Code of Maine Rules › 02 - DEPARTMENT OF PROFESSIONAL AND FINANCIAL REGULATION › 031 - BUREAU OF INSURANCE › Chapter 760 - LIFE AND HEALTH REINSURANCE AGREEMENTS › Section 031-760-4 - Accounting requirements

Current through 2024-29, July 17, 2024
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 Bureau 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
				renewal expenses of the ceding insurer allocable pursuant to terms of the
				agreement 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 costs 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, which includes but is not limited to 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 provisions requiring 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 or may be required due to oppressive or arbitrary 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 agreement;
(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 entails the
				possible payment by the ceding insurer to the reinsurer of amounts other than
				from income realized from the reinsured policies. It shall be 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 agreement 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 an asset
				  will suffer default or that there will be a decrease in earning power of the
				  asset. 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.
(7) The ceding company does not (other than
				for the classes of business excepted 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 satisfactory to the Superintendent
				which legally segregates, by contract or contract provision, the underlying
				assets when the credit quality, reinvestment, or disintermediation risk is
				significant for the business reinsured.
Notwithstanding the foregoing, 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)
In order for a credit to be allowed, the reinsurance
				  agreement must provide for a reserve interest rate adjustment when funds held
				  by the ceding insurer are not segregated. In determining the reserve interest
				  rate adjustment, the ceding insurer must use a formula which reflects its
				  investment earnings and incorporates all realized and unrealized gains and
				  losses reflected in the insurer's annual statutory financial statement. Any
				  adjustment which produces an additional cost for the reinsurance coverage shall
				  be recognized as a liability of the insurer. The following is an acceptable
				  formula:
***** FORMULA HERE *****
Where: I is the net investment income (Exhibit 2, Line 16,
				  Column 7 Part 1, Line 9, Column 8 for casualty blanks) CG is capital gains less
				  capital losses (Exhibit 4, Line 10, Column 6 Part 1A, Line 10, Column 7, for
				  casualty blanks) 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, 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.