Oregon Administrative Rules › Chapter 836 - DEPARTMENT OF CONSUMER AND BUSINESS SERVICES, INSURANCE REGULATION › Division 12 - CREDIT FOR REINSURANCE › Section 836-012-0310 - Accounting Requirements

Current through Register Vol. 63, No. 7, July 1, 2024
(1) An
			 insurer that is subject to OAR 836-012-0300  to 836-012-0330 shall not, for
			 reinsurance ceded, reduce any liability or establish any asset in any financial
			 statement filed with the Director if by the terms of the reinsurance agreement,
			 in substance or effect, one or more 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 but
			 not limited to expenses for billing, valuation, claims and maintenance expected
			 by the ceding insurer at the time the business is reinsured;
(b) 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 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 in which termination occurs
			 because of unreasonable provisions that 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 insurer to prematurely terminate the
			 reinsurance treaty;
(c) 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 non-payment 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;
(d) The ceding insurer, at specific points in
			 time scheduled in the agreement, 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 insurer to pay reinsurance premiums or other fees or charges to a
			 reinsurer that are greater than the direct premiums collected by the ceding
			 insurer;
(f) The treaty does not
			 transfer all of the significant risk inherent in the business being reinsured.
			 The following table in this subsection 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. The risk categories are as
			 follows:
(A) Morbidity;
(B) Mortality;
(C) Lapse, which 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), which 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. Credit quality excludes market value declines due to changes
			 in interest rate;
(E) Reinvestment
			 (C3), which 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), which 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 insurer may have to sell assets at a loss
			 to provide for these withdrawals.
For purposes of the following chart: + - Significant 0 -
				Insignificant
RISK CATEGORY
A B C D E F
Health Insurance - other than long + 0 + 0 0 0
term care insurance and long term
disability insurance
Health Insurance - long term care + 0 + + + 0
insurance and long term disability
insurance
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
(g)
(A) 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 paragraph (B) of this subsection (g) 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 that legally segregates, by contract or contract provision, the
			 underlying assets;
(B)
			 Notwithstanding the requirements of paragraph (A) of this subsection (g), the
			 assets supporting the reserves for the following classes of business and any
			 classes of business that do not have a significant credit quality, reinvestment
			 or disintermediation risk may be held by the ceding insurer without segregation
			 of such assets:
(i) Health Insurance - long
			 term care insurance and long term disability insurance;
(ii) Traditional Non-Par Permanent;
(iii) Traditional Par Permanent;
(iv) Adjustable Premium Permanent;
(v) Indeterminate Premium Permanent;
			 and
(vi) Universal Life Fixed
			 Premium, (no dump-in premiums allowed).
(C) For assets that are not legally
			 segregated, the associated formula for determining the reserve interest rate
			 adjustment must reflect 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
When: I -- is the net investment income;
CG -- is capital gains less capital losses;
X -- is the current year cash and
-- invested assets plus invest-
-- ment income due and accrued
-- less borrowed money; and
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 90
			 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; or
(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.