North Dakota Administrative Code › Title 45 - Insurance, Commissioner of › Article 45-03 - Regulation of Insurance Companies › Chapter 45-03-07.2 - Life and Health Reinsurance Agreements › Section 45-03-07.2-02 - Accounting requirements

Current through Supplement No. 393, July, 2024
1. An
				insurer subject to this chapter, for reinsurance ceded, does not reduce any
				liability or establish any asset in any financial statement filed with the
				insurance 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. Those
				expenses include commissions, premium taxes, and direct expenses including
				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, may not be considered to be such a
				deprivation of surplus or assets.
c. The ceding insurer shall 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 must be considered a
				reimbursement to the reinsurer for negative experience. Voluntary termination
				does not include situations when 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. At specific points in time scheduled in
				the agreement, the ceding insurer must 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 that are considered to be significant. For products
				not specifically included, the risks determined to be significant must 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. 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. 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.
(f)
				Disintermediation. 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.
Click here
				  to view Image
Click here
				  to view Image
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 paragraph 2, either transfer the underlying assets to
				the reinsurer or legally segregate the 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 paragraph 1, 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 the assets:
(a) Health insurance - Long-term care
				insurance and long-term disability insurance.
(b) Traditional non-par permanent.
(c) Traditional par permanent.
(d) Adjustable premium permanent.
(e) Indeterminate premium permanent.
(f) Universal life fixed premium,
				no dump-in premiums allowed.
The associated formula for determining the reserve interest
				  rate adjustment must use a formula that 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 plus
				  investment income due and accrued less borrowed money.
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 ninety 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.