Florida Administrative Code › 69 - DEPARTMENT OF FINANCIAL SERVICES › 69O - OIR - Insurance Regulation › Chapter 69O-144 - REINSURANCE › Section 69O-144.010 - Accounting Requirements: Life and Health Reinsurance Agreements

Current through Reg. 50, No. 138; July 16, 2024
(1) Scope. This rule applies to all domestic
				life and accident and health insurers and to all other authorized life and
				accident and health insurers which are not subject to a substantially similar
				regulation in their domiciliary state. This rule also applies to authorized
				property and casualty insurers with respect to their accident and health
				business. This rule does not apply to assumption reinsurance, yearly renewable
				term reinsurance, or certain nonproportional reinsurance, such as stop loss or
				catastrophe reinsurance.
(2)
				Accounting Requirements.
(a) An insurer
				subject to this rule shall not, for reinsurance ceded, reduce any liability or
				establish any asset in any financial statement filed with the Office 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 all direct
				expenses, such as 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 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 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 under the agreement nor payment by the
				ceding insurer of an amount equal to the current and prior years' losses under
				the agreement upon voluntary termination of in force reinsurance by the 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 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 by the ceding insurer to the reinsurer of amounts other than
				from income realized from the reinsured policies. A ceding company may not pay
				reinsurance premiums or other fees or charges to a reinsurer which are greater
				than the direct premiums collected by the ceding company;
6.
a. The
				reinsurance agreement does not transfer all of the significant risk inherent in
				the business being reinsured. The table entitled "Risk Category" in this
				subparagraph identifies, for a representative sampling of products or types 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.
b. The
				risk categories are designated by the letters "a" through "f" in the table
				below. The references are as follows:
(I) The
				letter "a" refers to morbidity.
(II) The letter "b" refers to
				mortality.
(III) The letter "c"
				refers to lapse. For purposes of this rule, the term "lapse" is the risk that a
				policy will voluntarily terminate prior to the recoupment of a statutory
				surplus strain experienced at issue of the policy.
(IV) The letter "d" refers to credit quality.
				For purposes of this rule, the term "credit quality" 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. This term excludes market value declines due to changes in
				interest rates.
(V) The letter "e"
				refers to reinvestment. For purposes of this rule, the term "reinvestment" 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.
(VI) The letter "f"
				refers to disintermediation. For purposes of this rule, the term
				"disintermediation" 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. As a result, 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.
c. For purposes of the table below, the plus
				sign (+) means that the risk is significant and the zero (0) means that the
				risk is insignificant.
d. For
				purposes of the table below, the term "LTC" refers to Long Term Care Insurance
				and the term "LTD" refers to Long Term Disability Insurance.
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)
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 subparagraph b., below), either transfer the underlying
				assets to the reinsurer or legally segregate such assets in a trust or escrow
				account or otherwise establish a mechanism accomplishing the same end which
				legally segregates, by contract or contract provision, the underlying
				assets.
b. Notwithstanding the
				requirements of sub-subparagraph a., above, the assets supporting the reserves
				for the following classes of business and any 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 (including long term care insurance and long term disability
				insurance); traditional non-par permanent; traditional par permanent;
				adjustable premium permanent; indeterminate premium permanent; and universal
				life fixed premium (no dump-in premiums allowed).
c. In determining the reserve interest rate
				adjustment, the formula 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.
Note that the line references are for the 2001 National
				  Association of Insurance Commissioners (NAIC) Annual Statement and are supplied
				  as a convenient reference. Line references may be different in subsequent
				  annual statements.
Rate = 2* (I + CG) ÷ (X + Y - I - CG)
Where:
I
Is the net investment income (Exhibit 2, Line 16,
							 Column 7)
CG
Is capital gains less capital losses (Exhibit 3, Line
							 9, Column 4 plus Exhibit 4, Line 9, Column 4)
X
Is the current year cash and invested assets (Page 2,
							 Line 11, Column 1)
Plus investment income due and accrued (Page 2, Line
							 18, Column 1) less
Borrowed money (Page 3, Line 22, Column 1)
Y
Is the same as X but for the prior year
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.
11.
				The reinsurance agreement is entered into for the principal purpose of
				producing significant surplus relief 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.