No insurer subject to this rule shall, for reinsurance ceded, reduce any liability or establish any asset in any financial statement filed with the superintendent if, by the terms of the reinsurance agreement, in substance or effect, any of the following conditions exists:

1. A. 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. B. 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 such a deprivation of surplus or assets.
3. C. 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 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.
4. D. 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. E. The reinsurance agreement involves the possible payment by the ceding insurer to the reinsurer of amounts other than from gross premium less expenses 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 or to a reinsurer and a third party which are greater than the direct premiums collected by the ceding company.
6. F. The treaty does not transfer all of the significant risk inherent in the business being reinsured (Table A [now 13.2.7.14 NMAC] identifies the risks which are considered to be significant for a representative sampling of products or type of business; for products not specifically included in Table A [now 13.2.7.14 NMAC], the risks determined to be significant shall be consistent with this table.);

7. G. The credit quality, reinvestment, or disintermediation risk is significant for the business reinsured and the ceding company does not 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 superintendent which legally segregates, by contract or contract provision, the underlying assets; however, 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 non-par permanent;

   (3) traditional par permanent;

   (4) adjustable premium permanent;

   (5) indeterminate premium permanent;

   (6) universal life fixed premium (no dump-in premiums allowed).

   (a) 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. The following is an acceptable formula:

   Rate = 2 (I + CG)

   X + Y - I - CG

   (b) Where: I is the net investment income (Exhibit 2, Line 16, Column 7); CG is capital gains less capital losses (Exhibit 4, Line 10, Column 6); X is the current year cash and invested assets (Page 2, Line 10A, Column 1) plus investment income due and accrued (Page 2, Line 16, Column 1) less borrowed money (Page 3, Line 22, Column 1); Y is the same as X but for the prior year. (Note that line and exhibit references are for the 1992 annual statement. Be aware that annual statement references may change from year to year);

8. H. Settlements are made less frequently than quarterly or payments due from the reinsurer are not made in cash within ninety days of the settlement date.
9. I. The ceding insurer is required to make representations or warranties not reasonably related to the business being reinsured.
10. J. The ceding insurer is required to make representations or warranties about future performance of the business being reinsured; or

11. K. 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.

    [1/1/94; Recompiled 11/30/01]