1. (1) The Tennessee Department of Commerce and Insurance recognizes that licensed insurers routinely enter into reinsurance agreements that yield legitimate relief to the ceding insurer from strain to surplus.

2. (2) However, it is improper for a licensed insurer, in the capacity of ceding insurer, to enter into reinsurance agree- ments for the principal purpose of producing significant surplus aid for the ceding insurer, typically on a tempo- rary basis, while not transferring all of the significant risks inherent in the business being reinsured. In substance or effect, the expected potential liability to the ceding insurer remains basically unchanged by the improper reinsurance transaction, notwithstanding certain risk elements in the reinsurance agreement, such as catastrophic mortality or extraordinary survival. The terms of such improper agreements referred to herein and described in Rule 0780—1—62—.04:

   1. (a) Violate T.C.A. §§56—1—501 and 56—1—503 requiring sworn financial statements to properly reflect the financial condition of the ceding insurer and requiring assets and liabilities to be computed and allowed in accordance with the statutes stated therein and related rules;
   2. (b) May cause an agreement resulting in a ceding insurer improperly reducing liabilities or establishing assets for reinsurance ceded; and
   3. (c) May cause the application of any Sections of the insurance code including Title 56, Chapter 9, or regula- tions relating to creating a situation where an insurer may be hazardous, financially or otherwise, to policy- holders, creditors and/or the public.

Authority: T.C.A. §§56—1—501, 56—1—701, 56—2—301 and 56—9—508. Administrative History: Original rule filed December 20, 1993; effective March 5, 1994.