Virginia Administrative Code › Title 14 - INSURANCE › Agency 5 - STATE CORPORATION COMMISSION, BUREAU OF INSURANCE › Chapter 280 - RULES ESTABLISHING STANDARDS FOR LIFE, ANNUITY, AND ACCIDENT AND SICKNESS REINSURANCE AGREEMENTS › Section 14VAC5-280-40 - Accounting and actuarial requirements

Current through Register Vol. 40, No. 24, July 15, 2024
A. No insurer subject to this chapter shall,
				for reinsurance ceded, reduce any liability or establish any asset in any
				financial statement filed with the commission if, by the terms of the
				reinsurance agreement, in substance or effect, any of the following conditions
				exist:
1. The reserve credit taken by the
				ceding insurer is not in compliance with the laws of this Commonwealth,
				particularly the provisions of Title 38.2 of the Code of Virginia and related
				rules, regulations and administrative pronouncements, including actuarial
				interpretations or standards adopted by the commission.
2. 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 that 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.
3. The ceding
				insurer can be deprived of surplus or assets (i) at the reinsurer's option; or
				(ii) automatically upon the occurrence of some event, such as the insolvency of
				the ceding insurer or the appointment of a receiver; or (iii) upon the
				unilateral termination or reduction of reinsurance coverage by the reinsurer or
				by the terms of the reinsurance contract. 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.
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. 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.
7. The terms or
				operating effect of the reinsurance agreement are such that it does not
				transfer all of the significant risk inherent in the business being reinsured.
				The table at Exhibit 1 identifies for a representative sampling of products or
				types 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.
8.
a. 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 subdivision 8 b of this subsection) 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
				commission which legally segregates, by contract or contract provision, the
				underlying assets.
b.
				Notwithstanding the requirements of subdivision 8 a of this subsection, 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:
(1)
				Health Insurance - Long Term Care/Long Term Disability
(2) Traditional Nonparticipating
				Permanent
(3) Traditional
				Participating Permanent
(4)
				Adjustable Premium Permanent
(5)
				Indeterminate Premium Permanent
(6)
				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. An acceptable formula appears at
				  Exhibit 2.
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.