Ohio Administrative Code › Title 3901 - Department of Insurance › Chapter 3901-3 - Acquisitions and Mergers; Insurance Holding Company Systems › Section 3901-3-07 - Credit for life reinsurance agreements

Current through all regulations passed and filed through July 1, 2024
(A) Scope
This rule shall apply to all domestic life insurers and to all
				other licensed life insurers which are not subject to a substantially similar
				regulation in their state of domicile. This rule shall also apply to all
				domestic property and casualty insurers with respect to their accident and
				health business and to all other licensed property and casualty insurers with
				respect to their accident and health business which are not subject to a
				substantially similar regulation in their state of domicile. This rule shall
				not apply to assumption reinsurance, yearly renewable term reinsurance or
				certain nonproportional reinsurance such as stop loss or catastrophe
				reinsurance.
(B) Purpose
The purpose of this rule is to facilitate the department's
				surveillance of the financial condition of insurers by establishing accounting
				requirements for insurers to reduce any liability or establish any asset in any
				financial statement filed with the department based on reinsurance ceded by the
				insurer. These requirements are to ensure that financial statements accurately
				reflect the financial condition of a ceding insurer, and that a ceding insurer
				has not reduced liabilities or established assets through the improper use of
				reinsurance reserve credits.
(C) Authority
This rule is issued under the authority vested in the
				superintendent under sections
				3901.041,
				3901.62 and
				3901.77 of the Revised Code.
(D) Accounting
			 requirements
(1) 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 if, by the terms of the
			 reinsurance agreement, in substance or effect, any of the following conditions
			 exist:
(a) Renewal expense allowance 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;
(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 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;
(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. 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 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:
(i)
			 Morbidity
(ii) Mortality
(iii) Lapse
This is the risk that a policy will voluntarily terminate prior
				to the recoupment of a statutory surplus strain experienced at issuance of the
				policy.
(iv) 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.
(v) 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.
(vi) 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
(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 paragraph
			 (d)(1)(g)(ii) of this rule 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 superintendent which
			 legally segregates, by contract or contract provision, the underlying assets.
(ii) Notwithstanding the
			 requirements of paragraph (d)(1)(g)(i) of this rule, 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 (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
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.