§ 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.