Subject 120-2-61 LIFE AND HEALTH REINSURANCE AGREEMENTS
This rule is adopted and promulgated by the Commissioner of
Insurance pursuant to Sections
33-2-9 and
33-7-14 of the Georgia Insurance
Code.
| (1) |
The Georgia
Insurance Department recognizes that licensed insurers routinely enter into
reinsurance agreements that yield legitimate relief to the ceding insurer from
strain to surplus. |
| (2) |
However, it
is improper for a licensed insurer, in the capacity of ceding insurer, to enter
into reinsurance agreements 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 being
reinsured. In substance or effect, the expected potential liability to the
ceding insurer remains basically unchanged by the reinsurance transaction,
notwithstanding certain risk elements in the reinsurance agreement, such as
catastrophic mortality or extraordinary survival. The terms of such agreements
referred to herein and described in Section
120-2-61-.04(1) (excluding the
provisions found in
120-2-61-.04(1)(g)1. and
120-2-61-.04(1)(g)2.) violate:
| (a) |
O.C.G.A. Section
33-3-21 relating to financial
statements which do not properly reflect the financial condition of the ceding
insurer; |
| (b) |
O.C.G.A. Section
33-7-14 relating to reinsurance
reserve credits, thus, resulting in a ceding insurer improperly reducing
liabilities or establishing assets for reinsurance ceded; and |
| (c) |
O.C.G.A. Section
33-3-17, relating to creating a
situation that may be hazardous to policyholders and the people of this
State. |
|
This Regulation shall apply to all domestic life and accident
and health insurers and to all other licensed life and accident and health
insurers which are not subject to a substantially similar regulation in their
domiciliary state. This regulation shall also similarly apply to licensed
property and casualty insurers with respect to their accident and health
business. This regulation shall not apply to assumption reinsurance, yearly
renewable term reinsurance or certain nonproportional reinsurance such as stop
loss or catastrophe reinsurance.
| (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 Department if, by the terms of the
reinsurance agreement, in substance or effect, any of the following conditions
exist:
| (a) |
Renewal expense allowance 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.
The table following subparagraph (vi) 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. |
Risk categories:
| (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 - 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 - 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. |
| (vi) |
Disintermediation - 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 assets 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.
TABLE
|
+ - Significant
|
0 - Insignificant
|
|
RISK CATEGORY
|
| |
(i)
|
(ii)
|
(iii)
|
(iv)
|
(v)
|
(vi)
|
|
Health Insurance - other than LTC/LTD*
|
+
|
0
|
+
|
0
|
0
|
0
|
|
Health Insurance - 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) |
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
120-2-61-.04(1)(g)1.) 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
120-2-61-.04(1)(g), 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:
| (i) |
Health Insurance -
LTC/LTD; |
| (ii) |
Traditional Non-Par
Permanent; |
| (iii) |
Traditional Par
Permanent; |
| (iv) |
Adjustable Premium
Permanent; |
| (v) |
Indeterminate
Premium Permanent; |
| (vi) |
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 quarterly and annual statements of the
insurer. The following is an acceptable formula:
Rate = 2 (I + CG)
___________
X + Y - I - CG
Where: I is the 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 104, 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
|
|
| (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.
|
|
| (2) |
Notwithstanding
120-2-61-.04 (1), an insurer
subject to this regulation may, with the prior approval of the Commissioner,
take such reserve credit or establish such asset as the Commissioner may deem
consistent with the Georgia Insurance Code and Rules and Regulations, including
actuarial interpretations or standards adopted by the Department. |
| (3) |
Agreements entered into after the
effective date of this regulation 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 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 regulation and any applicable
actuarial standards of practice when determining the proper credit in financial
statements filed with this Department. 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
such work conforms to this regulation;
| (a) |
Any increase in surplus net of federal income tax resulting from arrangements
described in
120-2-61-.04(3) 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, page 4 of the Annual Statement) and recognition of
the surplus increase as income shall be reflected on a net of tax basis in the
"Reinsurance ceded" line, page 4 of the Annual Statement as earnings emerge
from the business reinsured. |
| (b) |
For example, on the last day of calendar year N, company XYZ pays a $20 million
initial commission and expense allowance to company ABC for reinsuring an
existing block of business. Assuming a 34% tax rate, the net increase in
surplus at inception is $13.2 million ($20 million - $6.8 million) which is
reported on the "Aggregate write-ins for gains and losses in surplus" line in
the Capital and Surplus account. $6.8 million (34% of $20 million) is reported
as income on the "Commissions and expense allowances on reinsurance ceded" line
of the Summary of Operations.
| 1. |
At the end of
year N+1 the business has earned $4 million. ABC has paid $.5 million in profit
and risk charges in arrears for the year and has received a $1 million
experience refund. Company ABC's annual statement would report $1.65 million
(66% of($ million - $1 million - $.5 million) up to a maximum of $13.2 million)
on the "Commissions and expense allowance on reinsurance ceded" line of the
Summary of Operations, and -$1.65 million on the "Aggregate write-ins for gains
and losses in surplus" line of the Capital and Surplus account. The experience
refund would be reported separately as a miscellaneous income item in the
Summary of Operations. |
|
|
| (1) |
No reinsurance agreement or amendment to
any agreement may 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 letter of intent has been duly executed by both parties no later
than the "as of date" of the financial statement. |
| (2) |
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. |
| (3) |
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. |
|
Insurers subject to this Regulation shall reduce to zero by
December 31, 1995, any reserve credits or assets established with respect to
reinsurance agreements entered into prior to the effective date of this
regulation which, under the provisions of this regulation 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
Regulation.
Any insurer which violates or fails to comply with any
provision of this regulation will be subject to fines and penalties applicable
to licensed insurers generally, including revocation of its license or right to
do business in this State.
If any section or portion of a section of this rule or the
applicability thereof to any person or circumstance is held invalid by a court,
the remainder of the rule or the applicability of such provision to other
persons or circumstances shall not be affected thereby.
