Louisiana Administrative Code › Title 37 - INSURANCE › Part XIII - Regulations › Chapter 37 - Regulation 57-Life and Health Reinsurance Agreements › Section XIII-3705 - Accounting Requirements

Current through Register Vol. 50, No. 6, June 20, 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
				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.
Risk Category +- Significant 0-Insignificant
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
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
				§3705. A.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 §3705.
				A.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 lump-in premiums
				  allowed)
i. 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;
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 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.