Oklahoma Administrative Code › Title 365 - Insurance Department › Chapter 25 - Other Licensees › Subchapter 7 - Companies › Part 9 - LIFE AND HEALTH REINSURANCE AGREEMENTS › Section 365:25-7-51 - Accounting requirements

Current through Vol. 41, No. 20, July 1,
				  2024
(a) No life insurer
				  subject to this part 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:
(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 or assets at the reinsure'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;
(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 agreements 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 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 the changes in
				  interest rate.
e. Reinvestments
				  (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 more 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
Long Term Care Insurance / Long
Term Disability Insurance
+ 0 + 0 0 0
Health Insurance - Long Term
Care Insurance / Long Term
Disability Insurance
+ 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
dump-in premiums allowed
0 + + + + +
(7) 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 expected in
				  subparagraph (A) of this paragraph] 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.
(A) Notwithstanding the aforementioned
				  requirements of this paragraph (7), 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)
(B)
				  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) I is the net investment
				  income (Exhibit 2, Line 16, Column 7)
(ii) CG is the capital gains less capital
				  losses (Exhibit 4, Line 10, Column 6)
(iii) X is 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)
(iv) Y is 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 and, in substance or effect, the expected potential
				  liability to the ceding insurer remains basically unchanged.