Arizona Administrative Code › Title 20 - COMMERCE, FINANCIAL INSTITUTIONS, AND INSURANCE › Chapter 06 - DEPARTMENT OF INSURANCE AND FINANCIAL INSTITUTIONS - INSURANCE DIVISION › Article 16 - CREDIT FOR REINSURANCE › Part B - TERM AND UNIVERSAL LIFE INSURANCE RESERVE FINANCING › Section R20-6-B1602 - The Actuarial Method

Current through Register Vol. 30, No. 28, July 12, 2024
A. Actuarial Method. The Actuarial Method to
				  establish the Required Level of Primary Security for each reinsurance treaty
				  subject to this Part B shall be VM-20, applied on a treaty-by-treaty basis,
				  including all relevant definitions, from the Valuation Manual then in effect,
				  applied as follows:
1. For Covered Policies
				  described in Section R20-6-B1601(C)(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. However, if the Covered
				  Policies do not meet the requirements of the Stochastic Reserve exclusion test
				  in the Valuation Manual, then the Actuarial Method is the greatest of the
				  Deterministic Reserve, the Stochastic Reserve, or the NPR. In addition, if such
				  Covered Policies are reinsured in a reinsurance treaty that also contains
				  Covered Policies described in Section R20-6-B1601(C)(2)(b), the ceding insurer
				  may elect to instead use subsection (A)(2) below as the Actuarial Method for
				  the entire reinsurance agreement. Whether subsection (A)(1) or (A)(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. For Covered Policies described in Section
				  R20-6-B1601(C)(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. Except as provided in subsection (A)(4)
				  below, the Actuarial Method is to be applied on a gross basis to all risks with
				  respect to the Covered Policies as originally issued or assumed by the ceding
				  insurer.
4. If the reinsurance
				  treaty cedes less than 100% of the risk with respect to the Covered Policies,
				  then the Required Level of Primary Security may be reduced as follows:
a. If a reinsurance treaty cedes only a quota
				  share of some of all of the risks pertaining to the Covered Policies, the
				  Required Level of Primary Security, as well as any adjustment under subsection
				  (A)(4)(c) below, may be reduced to a pro rata portion in accordance with the
				  percentage of the risk ceded;
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 Policies, except that for Covered Policies for 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 those Covered Policies,
				  where the retained reserve of those Covered Policies should be reflective of
				  any reduction pursuant to the cessation of mortality risk on a yearly renewable
				  term basis in an exempt arrangement;
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 by applying the Actuarial Method including the reinsurance
				  section of VM-20 to the portion of the covered policy risks ceded in the exempt
				  arrangement, except that for Covered Policies issued prior to January 1, 2017,
				  this adjustment is not to exceed [cx/ (2 * number of reinsurance premiums per
				  year)] where cx is calculated using the same mortality table used in
				  calculating the Net Premium Reserve; and
d. For any other treaty ceding a portion of
				  risk to a different reinsurer, including but not limited to stop loss, excess
				  of loss, and other non-proportional reinsurance treaties, there will be no
				  reduction in the Required Level of Primary Security. It is possible for any
				  combination of subsections (A)(4)(a), (A)(4)(b), (A)(4)(c), and (A)(4)(d) to
				  apply. Such adjustments to the Required Level of Primary Security will be done
				  in the sequence that accurately reflects the portion of the risk ceded via the
				  treaty. The ceding insurer should document the rationale and steps taken to
				  accomplish the adjustments to the Required Level of Primary Security due to the
				  cession of less than 100% of the risk. The adjustments for other reinsurance
				  will be made only with respect to reinsurance treaties entered into directly by
				  the ceding insurer. The ceding insurer will make no adjustment as a result of a
				  retrocession treaty entered into by the assuming insurers.
5. In no event will the Required Level of
				  Primary Security resulting from application of the Actuarial Method exceed the
				  amount of statutory reserves ceded.
6. If the ceding insurer cedes risk with
				  respect to Covered Policies, including any riders, in more than one reinsurance
				  treaty subject to this Part B, in no event will the aggregate Required Level of
				  Primary Security for those reinsurance treaties be less than the Required Level
				  of Primary Security calculated using the Actuarial Method as if all risks ceded
				  in those treaties were ceded in a single treaty subject to this Part
				  B.
7. If a reinsurance treaty
				  subject to this Part B cedes risk on both Covered and Non-Covered Policies,
				  credit for the ceded reserves shall be determined as follows:
a. The Actuarial Method shall be used to
				  determine the Required Level of Primary Security for the Covered Policies, and
				  R20-6-B1603 shall be used to determine the reinsurance credit for the covered
				  policy reserves; and
b. Credit for
				  the non-covered policy reserves shall be granted only to the extent that
				  security, in addition to the security held to satisfy the requirements of
				  subsection (A)(7)(a), is held by or on behalf of the ceding insurer in
				  accordance with A.R.S. §§
												20-3602
				  and
				  20-3603.
				  Any Primary Security used to meet the requirements of this subsection (A)(7)(b)
				  may not be used to satisfy the Required Level of Primary Security for the
				  Covered Policies.