Alabama Administrative Code › Title 482 - ALABAMA DEPARTMENT OF INSURANCE › Chapter 482-1-085 - LIFE AND HEALTH REINSURANCE AGREEMENTS › Section 482-1-085-.04 - Accounting Requirements

Current through Register Vol. 42, No. 9, June 28, 2024
(1) No
			 insurer subject to this chapter 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 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.
(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)
1. 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:
(1)
			 Morbidity.
(2) Mortality.
(3) 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.
(4) Credit Quality (C1). This is 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.
(5) Reinvestment (C3). This
			 is the risk that interest rates will fail 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.
(6)
			 Disintermediation (C3). 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
1 2 3 4 5 6
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)
(1) The credit quality, reinvestment, or
			 distermediation risk is significant for the business reinsured and the ceding
			 company does not (other than for the classes of business excepted in Rule
			 482-1-085-.04(1)(g)(2)
			 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.
(2)
(i)
			 Notwithstanding the requirements of Rule
			 482-1-085-.04(1)(g)(1),
			 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)
(ii) The associated formula for determining
			 the reserve interest rate adjustment must use a formula which reflects the
			 ceding company's investment earnings and incorporated all realized and
			 unrealized gains and losses reflected in the statutory statement. The following
			 is an acceptable formula:
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
				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 is the same as X but for the prior year
Line references are to the 1992 annual statement. Be aware that
				annual statement line references may change from year to 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.
(l) The
			 primary effect of the reinsurance agreement is to transfer reserves to the
			 books of the reinsurer for a "risk charge" and the agreement does not provide
			 for significant participation by the reinsurer in one or more of the following:
			 mortality, morbidity, investment, or surrender benefits.
(m) No cash payment is due from the reinsurer
			 with all settlements prior to the termination date of the agreement made only
			 in a "reinsurance account," by whatever name it is called, and no funds in such
			 account are available for the payment of benefits.
(2) Notwithstanding Rule
			 482-1-085-.04(1),
			 an insurer subject to this chapter may, with the prior approval of the
			 commissioner, take such reserve credit or establish such asset as the
			 commissioner may deem consistent with the Insurance Law, Rules or Regulations,
			 including actuarial interpretations or standards adopted by the
			 Department.
(3)
(a) Agreements entered into after the
			 effective date of this chapter which involve the reinsurance of business issued
			 prior to the effective date of the agreements, along with any subsequent
			 amendments thereto, shall be filed by the ceding company with the commissioner
			 within thirty (30) days from its date of execution. Each filing shall include
			 data detailing the financial impact of the transaction. The ceding insurer's
			 actuary who signs the financial statement actuarial opinion with respect to
			 valuation of reserves shall consider this chapter and any applicable actuarial
			 standards of practice when determining the proper credit in financial
			 statements filed with this department. The actuary should maintain adequate
			 documentation and be prepared upon request to describe the actuarial work
			 performed for inclusion in the financial statements and to demonstrate that
			 such work conforms to this chapter.
(b) Any increase in surplus net of federal
			 income tax resulting from arrangements described in Rule
			 482-1-085-.04(3)(a)
			 shall be identified separately on the insurer's statutory financial statement
			 as a surplus item (aggregate write-ins for gains and losses in surplus in the
			 Capital and Surplus Account, page 4 of the Annual Statement) and recognition of
			 the surplus increase as income shall be reflected on a net of tax basis in the
			 "Reinsurance ceded" line, page 4 of the Annual Statement as earnings emerge
			 from the business reinsured. If an allocation based on earnings on the block
			 business, which is subject of the reinsurance cession, is not appropriate for a
			 particular reinsurance contract, another basis of amortizing the "surplus
			 increase" to the Summary of Operations over the course of the reinsurance
			 contract should be used, with the Commissioner's approval.
[For example, on the last day of calendar year N, company XYZ
				pays a $20 million initial commission and expense allowance to company ABC for
				reinsuring an existing block of business. Assuming a 34% tax rate, the net
				increase in surplus at inception is $13.2 million ($20 million - $6.8 million)
				which is reported on the "Aggregate write-ins for gains and losses in surplus"
				line in the Capital and Surplus account. $6.8 million (34% of $20 million) is
				reported as income on the "Commissions and expense allowances on reinsurance
				ceded" line of the Summary of Operations. At the end of year N+1 the business
				has earned $4 million. ABC has paid $.5 million in profit and risk charges in
				arrears for the year and has received a $1 million experience refund. Company
				ABC's annual statement would report $1.65 million (66% of ($4 million - $1
				million - $.5 million) up to a maximum of $13.2 million) on the "Commissions
				and expense allowance on reinsurance ceded" line of the Summary of Operations,
				and - $1.65 million on the "Aggregate write-ins for gains and losses in
				surplus" line of the Capital and Surplus account. The experience refund would
				be reported separately as a miscellaneous income item in the Summary of
				Operations.]
Author:
Commissioner of Insurance