Washington Administrative Code › Title 284 - Insurance Commissioner, Office of the › Chapter 284-13 - Assets-Liabilities-Investments and reinsurance › REINSURANCE INTERMEDIARIES › Section 284-13-855 - Accounting requirements

Current through Register Vol. 24-14, July 15, 2024
(1) No
				insurer subject to this regulation 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, 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). Such
				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 the 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 issue 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 moneys 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
i
ii
iii
iv
v
vi
Disability - other than LTC/LTD*
+
0
+
0
0
0
Disability - 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 subsection (1)(g)(ii) of this section) 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.
(ii)
				Notwithstanding (g)(i) 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:
-
Disability Insurance - LTC/LTD
-
Traditional Non-Par Permanent
-
Traditional Par Permanent
-
Adjustable Premium Permanent
-
Indeterminate Premium Permanent
-
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 net investment income
(Exhibit 2, Line 16, Column 7)
CG
is capital gains less capital losses
(Exhibit 4, Line 10, Column 6)
X
is the current year cash and invested assets (Page
								2, Line 10A, Column 1) plus investment income due and accrued (Page 2, Line 16,
								Column 1) less borrowed money (Page 3, Line 22, Column 1)
Y
is the same as X but for the prior year
(iii) Line references are for the
				commissioner's 1992 annual statement form.
(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.