Iowa Administrative Code › Agency 191 - Insurance Division › Unfair Trade Practices › Chapter 17 - Life and Health Reinsurance Agreements › Rule 191-17.3 - Accounting Requirements

Current through Register Vol. 47, No. 3, July 24, 2024
(1) No
				insurer subject to this chapter 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 any 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 (CI). 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 moneys 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 Armuities
0
+
0
+
+
0
Single Premium Deferred Armuities
0
0
+
+
+
+
Flexible Premium Deferred Armuities
0
0
+
+
+
+
Guaranteed Interest Contracts
0
0
0
+
+
+
Other Armuity 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
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
				subparagraph (2) of this paragraph
"g")
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 subparagraph (1) of this
				paragraph
"g,"
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:
1. Health Insurance-LTC/LTD
2. Traditional Non-Par Permanent
3. Traditional Par Permanent
4. Adjustable Premium Permanent
5. Indeterminate Premium Permanent
6. 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 imrealized 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, Column
				  7)
CG is capital gains less capital losses (Exhibit 4, Column
				  6)
X is the current year cash and invested assets (Page 2,
				  Column 1) plus investment income due and accrued (Page 2, Column 1) less
				  borrowed money (Page 3, Column 1)
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.