Administrative Rules of Montana › Department 6 - STATE AUDITOR › Chapter 6.6 - INSURANCE DEPARTMENT › Subchapter 6.6.36 - Life and Health Reinsurance Agreements › Rule 6.6.3602 - ACCOUNTING REQUIREMENTS

Current through Register Vol. 13, July 5, 2024
(1) No insurer
				subject to these rules may, 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:
(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). Renewal 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 insurer 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;
(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;
(f) The agreement does
				not involve transfer of all of the significant risk inherent in the business
				being reinsured.
(i) Significant risks
				include, but are not limited to, the following:
(A) Morbidity.
(B) Mortality.
(C) The risk that a policy will voluntarily
				terminate prior to the recoupment of a statutory surplus strain experienced at
				issue of the policy (lapse risk).
(D) The risk that invested assets supporting
				the reinsured business will decrease in value, the main hazards being that
				assets will default or that there will be a decrease in earning power (credit
				quality risk). This risk excludes market value declines due to changes in
				interest rate.
(E) 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
				(reinvestment risk).
(F) The risk
				that interest rates rise and policy loans and surrenders increase or maturing
				contracts do not renew at anticipated rates of renewal (disintermediation
				risk).
(ii) Risk
				categories for types of insurance covered by these rules are summarized in the
				following chart: (+ denotes significant risk; 0 denotes insignificant risk.)
LINES OF INSURANCE
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
0
+
+
+
+
+
*LTC = Long Term Care Insurance
LTD = Long Term Disability Insurance
(g) 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 (i) 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 commissioner which legally
				segregates, by contract or contract provision, the underlying assets.
(i) Notwithstanding the requirements of (1)
				(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:
(A)
				Health Insurance--LTC/LTD;
(B)
				Traditional Non-Par Permanent;
(C)
				Traditional Par Permanent;
(D)
				Adjustable Premium Permanent;
(E)
				Indeterminate Premium Permanent;
(F) Universal Life Fixed Premium (exclusive
				of dumped-in premiums).
(ii) Any formula for determining reserve
				interest rate adjustment must be one which reflects the ceding company's
				investment earnings and incorporates all realized and unrealized gains and
				losses reflected in the statement.
(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.