Pennsylvania Code › Title 31 - INSURANCE › Part VIII - Miscellaneous Provisions › Chapter 162 - LIFE AND HEALTH REINSURANCE AGREEMENTS › Section 162.4 - Accounting requirements

Current through Register Vol. 54, No. 28, July 13, 2024
(a) An
				insurer subject to this chapter may not, for reinsurance ceded, reduce
				liability or establish an asset in financial statements filed with the
				Department if, by the terms of the reinsurance agreement, in substance or
				effect, one or more of the following conditions exist:
(1) The reserve credit taken by the ceding
				insurer is greater than the underlying reserve of the ceding insurer supporting
				the policy obligations transferred under the reinsurance agreement.
(2) 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. Renewal
				expenses include commissions, premium taxes and direct expenses including
				billing, valuation, claims and maintenance expected by the ceding insurer at
				the time the business is reinsured.
(3) 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.
				However, 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, will not be considered to be a deprivation of surplus
				or assets for purposes of this subsection.
(4) The ceding insurer is required to
				reimburse the reinsurer for negative experience under the reinsurance
				agreement. 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 will be
				considered a reimbursement to the reinsurer for negative experience for
				purposes of this subsection. In addition, voluntary termination does not
				include termination as a result of unreasonable provisions which allow the
				reinsurer to reduce its risk under the agreement. An example of an unreasonable
				provision is the right of the reinsurer to increase reinsurance premiums or
				risk and expense charges to excessive levels thereby forcing the ceding insurer
				to prematurely terminate the reinsurance treaty.
(5) The ceding insurer shall, at specific
				points in time scheduled in the agreement, terminate or automatically recapture
				all or part of the reinsurance ceded.
(6) 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 insurer to pay reinsurance premiums, or other fees or charges, to
				the reinsurer which are greater than the direct premiums collected by the
				ceding insurer.
(7) 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 the following table:
Risk Categories
(A) Morbidity.
(B) Mortality.
(C) Lapse-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-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. This risk category excludes market value declines due to changes
				in interest rate.
(E)
				Reinvestment-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-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 insurer may have to sell assets at a loss to provide
				for these withdrawals.
Table of Risk Significance +- Significant 0 -
				  Insignificant
Risk Category
A
B
C
D
E
F
Health Insurance Other than Long Term Care/Long Term
							 Disability
+
0
+
0
0
0
Health Insurance-Long Term Care/Long Term
							 Disability
+
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
+
+
+
+
+
(8) The credit quality, reinvestment or
				disintermediation risk is significant for the business reinsured and the ceding
				insurer does not, other than for the classes of business excepted in
				subparagraph (i), 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.
(i) Notwithstanding the provisions of this
				paragraph, 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
				insurer without segregation of the assets:
Health Insurance-Long Term Care/Long Term Disability
				  Insurance
Traditional Non-Par Permanent
Traditional Par Permanent
Adjustable Premium Permanent
Indeterminate Premium Permanent
Universal Life Fixed Premium (no dump-in premiums
				  allowed)
(ii) If the ceding
				insurer elects to hold the assets supporting the reserves for the classes of
				business stated in subparagraph (i) or for classes of business which do not
				represent a significant risk as noted in subparagraph (i), the determination of
				the modified coinsurance reserve interest rate adjustment shall conform to a
				formula which reflects the ceding insurer'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 =
the net investment income
CG =
realized and unrealized capital gains
							 less realized and unrealized capital losses
X =
the current year cash and invested assets
							 plus investment income due and accrued less borrowed money
Y =
the same as X but for the prior year
(9) Settlements are made less frequently than
				quarterly or payments due from the reinsurer are not made in cash within 90
				days of the settlement date.
(10)
				The ceding insurer is required to make representations or warranties not
				reasonably related to the business being reinsured.
(11) The ceding insurer is required to make
				representations or warranties about future performance of the business being
				reinsured.
(12) 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.