1. (1) An insurer subject to this rule may not, for reinsurance ceded, reduce a liability or establish an asset in a financial statement filed with the department if, by the terms of a reinsurance agreement, any of the following conditions exist:

   1. (a) Renewal expense allowances provided to a ceding insurer by a reinsurer in an accounting period are not sufficient to cover anticipated allocable renewal expenses of a 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, including:

      1. (i) commissions;
      2. (ii) premium taxes; and

      3. (iii) direct expenses, including:

         1. (A) billing;
         2. (B) valuation;
         3. (C) claims; and
         4. (D) maintenance expected by the company at the time the business is reinsured.

   2. (b) A ceding insurer may be deprived of surplus or assets at the reinsurer's option or upon the occurrence of an event, such as the insolvency of the ceding insurer, except that it is not a deprivation of surplus or assets to terminate a reinsurance agreement by a reinsurer for nonpayment of reinsurance premiums or other amounts due, including:

      1. (i) modified coinsurance reserve adjustments;
      2. (ii) interest and adjustments on funds withheld; and
      3. (iii) tax reimbursements.

   3. (c) A ceding insurer shall reimburse a reinsurer for negative experience under a reinsurance agreement.

      1. (i) Reimbursement for negative experience does not include:

         1. (A) offsetting experience refunds against current and prior years' losses under an agreement or;
         2. (B) paying a ceding insurer an amount equal to the current and prior years' losses under an agreement upon voluntary termination of in force reinsurance by a ceding insurer.
      2. (ii) Voluntary termination does not include a situation where termination occurs because of an unreasonable provision that allows a reinsurer to reduce its risk under an agreement, including a provision granting the reinsurer the right to increase reinsurance premiums or risk and expense charges to excessive levels, thereby forcing the ceding company to prematurely terminate the reinsurance treaty.
   4. (d) A ceding insurer shall, at specific times listed in an agreement, terminate or automatically recapture all or part of the reinsurance ceded.
   5. (e) A reinsurance agreement by a ceding insurer to a reinsurer involving payment of an amount that is not solely from income realized from the reinsured policy.

   6. (f) A treaty does not transfer the significant risk inherent in the business being reinsured.

      1. (i) The following table identifies the significant risks:

         TABLESignificant Risk CategoryABCDEFHealth Insurance - other than LTC/LTD*+0+000Health Insurance - LTC/LTD*+0+++0Immediate Annuities0+0++0Single Premium Deferred Annuities00++++Flexible Premium Deferred Annuities00++++Guaranteed Interest Contracts000+++Other Annuity Deposit Business00++++Single Premium Whole Life0+++++Traditional Non-Par Permanent0+++++Traditional Non-Par Term0++000Traditional Par Permanent0+++++Traditional Par Term0++000Adjustable Premium Permanent0+++++Indeterminate Premium Permanent0+++++Universal Life Flexible Premium0+++++Universal Life Fixed Premium0+++++Universal Life Fixed Premium - dump-in premiums allowed0++++++ Significant0 Insignificant* LTC = Long-term care insurance; LTD = Long-term disability insurance

      2. (ii) The significant risk categories in the table in Subsection (1)(f)(i) are as follows:

         1. (A) morbidity;
         2. (B) mortality;
         3. (C) lapse;
         4. (D) credit quality (C1);
         5. (E) reinvestment (C3); and
         6. (F) disintermediation.
      3. (iii) Products not specifically included in the table in Subsection (1)(f)(i) shall be determined consistent with the significant risk categories in Subsection (1)(f)(ii).

   7. (g)(i) Credit quality, reinvestment, or disintermediation risks are significant for the business reinsured and the ceding company does not, other than for the classes of business exempt under Subsection (1)(g)(ii), 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 commissioner which legally segregates, by contract, the underlying assets.

      1. (ii) Notwithstanding the requirements of Subsection (1)(g)(i), the assets supporting the reserves for the following classes of business and a class of business that does not have a significant credit quality, reinvestment, or disintermediation risk may be held by the ceding company without segregation of such 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; and
         6. (F) universal life fixed premium, no dump-in premiums are allowed.

      2. (iii)(A) A formula for determining the reserve interest rate adjustment shall reflect the ceding company's investment earnings and incorporate all realized and unrealized gains and losses reflected in the statutory statement.

         1. (B) The following is an acceptable formula: Rate = 2 (I + CG)/(X + Y - I - CG):
         2. (I) I is the net investment income;
         3. (II) CG is capital gains less capital losses;
         4. (III) X is the current year cash and invested assets plus investment income due and accrued less borrowed money; and
         5. (IV) Y is the same as X but for the prior year.

   8. (h) Settlement is made less frequently than quarterly or payment due from the reinsurer is not made in cash within 90 days of the settlement date.

      1. (i) A ceding insurer shall make a representation or warranty not reasonably related to the business being reinsured.
   9. (j) A ceding insurer shall make a representation or warranty about future performance of the business being reinsured.
   10. (k) A 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 the significant risks inherent in the business reinsured and, in substance or effect, the expected potential liability to the ceding insurer remains basically unchanged.
2. (2) Notwithstanding Subsection (1), an insurer subject to this rule may, with the prior approval of the commissioner, take reserve credit or establish an asset consistent with Title 31A, Insurance Code, and Title R590 including actuarial interpretations or standards adopted by the department.

3. (3)(a) An agreement involving the reinsurance of business, along with any subsequent amendments thereto, shall be filed by the ceding company with the commissioner within 30 days from its date of execution and shall include data detailing the financial impact of the transaction.

   1. (b) A ceding insurer's actuary who signs the actuarial opinion regarding valuation of reserves shall comply with this rule and any applicable actuarial standards of practice when determining the proper credit in a financial statement filed with the department.

   2. (c) The actuary shall maintain adequate documentation and be prepared to:

      1. (i) describe the actuarial work performed for inclusion in a financial statement; and
      2. (ii) demonstrate that such work conforms to this rule.

   3. (d)(i) An increase in surplus, net of federal income tax resulting from arrangements described in Subsection (3)(a), shall be identified separately on the insurer's statutory financial statement as a surplus item, aggregate write-ins for gains and losses in surplus in the Capital and Surplus Account, page 4 of the Annual Statement, and recognition of the surplus increase as income shall be reflected on a net of tax basis in the "Reinsurance ceded" line, page 4 of the Annual Statement as earnings emerge from the business reinsured.

      1. (ii)(A) For example, on the last day of calendar year N, company XYZ pays a $20 million initial commission and expense allowance to company ABC for reinsuring an existing block of business. Assuming a 34% tax rate, the net increase in surplus at inception is calculated by multiplying $20 million by 1 minus 0.34, resulting in $13.2 million, which is reported on the "Aggregate write-ins for gains and losses in surplus" line in the Capital and Surplus account. The 34% of $20 million, or $6.8 million, is reported as income on the "Commissions and expense allowances on reinsurance ceded" line of the Summary of Operations.

         1. (B) At the end of year N+1 the business has earned $4 million. ABC has paid $0.5 million in profit and risk charges in arrears for the year and has received a $1 million experience refund. Company ABC's annual statement would report $1.65 million, calculated by taking 66% of the total of $4 million minus $1 million minus $0.5 million, up to a maximum of $13.2 million, on the "Commissions and expense allowance on reinsurance ceded" line of the Summary of Operations, and -$1.65 million on the "Aggregate write-ins for gains and losses in surplus" line of the Capital and Surplus account. The experience refund would be reported separately as a miscellaneous income item in the Summary of Operations.

KEY: insurance law

Date of Last Change: March 16, 2022

Notice of Continuation: December 13, 2021

Authorizing, and Implemented or Interpreted Law: 31A-2-201