20 : 06 : 30 : 14 . The actuarial method. A ceding insurer shall use the VM-20 actuarial method to establish the required level of primary security for each reinsurance treaty subject to §§ 20:06:30:13 to 20:06:30:20 , inclusive, applied on a treaty-by-treaty basis from the Valuation Manual, as then in effect, including all relevant definitions, applied as follows :

1. (1) For a covered policy described in subsection 20:06:30:13(2)(a), the actuarial method is the greater of the deterministic reserve or the net premium reserve (NPR), regardless of whether the criteria for exemption testing can be met. If the covered policy does not meet the requirements of the stochastic reserve exclusion test in the Valuation Manual, the actuarial method is the greatest of the deterministic reserve, the stochastic reserve, or the NPR. If such covered policies are reinsured in a reinsurance treaty that also contains covered policies described in § 20:06:30:13(2)(b), the ceding insurer may elect to instead use subdivision 20:06:30:14(2) as the actuarial method for the entire reinsurance agreement treaty. Whether subdivision 20:06:30:14(1) or 20:06:30:14(2) is used, the actuarial method must comply with any requirements or restrictions that the Valuation Manual imposes when aggregating these policy types for purposes of principle-based reserve calculations;
2. (2) For a covered policy described in subsection 20:06:30:13(2)(b), the actuarial method is the greatest of the deterministic reserve, the stochastic reserve, or the NPR, regardless of whether the criteria for exemption testing can be met;
3. (3) Except as provided in subdivision 20:06:30:13(4), the actuarial method must be applied on a gross basis to all risks with respect to the covered policy, as originally issued or assumed by the ceding insurer; and

4. (4) If the reinsurance treaty cedes less than one hundred percent of the risk with respect to the covered policy, then the required level of primary security may be reduced as follows:

   1. (a) If a reinsurance treaty cedes only a quota share of some or all of the risks pertaining to the covered policy, the required level of primary security, as well as any adjustment under subsection 20:06:30:14(4)(c), may be reduced to a pro rata portion in accordance with the percentage of the risk ceded;
   2. (b) If the reinsurance treaty in a non-exempt arrangement cedes only the risks pertaining to a secondary guarantee, the required level of primary security may be reduced by an amount determined by applying the actuarial method on a gross basis to all risks, other than risks related to the secondary guarantee, pertaining to the covered policy, except that for a covered policy in which the ceding insurer did not elect to apply the provisions of VM-20 to establish statutory reserves, the required level of primary security may be reduced by the statutory reserve retained by the ceding insurer on that covered policy, where the retained reserve of that covered policy is reflective of any reduction pursuant to the cession of mortality risk on a yearly renewable term basis in an exempt arrangement;
   3. (c) If a portion of the covered policy risk is ceded to another reinsurer on a yearly renewable term basis in an exempt arrangement, the required level of primary security may be reduced by the amount resulting in applying the actuarial method, including the reinsurance section of VM-20, to the portion of the covered policy risk ceded in the exempt arrangement; except that in a case of a covered policy issued prior to January 1, 2017, this adjustment is not to exceed [cx divided by (2timesthenumberofreinsurancepremiumsperyear)] where cx is calculated using the same mortality table used in calculating the net premium reserve; and

   4. (d) For any other treaty ceding a portion of risk to a different reinsurer, including stop loss, excess of loss, and other non-proportional reinsurance treaties, there is no reduction in the required level of primary security.

      A ceding insurer may apply individually or in combination subsections 20:06:30:14(4)(a), 20:06:30:14(4)(b), 20:06:30:14(4)(c), and 20:06:30:14(4)(d) to apply. These adjustments to the required level of primary security shall be done in the sequence that accurately reflects the portion of the risk ceded via the treaty. The ceding insurer shall document the rationale and steps taken to accomplish the adjustments to the required level of primary security, due to the cession of less than one hundred percent of the risk.

Source: 49 SDR 9, effective August 8, 2022 .

General Authority: SDCL 58-14-17 .

Law Implemented: SDCL 58-14-17 .