Code of Massachusetts Regulations › 211 CMR - DIVISION OF INSURANCE › Title 211 CMR 129.00 - Life And Health Reinsurance Agreements › Section 129.02 - Accounting Requirements

Current through Register 1525, July 5, 2024
(1) No insurer
			 subject to
			 211 CMR 129.00 shall, for
			 reinsurance ceded, reduce any liability or establish any asset in any financial
			 statement filed with the Division 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) 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 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.
5. 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.
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
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 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 dump-in premiums
							 allowed
0
+
+
+
+
+
*LTC = Long Term Care Insurance
LTD = Long Term Disability Insurance
(g)
1. 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 211 CMR
			 129.02(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. Notwithstanding the requirements of 211
			 CMR 129.02(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:
- 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
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
(h) Settlements are made less
			 frequently than quarterly or payments due from the reinsurer are not made in
			 cash within 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.