Compilation of Rules and Regulations of the State of Georgia › Department 120 - OFFICE OF COMMISSIONER OF INSURANCE, SAFETY FIRE COMMISSIONER AND INDUSTRIAL LOAN COMMISSIONER › Chapter 120-2 - RULES OF COMMISSIONER OF INSURANCE › Subject 120-2-61 - LIFE AND HEALTH REINSURANCE AGREEMENTS › Rule 120-2-61-.04 - Accounting Requirements

Current through Rules and Regulations filed through June 27, 2024
(1) No insurer subject to this regulation
				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:
(a) Renewal expense allowance 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;
(b) 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;
(c) 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;
(d) The ceding
				insurer must, at specific points in time scheduled in the agreement, terminate
				or automatically recapture all or part of the reinsurance ceded;
(e) 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;
(f) The treaty does not
				transfer all of the significant risk inherent in the business being reinsured.
				The table following subparagraph (vi) 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.
1. Risk categories:
(i) Morbidity.
(ii) Mortality.
(iii) 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.
(iv) 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.
(v) 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.
(vi)
				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 assets 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.
TABLE
+ - Significant
0 - Insignificant
RISK CATEGORY
(i)
(ii)
(iii)
(iv)
(v)
(vi)
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 = Long Term Disability Insurance
(g) 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
				120-2-61-.04(1)(g)1.)
				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.
1.
				Notwithstanding the requirements of
				120-2-61-.04(1)(g),
				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:
(i)
				Health Insurance - LTC/LTD;
(ii)
				Traditional Non-Par Permanent;
(iii) Traditional Par Permanent;
(iv) Adjustable Premium Permanent;
(v) Indeterminate Premium
				Permanent;
(vi) Universal Life
				Fixed Premium (no dump-in premiums allowed).
2. 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 quarterly and annual statements of the
				insurer. The following is an acceptable formula:
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 4, Line 10, Column 6)
X is the current year cash and invested assets
(Page 2, Line 104, Column 1) plus investment income due and
				  accrued (Page 2, Line 16, Column 1) less borrowed money (Page 3, Line 22,
				  Column 1)
Y is the same as X but for the prior year
(h) 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;
(i) The ceding insurer is required to make
				representations or warranties not reasonably related to the business being
				reinsured;
(j) The ceding insurer
				is required to make representations or warranties about future performance of
				the business being reinsured;
(k)
				The 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 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.