Arkansas Administrative Code › Agency 054 - Arkansas Insurance Department › Rule 054.00.96-001 - Life and Disability Reinsurance Agreements - Reg. 51

Current through Register Vol. 49, No. 6, June, 2024
SECTION 1. This regulation is adopted and
		  promulgated pursuant to Ark. Code Ann. §
							23-61-108 and
		  §
							23-66-207
		  and §
							25-15-201, et
		  seq.
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SECTION
		  3. Scope and Application
This regulation shall apply to all domestic life and disability
			 insurers and to all other licensed life and disability insurers which are not
			 subject to a substantially similar regulation in their domiciliary state. This
			 regulation shall also similarly apply to licensed property and/or casualty
			 insurers with respect to their disability business. This regulation shall not
			 apply to bulk or assumption reinsurance, yearly renewable term reinsurance or
			 certain nonproportional reinsurance such as stop loss or catastrophe
			 reinsurance.
SECTION 4.
		  Accounting Requirements
A. 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:
(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 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. 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
		  (C1)
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 (C3)
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 (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
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 Terra
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
(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 (7) (b)] 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 (7)(a), 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 - 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 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 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
(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 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.