Connecticut Administrative Code › Title 38a - Insurance Department › 72a - Life Reinsurance Agreements › Section 38a-72a-3 - Accounting requirements

Current through July 10, 2024
(a) No insurer
			 subject to these regulations shall, for reinsurance ceded, reduce any liability
			 or establish any asset in any financial statement filed with the Department if,
			 by the terms of the reinsurance agreement, in substance or effect, any of the
			 following conditions exist:
(1) Renewal
			 expense allowances provided or to be provided to the ceding insurer by the
			 reinsurer in any 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). Those expenses include commissions, premium taxes and
			 direct expenses including, but not limited to, billing, valuation, claims and
			 maintenance expected by the company at the time the business is
			 reinsured;
(2) The ceding insurer
			 can 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, except that termination of the reinsurance agreement by the reinsurer
			 for non-payment 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 to be such a deprivation of
			 surplus or assets;
(3) The ceding
			 insurer is required to reimburse the reinsurer for negative experience under
			 the reinsurance agreement, except that neither offsetting experience refunds
			 against
current and
prior years' losses nor payment by the
			 ceding insurer of an amount equal to
current and
prior years'
			 losses upon voluntary termination of in-force reinsurance by that ceding
			 insurer shall be considered such 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. An example of such a provision is the right of
			 the reinsurer to increase reinsurance premiums or risk and expense charges to
			 excessive levels forcing the ceding company to prematurely terminate the
			 reinsurance treaty;
(4) The ceding
			 insurer shall, 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 by the ceding insurer to the reinsurer of amounts other than
			 from income realized from the reinsured policies. For example, it is improper
			 for a ceding company to pay reinsurance premiums, or other fees or charges to a
			 reinsurer which are greater than the direct premiums collected by the ceding
			 company;
(6) The treaty does not
			 transfer all of the significant risk inherent in the business being reinsured.
			 The following table identifies, for a representative sampling of products or
			 type of business, the risks which are considered to be significant. For
			 products not specifically included, the risks determined to be significant
			 shall be consistent with this table.
Risk Categories:
(A)
Morbidity
(B)
Mortality
(C)
Lapse.
This is the risk that a policy will voluntarily terminate
			 prior to the recoupment of a statutory surplus strain experienced at issue of
			 the policy.
(D)
Credit
			 Quality.
This is the risk that invested assets supporting the reinsured
			 business will decrease in value. The main hazards are that assets will default
			 or that there will be a decrease in earning power. It excludes market value
			 declines due to changes in interest rate.
(E)
Reinvestment.
This is the
			 risk that interest rates will fall and funds reinvested (coupon payments or
			 monies received upon asset maturity or call) will therefore earn less than
			 expected. If asset durations are less than liability durations, the mismatch
			 will increase.
(F)
Disintermediation.
This is the risk that interest rates rise and
			 policy loans and surrenders increase or maturing contracts do not renew at
			 anticipated rates of renewal. If asset durations are greater than the liability
			 durations, the mismatch will increase. Policyholders will move their funds into
			 new products offering higher rates. The company may have to sell assets at a
			 loss to provide for these withdrawals.
+ = significant 0 = insignificant
Risk Category
A B C D E F
Health Insurance-other than LTC/LTD*
+ 0 + 0 0 0
Health Insurance-LTC/LTD*
+ 0 + + + 0
Immediate Annuities
0 + 0 + + 0
Single Premium Deferred Annuities
0 0 + + + +
Flexible Premium Deferred Annuities
0 0 + + + +
Guaranteed Interest Contracts
0 0 0 + + +
Other Annuity Deposit Business
0 0 + + + +
Single Premium Whole Life
0 + + + + +
Traditional Non-Par Permanent
0 + + + + +
Traditional Non-Par Term
0 + + 0 0 0
Traditional Par Permanent
0 + + + + +
Traditional Par Term
0 + + 0 0 0
Adjustable Premium Permanent
0 + + + + +
Indeterminate Premium Permanent
0 + + + + +
Universal Life Flexible Premium
0 + + + + +
Universal Life Fixed Premium
0 + + + + +
Universal Life Fixed Premium
0 + + + + +
dump-in premiums allowed
*LTC = Long Term Care Insurance
*LTD = Longer Term Disability
						  Insurance
(7)
(A) 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 paragraph (B) of this subdivision) either 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 or contract provision, the
			 underlying assets;
(B)
			 Notwithstanding the requirements of paragraph (A) of this subdivision, the
			 assets supporting the reserves for the following classes of business which do
			 not have a significant credit quality, reinvestment or disintermediation risk
			 may be held by the ceding company without segregation of such assets:
*health insurance-LTC/LTD
*traditional non-par permanent
*traditional par permanent
*adjustable premium permanent
*indeterminate premium permanent
*universal life fixed premium (no dump-in premiums
				allowed)
The associated formula for determining the reserve interest
				rate adjustment must use a formula which reflects the ceding company's
				investment earnings and incorporates all realized and unrealized gains and
				losses reflected in the statutory statement. The following is the accepted
				formula:
Click here
				to view image
Where:
I = net investment income (exhibit 2, line 16, column 7 of the
				annual statement)
CG = capital gains less capital losses (exhibit 3, line 10,
				column 4, plus exhibit 4, line 10, column 4, of the annual statement)
X = current year cash and invested assets (page 2, line 10a,
				column 1) plus investment income due and accrued (page 2, line 16, column 1)
				less borrowed money (page 3, line 22, column 1)
Y = same as X, but for the prior year
Note:
Annual statement references pertain to the
				1993 annual statement. Such line references may change to reflect changes in
				subsequent annual statement convention blanks.
(8) Settlements are made less frequently than
			 quarterly or payments due from the reinsurer are not made in cash within ninety
			 (90) 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 for
			 the principal purpose of producing significant surplus aid for the ceding
			 insurer, typically on a temporary basis, while not transferring 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.