West Virginia Code of State Rules › Agency 114 - Insurance Commission › Title 114 - LEGISLATIVE RULE INSURANCE COMMISSIONER › Series 114-48 - Life And Health Reinsurance Agreements › Section 114-48-3 - Accounting Requirements

Current through Register Vol. XLI, No. 28, July 12, 2024
3.1. No
				insurer subject to this rule shall, for reinsurance ceded, reduce any liability or
				establish any asset in any financial statement filed with the commissioner if, by
				the terms of the reinsurance agreement, in substance or effect, any 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, 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. Table 114-48A 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.
1. The risk categories indicated
				in Table 114-48A are as follows.
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 changes in interest rate.
E. 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.
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 move their
				funds into new products offering higher rates. The company may have to sell assets
				at a loss to provide for these withdrawals.
g. 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 1 of
				subdivision g 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 commissioner which legally segregates, by
				contract or contract provision, the underlying assets.
1. Notwithstanding the requirements of subdivision
				g 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:
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)
2. 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
				(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.
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.