(a) No insurer subject to this Part shall, for reinsurance ceded, take reserve credit by reducing a liability or establishing an 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. (1) renewal expense allowances, provided or to be provided to the ceding insurer by the assuming insurer in any accounting period, are not sufficient to cover anticipated allocable renewal expenses of the ceding insurer on the portion of 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 ceding insurer at the time the business is reinsured;
2. (2) the ceding insurer can be deprived of surplus or assets at the assuming insurer'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 assuming insurer 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. (3) the ceding insurer is required to reimburse the assuming reinsurer for negative experience under the reinsurance agreement, except that offsetting experience refunds against current and prior years' losses under the agreement or 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 not be considered a reimbursement to the reinsurer for negative experience. Voluntary termination does not include terminations that occur because of provisions which allow the assuming insurer to reduce its risk under the agreement; for example, a provision allowing the assuming insurer to increase reinsurance premiums or risk and expense charges;
4. (4) the interest rate applied to current and prior years' losses exceeds the rate calculated according to the formula set forth in subparagraph (8)(iii) of this subdivision, or, if assets are segregated in accordance with subparagraph (8)(i) of this subdivision, the interest rate reflecting the segregated portfolio's investment earnings including all realized and unrealized gains and losses. For purposes of this paragraph, the application of a negative interest rate is not required;
5. (5) the ceding insurer must, at specific points in time scheduled in the agreement, terminate or automatically recapture all or part of the reinsurance ceded;
6. (6) the ceding insurer may be obligated to pay to the assuming insurer amounts other than from income realized from the insured policies. For example, a ceding insurer pays reinsurance premiums, or other fees or charges to an assuming insurer which are greater than the direct premiums collected by the ceding insurer on the insurance policies or contracts reinsured;

7. (7) the ceding insurer does not transfer to the assuming insurer all of the significant risks inherent in the insurance policies or contracts reinsured. The following table identifies, for a representative sampling of types of insurance policies or contracts, the risks which are considered to be significant. For policies or contracts not specifically included, the risks determined to be significant shall be consistent with this table: Risk Category + = Significant, 0 = Insignificant *

   Risk Categories

8. (a) Morbidity
9. (b) Mortality

10. (c) Lapse

    This is the risk that an insurance policy or contract will voluntarily terminate prior to the recoupment of a statutory surplus strain experienced at issue of the policy.

11. (d) Credit Quality (C1)

    This is the risk that invested assets supporting the reinsured business will decrease in value. The main hazards are that assets will default or that there will be a decrease in earning power. It excludes market value declines due to changes in interest rate.

12. (e) Reinvestment (C3)

    This is the risk that interest rates will fall and funds reinvested (coupon payments or monies received upon asset maturity or call) will therefore earn less than expected. If asset durations are less than liability durations, the mismatch will increase.

13. (f) Disintermediation (C3)

    1. (i) the ceding insurer does not transfer the underlying assets to the assuming insurer or otherwise establish a mechanism satisfactory to the superintendent which legally segregates, by contract or contract provision, the underlying assets, except as provided in subparagraph (ii) of this paragraph;

    2. (ii) the assets supporting the reserves for the following classes of insurance policies or contracts and any classes of insurance policies or contracts which do not have a significant credit quality, reinvestment or disintermediation risk may be held by the ceding insurer without segregation of the underlying assets:

       1. (a) Health insurance—LTC/LTD
       2. (b) Traditional non-par permanent
       3. (c) Traditional par permanent
       4. (d) Adjustable premium permanent
       5. (e) Indeterminate premium permanent
       6. (f) Universal life fixed premium—no dump-in premiums allowed

    3. (iii) when assets are held by the ceding insurer pursuant to subparagraph (ii) of this paragraph, the associated formula for determining the reserve interest rate adjustment must reflect the ceding insurer's investment earnings and incorporate all realized and unrealized gains and losses reflected in its statutory statement. The following is an acceptable formula:

       Rate = ^{2(I + CG)}/_{X + Y − I − CG}

       Where:

       I is the net investment income earned, 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

    This is the risk that interest rates rise and policy loans and surrenders increase or maturing contracts do not renew at anticipated rates of renewal. If asset durations are greater than the liability durations, the mismatch will increase. Policyholders will move their funds into new products offering higher rates. The company may have to sell assets at a loss to provide for these withdrawals.

    Risk Category

    + = Significant, 0 = Insignificant

    	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 Non–Par Permanent	0	+	+	+	+	+
    Traditional Non–Par 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	+	+	+	+	+
    Universal Life Fixed Premium–dump–in premiums allowed	0	+	+	+	+	+

    *

    LTC = Long Term Care Insurance, LTD = Long Term Disability Insurance

    (8)

14. (9) settlements are:

    1. (i) made less frequently than quarterly or payments due from the assuming insurer are not made in cash within 90 days of the settlement date; or
    2. (ii) not based on actual experience of the insurance policies being reinsured (including all components of the formula set forth in subparagraph [8][iii] of this subdivision) or reasonable estimates thereof; provided, however, any settlements based on reasonable estimates must be recalculated at least annually to reflect the actual experience of the year;
15. (10) the ceding insurer is required to make representations or warranties not reasonably related to the business being reinsured;
16. (11) the ceding insurer is required to make representations or warranties about future performance of the business being reinsured;
17. (12) the assuming insurer is not required to fully reimburse the ceding insurer for its share of dividends paid on participating policies or additional amounts paid or credited arising from the declaration of interest, mortality or expense more favorable than guaranteed on policies subject to the reinsurance agreement, unless the agreement contains another provision relating to the reimbursement of dividends and/or additional amounts paid or credited which is approved by the superintendent pursuant to subdivision (b) of this section; or
18. (13) the ceding insurer does not transfer all of the significant risks inherent in the insurance policies or contracts reinsured, and, in substance or effect, the expected potential liability to the ceding insurer remains basically unchanged.

(b) Notwithstanding that the reinsurance agreement provides for one or more of the conditions specified subdivision (a) of this section, an insurer subject to this Part may take reserve credit in such amount as the superintendent may deem consistent with the Insurance Law or this Title, if the insurer obtains the prior approval of the superintendent. In reviewing a request for approval, the superintendent shall consider, among other things:

1. (1) whether, and the extent that, the terms of the reinsurance agreement provide for the transfer of all significant risks to the assuming insurer;
2. (2) whether taking the reserve credit by reducing liabilities or establishing assets would distort the annual statement of the ceding insurer; and
3. (3) whether approval to take such reserve credit would create a situation that may be hazardous to policyholders and the people of this State.