Hawaii Administrative Rules › Title 16 - DEPARTMENT OF COMMERCE AND CONSUMER AFFAIRS › Chapter 20 - LIFE AND HEALTH REINSURANCE AGREEMENTS › Section 16-20-3 - Accounting requirements

Current through June, 2024
(a) No insurer
			 subject to this chapter shall, on account of reinsurance ceded, reduce any
			 liability or establish any asset in any financial statement filed with the
			 commissioner if the terms of the reinsurance agreement, in substance or effect,
			 provide for any of the following conditions:
(1) Renewal expense allowances provided, or
			 to be provided, to the ceding insurer by the reinsurer in an 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). The expenses
			 include commissions, premium taxes, and direct expenses, including, but not
			 limited to, billing, valuation, claims, and maintenance expended by the company
			 at the time the business is reinsured;
(2) The ceding insurer will 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;
			 provided, however, 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 a deprivation of
			 surplus or assets;
(3) The ceding
			 insurer is required to reimburse the reinsurer for negative experience under
			 the reinsurance agreement; provided, however, that offsetting experience
			 refunds against current and prior year losses under the agreement and payment
			 by the ceding insurer of an amount equal to the current and prior year losses
			 under the agreement when the ceding insurer voluntarily terminates in force
			 reinsurance shall not be considered 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, such as a provision giving the
			 reinsurer the right to increase reinsurance premiums or risk and expense
			 charges to excessive levels, forcing the ceding company to terminate
			 prematurely the reinsurance treaty;
(4) 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) The reinsurance agreement involves the
			 possible payment of reinsurance premiums or other fees or charges by the ceding
			 insurer to the reinsurer of amounts greater than from income realized from the
			 reinsured policies;
(6) The
			 agreement does not transfer all of the significant risk inherent in the
			 business being reinsured. The table entitled Exhibit A at the end of this
			 chapter and made a part of this chapter identifies the risks to be considered
			 significant for a representative sampling of products or types of business. For
			 products not specifically included, the risks determined to be significant
			 shall be consistent with Exhibit A;
(7) The credit quality, reinvestment, or
			 disintermediation risk is significant for the business reinsured, and the
			 ceding company does not (other than for the classes of business excepted in
			 this section) either transfer the underlying assets to the reinsurer or legally
			 segregate the assets in a trust or escrow account or otherwise establish a
			 mechanism satisfactory to the commissioner which legally segregates the
			 underlying assets.
Notwithstanding the requirements of this subsection, the
				assets supporting the reserves for the following classes of business and any
				other classes of business which do not have a significant credit quality
				reinvestment or disintermediation risk may be held by the ceding company
				without segregation:
(i) Health
			 insurance, including long term care and long term disability;
(ii) Traditional non-participating
			 permanent;
(iii) Traditional
			 participating permanent;
(iv)
			 Adjustable premium permanent;
(v)
			 Indeterminate premium permanent; or
(vi) Universal life fixed premium with no
			 dump-in premiums allowed.
The associated formula for determining the reserve interest
				rate adjustment must reflect the ceding company's investment earnings and
				incorporate all realized and unrealized gains and losses reflected in the
				statutory statement. The following is an acceptable formula:
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Where:
I is the net investment income;
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; and
Y is the prior year cash and invested assets plus investment
				income due and accrues less borrowed money;
(8) 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)
			 The ceding insurer is required to make representations or warranties not
			 reasonably related to the business being reinsured;
(10) The ceding insurer is required to make
			 representations or warranties about future performance of the business being
			 reinsured; or
(11) The reinsurance
			 agreement is entered into for the principal purpose of producing significant
			 surplus aid for the ceding insurer and does not transfer 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.