual statement) and recognition of the surplus increase asincome shall be reflected on a net of tax basis in the annual statement asearnings emerge from the business reinsured.