Nebraska Administrative Code › Topic - INSURANCE, DEPARTMENT OF › Title 210 - NEBRASKA DEPARTMENT OF INSURANCE › Chapter 57 - LIFE AND HEALTH REINSURANCE AGREEMENTS › Section 210-57-004 - Accounting requirements

Current through June 17, 2024
004.01 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:
004.01(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;
004.01(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;
004.01(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;
004.01(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;
004.01(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;
004.01(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:
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.
+ - 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 0 + + + + +
dump-in premiums allowed
*LTC = Long Term Care Insurance
LTD = Long Term Disability Insurance
004.01(g)(i) 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 Section 004.01(g)(ii)) 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 Director which
				legally segregates, by contract or contract provision, the underlying
				assets.
004.01(g)(ii)
				Notwithstanding the requirements of Section
				004.01(g)(i), 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: 
				
											 How much time has passed since the planning studies
					 and corresponding decisions were made?
											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 (Exhibit 2, Line 15,
				  Column 7)
CG is capital gains less capital losses (Exhibit 3, Line 11,
				  Column 6, less Exhibit 4, Line 9, Column 4)
X is the current year cash and invested assets (Page 2, Line
				  11, Column 4) plus investment income due and accrued (Page 2, Line 17, Column
				  4) less borrowed money (Page 3, Line 22, Column 1)
Y is the same as X but for the prior year
004.01(h) 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.
004.01(i) The ceding insurer is required to
				make representations or warranties not reasonably related to the business being
				reinsured.
004.01(j) The ceding
				insurer is required to make representations or warranties about future
				performance of the business being reinsured.
004.01(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.