Indiana Administrative Code › Title 760 - DEPARTMENT OF INSURANCE › Article 1 - GENERAL PROVISIONS › Rule 55 - Life and Accident and Health Insurers; Reinsurance Agreements › Section 55-4 - Accounting requirements

Current through July 10, 2024
Authority: IC
				  27-1-3-7;
				  IC
				  27-6-10-15
Affected: IC 27-6-10
Sec. 4.
(a) No
				insurer subject to this rule shall, for reinsurance ceded, reduce any liability
				or establish any asset in any financial statement filed with the department of
				insurance 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 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.
(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 risks inherent
				in the business being reinsured. The table in this subdivision 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 the following: Risk
				categories: a = Morbidity.
b = Mortality.
c = Lapse. This is the risk that a policy will voluntarily
				  terminate prior to the recoupment of any 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.
+ = Significant.
o = Insignificant.
Risk Category
a
b
c
d
e
f
Health insurance-other than LTC/LTD*
+
o
+
o
o
o
Health insurance-LTC/LTD*
+
o
+
+
+
o
Immediate annuities
o
+
o
+
+
o
Single premium deferred annuities
o
o
+
+
+
+
Flexible premium deferred annuities
o
o
+
+
+
+
Guaranteed interest contracts
o
o
o
+
+
+
Other annuity deposit business
o
o
+
+
+
+
Single premium whole life
o
+
+
+
+
+
Traditional non-par permanent
o
+
+
+
+
+
Traditional non-par term
o
+
+
o
o
o
Traditional par permanent
o
+
+
+
+
+
Traditional par term
o
+
+
o
o
o
Adjustable premium permanent
o
+
+
+
+
+
Indeterminate premium permanent
o
+
+
+
+
+
Universal life flexible premium
o
+
+
+
+
+
Universal life fixed premium
o
+
+
+
+
+
Universal life fixed premium
o
+
+
+
+
+
dump-in premiums allowed
*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 clause
				(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 the
				underlying assets.
(B)
				Notwithstanding the requirements of clause (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:
(i) Health
				insurance-LTC/LTD.
(ii) Traditional
				non-par permanent.
(iii)
				Traditional par permanent.
(iv)
				Adjustable premium permanent.
(v)
				Indeterminate premium permanent.
(vi) 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 preceding year's statutory statement. The following is
				  an acceptable formula:
Click
				  here to view Image
Where: I = the net investment income (Exhibit 2, Line 16,
				  Column 7).
CG = capital gains less capital losses (Exhibit 4, Line 10,
				  Column 6).
X = 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 = 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, typically on a
				temporary basis, while not transferring all of the significant risks inherent
				in the business reinsured.