26-5-119. Life and disability reinsurance agreements; limitations.

(a) This section shall apply to all domestic life and domestic disability insurers and to all other licensed life and disability insurers which are not subject to a substantially similar law or regulation in their domiciliary state. This section shall also similarly apply to licensed property and casualty insurers with respect to their accident and health business. This section shall not apply to assumption reinsurance, yearly renewable term reinsurance or certain nonproportional reinsurance such as stop loss or catastrophe reinsurance.

(b)(i) No insurer subject to this section 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:

(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 a deprivation of surplus or assets;

(C) The ceding insurer is required to reimburse the reinsurer for negative experience under the reinsurance agreement. Offsetting experience refunds against current and prior years' losses under the agreement or 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 not be considered 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;

(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;

(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 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. The risk categories are:

(I) Morbidity;

(II) Mortality;

(III) Lapse, meaning 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, meaning 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;

(V) Reinvestment, meaning 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;

(VI) Disintermediation, meaning the risk that interest rates rise and policy loans and surrenders increase or maturing contracts do not renew at anticipated rates of renewal.

TYPE OF INSURANCE RISK CATEGORY

I II III IV V VI

Health Insurance-other than long + 0 + 0 0 0

term care insurance or long term

disability insurance

Health Insurance-long term care + 0 + + + 0

insurance or 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

dump-in premiums allowed 0 + + + + +

+ - Significant

0 - Insignificant

(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 subdivision (G)(II) of this paragraph either transfer the underlying assets to the reinsurer, legally segregate such assets in a trust or escrow account or otherwise establish a mechanism which legally segregates, by contract or contract provision, the underlying assets;

(II) Notwithstanding the requirements of subdivision (G)(I) of this paragraph, 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 the assets:

(1) Health insurance-long term care or long term disability;

(2) Traditional nonparticipating permanent;

(3) Traditional participating permanent;

(4) Adjustable premium permanent;

(5) Indeterminate premium permanent;

(6) Universal life fixed premium, with no dump-in premiums allowed.

(III) The associated formula for determining the reserve interest rate adjustment shall 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;

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

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

(M) The reinsurance agreement is entered into for the principal purpose of producing significant surplus aid for the ceding insurer 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.

(ii) Notwithstanding paragraph (i) of this subsection, an insurer subject to this section may, with the prior approval of the commissioner, take reserve credit or establish assets the commissioner deems consistent with this code, rules or regulations, including actuarial interpretations or standards adopted by the department;

(iii)(A) Agreements entered into after April 1, 1994 which involve the reinsurance of business issued prior to the effective date of the agreements, along with any subsequent amendments thereto, shall be filed by the ceding company with the commissioner within thirty (30) days from their 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 section and any applicable actuarial standards of practice when determining the proper credit in financial statements filed with the department. The actuary shall 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 section;

(B) Any increase in surplus net of federal income tax resulting from arrangements described in subparagraph (A) of this paragraph shall be identified separately on the insurer's statutory financial statement as a surplus item with aggregate write-ins for gains and losses in surplus in the capital and surplus account, and recognition of the surplus increase as income shall be reflected on a net of tax basis in the "reinsurance ceded" line, of the annual statement as earnings emerge from the business reinsured.

(c)(i) No reinsurance agreement or amendment to any agreement shall be used to reduce any liability or to establish any asset in any financial statement filed with the department, unless the agreement, amendment or a binding letter of intent has been duly executed by both parties no later than the "as of date" of the financial statement;

(ii) In the case of a letter of intent, a reinsurance agreement or an amendment to a reinsurance agreement must be executed within a reasonable period of time, not exceeding ninety (90) days from the execution date of the letter of intent, in order for credit to be granted for the reinsurance ceded;

(iii) The reinsurance agreement shall contain provisions which provide that:

(A) The agreement shall constitute the entire agreement between the parties with respect to the business being reinsured thereunder and that there are no understandings between the parties other than as expressed in the agreement; and

(B) Any change or modification to the agreement shall be null and void unless made by amendment to the agreement and signed by both parties.

(d) Insurers subject to this section shall reduce to zero (0) by December 31, 1995 any reserve credits or assets established with respect to reinsurance agreements entered into prior to April 1, 1994 which, under the provisions of this section would not be entitled to recognition of the reserve credits or assets, provided, however, that the reinsurance agreements shall have been in compliance with laws or regulations in existence immediately preceding the effective date of this section.

(e) The commissioner may promulgate reasonable rules and regulations and issue orders necessary to implement the provisions of this section.