California Code of Regulations › Title 10 - Investment › Chapter 5 - Insurance Commissioner › Subchapter 3 - Insurers › Article 3 - Annual Statements › Premiums in Course of Collection › Section 2303.11 - Transfer of Risk - Life and Disability

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(a) This section prescribes accounting and
					 other requirements for domestic life and disability insurers and for domestic
					 property and casualty insurers with respect to their disability business.
					 Failure to comply with this section results in a ceding insurer improperly
					 reducing liabilities or establishing assets for reinsurance ceded, and,
					 pursuant to Section
					 922.3 of the Code, the
					 Commissioner shall not allow credit for such reinsurance.
(b) This section shall not apply to
					 assumption reinsurance, or non-proportional reinsurance such as stop loss or
					 catastrophe reinsurance. Except as provided in the Statutory Accounting
					 Principles ("SSAP") 61 of the NAIC Accounting Guidance, it shall also not apply
					 to yearly renewable term reinsurance ("YRT"), as described in SSAP 61, that
					 provides reserve credit not greater than up to one year's valuation mortality
					 cost.
(c) No insurer shall, for
					 reinsurance ceded, reduce any liability or establish any asset in any statutory
					 financial statement 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, at a specified time scheduled in
					 the reinsurance agreement, 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.
4. The ceding insurer
					 must, at specific points in time scheduled in the agreement or at the
					 reinsurer's option, 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 risks inherent in the business being reinsured. The following table
					 identifies for a representative sampling of products or type of business, the
					 risks which are typically considered to be significant. For products not
					 specifically included, the risks determined to be significant shall be
					 consistent with this table.
Table of Significant Risks
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 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
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
7. The credit quality, reinvestment, or
					 disintermediation risk is significant for the business reinsured and the ceding
					 company does not 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 segregates, by
					 contract or contract provision, the underlying assets. Assets held to secure
					 statement credit for a cession to an unauthorized reinsurer as permitted by
					 Code Section
					 922.5(a)(1) may
					 not be placed in a trust or escrow account unless (1) the reinsurer is an
					 affiliate of the ceding insurer, or (2) the agreement establishing the escrow
					 or trust account provides that the ceding insurer has the sole right to
					 withdraw assets from the account at any time and without prior notice to the
					 reinsurer. The agreement establishing the escrow or trust account shall be in a
					 form satisfactory to the Commissioner.
A.
					 This paragraph shall not apply to the assets supporting the reserves for the
					 following classes of business:
(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)
B. When
					 asset segregation is not required, the associated formula for determining the
					 reserve interest rate adjustment shall 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:
Rate =
2 (I + CG)
X + Y - I - CG
Where:
I
is the net investment income
CG
is capital gains less capital
								losses
X
is the current year cash and invested
								assets plus investment income due and accrued less borrowed money
Y
is the same as X but for the prior
								year
8. Settlements are made less frequently than
					 quarterly or amounts receivable from the reinsurer are not paid 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.