§ 27-4.2-3. Accounting requirements. (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 department if, by the terms of the reinsurance agreement, in substance or effect, any of the following conditions exist:

(1) 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;

(2) 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 a deprivation of surplus or assets;

(3) 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 a reimbursement to the reinsurer for negative experience. Voluntary termination does not include situations where termination occurs because of unreasonable provisions that allow the reinsurer to reduce its risk under the agreement. An example of this 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;

(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 that are greater than the direct premiums collected by the ceding company;

(6) The treaty does not transfer all of the significant risk inherent in the business being reinsured. The risk categories considered shall be morbidity, mortality, lapse, credit quality, reinvestment, and disintermediation. These categories are further defined in the regulation promulgated pursuant to this chapter;

(7)(i) The credit quality, reinvestment, or disintermediation risk is significant for business reinsured and the ceding company does not (other than for the classes of business excepted in subdivision (a)(7)(ii) of this section) either transfer the underlying assets to the reinsurer or legally segregate these assets in a trust or escrow account or establish a mechanism satisfactory to the commissioner which legally segregates, by contract or contract provision, the underlying assets;

(ii) Notwithstanding the requirements of subdivision (a)(7)(i) of this section, 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 these assets:

(A) Health insurance - long term care insurance/long term disability insurance;

(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);

(iii) The associated formula for determining the reserve interest rate adjustment must use a formula that reflects the ceding company's investment earnings and incorporates all realized and unrealized gains and losses reflected in the statutory statement. An acceptable formula shall be set forth in regulations promulgated pursuant to this chapter;

(8) 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;

(9) The ceding insurer is required to make representations or warranties not reasonably related to the business being reinsured;

(10) The ceding insurer is required to make representations or warranties about future performance of the business being reinsured; and

(11) 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.

(b) Notwithstanding subsection (a), an insurer subject to this chapter may, with the prior approval of the commissioner, take a reserve credit or establish any asset the commissioner may deem consistent with chapter 1.1 of this title and regulations promulgated under that chapter, including actuarial interpretations or standards adopted by the insurance division of the department of business regulation.

(c)(1) Agreements entered into after the effective date of this chapter which involve the reinsurance of business issued prior to the effective date of the agreements, along with any subsequent amendments to it, shall be filed by the ceding company with the commissioner within thirty (30) days from its date of execution. Each filing shall include data detailing the financial impact of the transaction. The ceding insurer's actuary who signs the financial statement actuarial opinion with respect to valuation of reserves shall consider this chapter and any applicable actuarial standards of practice when determining the proper credit in financial statements filed with the insurance division of the department of business regulation. The actuary should maintain adequate documentation and be prepared upon request to describe the actuarial work performed for inclusion in the financial statements and to demonstrate that the work conforms to this regulation.

(2) Any increase in surplus net of federal income tax resulting from arrangements described in subsection (c)(1) shall be identified separately on the insurer's statutory financial statement as a surplus item (aggregate write-ins for gains and losses in surplus in the capital and surplus account, of the annual statement) and recognition of the surplus increase as income shall be reflected on a net of tax basis in the annual statement as earnings emerge from the business reinsured.

History of Section. (P.L. 1995, ch. 111, § 2.)