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(a) A life or health insurer subject to 3 AAC 21.600 - 3 AAC 21.695 may not, for reinsurance ceded, reduce a liability or establish an asset in a statutory financial statement filed with the division if, by the terms of the reinsurance agreement, any of the following conditions exist in substance or effect:
(1) a renewal expense allowance provided or to be provided to the ceding insurer by the reinsurer in any accounting period is not sufficient to cover the 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; renewal expenses may include commissions, premium taxes, and direct expenses, including billing, valuation, claims, and maintenance expected by the company at the time the business is reinsured;
(2) the ceding insurer may 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, but 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, may not be considered a deprivation of surplus or assets;
(3) the ceding insurer is required to reimburse the reinsurer for negative experience under the reinsurance agreement, but neither offsetting experience refunds against current and prior years' losses nor payment by the ceding insurer of an amount equal to the current and prior years' losses upon voluntary termination of in-force reinsurance by the ceding insurer will be considered a reimbursement to the reinsurer for negative experience; voluntary termination does not include a situation where termination occurs because of an unreasonable provision that allows the reinsurer to reduce its risk under the agreement; an example of an unreasonable provision is the right of the reinsurer to increase to excessive levels reinsurance premiums or risk and expense charges, thereby forcing the ceding company to prematurely terminate the reinsurance agreement;
(4) the ceding insurer shall terminate or automatically recapture all or part of the reinsurance ceded, at times specified in the agreement;
(5) the reinsurance agreement involves the possible payment by the ceding insurer to the reinsurer of amounts other than income realized from the reinsured policies; for example, a ceding company may not 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 reinsurance agreement does not transfer all of the significant risk inherent in the business being reinsured; Appendix A of this section identifies the risks that are considered to be significant for a representative sampling of products or type of business; for products not specifically included, the risks determined to be significant must be consistent with Appendix A of this section;
(7) the credit quality, reinvestment, or disintermediation risk is significant for the business reinsured and the ceding company does not transfer the underlying assets to the reinsurer or legally segregate the underlying assets in a trust or escrow account or establish a mechanism satisfactory to the director that legally segregates by contract the underlying assets, unless reinsurance is for one of the following classes of insurance business:
(A) long term care or long term disability;
(B) traditional non-par permanent;
(C) traditional par permanent;
(D) adjustable premium permanent;
(E) indeterminate premium permanent; or
(F) universal life fixed premium with no dump-in premiums allowed;
(8) settlements are made less frequently than quarterly or payments due from the reinsurer are not made in cash within 90 days of a settlement date;
(9) the ceding insurer is required to make a representation or warranty not reasonably related to the insurance being reinsured;
(10) the ceding insurer is required to make a representation or warranty about the future performance of the insurance being reinsured; or
(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 insurance being reinsured and, in substance or effect, the expected potential liability to the ceding insurer remains basically unchanged.
(b) The formula for determining the reserve interest rate adjustment on the reserves held by the ceding insurer for a class of insurance business listed under (a)(7)(A) - (a)(7)(F) of this section must reflect the ceding insurer's investment earnings and incorporate all realized or unrealized gains or losses that are reflected in the ceding insurer's statutory financial statement.
(c) Notwithstanding (a) or (b) of this section, an insurer subject to 3 AAC 21.600 - 3 AAC 21.695 may, with the prior written approval of the director, take reserve credit or establish assets that the director determines are consistent with actuarial interpretations or the law in this state, including regulations adopted by the director.
TYPE OF INSURANCE BUSINESS RISK CATEGORY a b c d e f* Health insurance - other than long term care or long term disability + o + o o o Health insurance - long term care or long term disability + o + + + o Immediate annuities o + o + + o Single premium deferred annuities o o + + + + Flexible premium deferred annuities o o + + + + Guaranteed interest contracts o o o + + + Other annuity deposit business o o + + + + Single premium whole life o + + + + + Traditional non-par permanent o + + + + + Traditional non-par term o + + o o o Traditional par permanent o + + + + + Traditional par term o + + o o o Adjustable premium permanent o + + + + + Indeterminate premium permanent o + + + + + Universal life flexible premium o + + + + + Universal life fixed premium o + + + + + Universal life fixed premium with dump-in premiums allowed o + + + + +
KEY TO APPENDIX A
*a - morbidity risk
b - mortality risk
c - lapse risk that a policy will voluntarily terminate before the recoupment of a statutory surplus strain experienced at issue of the policy
d - credit quality risk that invested assets supporting the reinsured business will decrease in value excluding market value declines due to changes in interest rate
e - reinvestment risk that interest rates will fall and funds reinvested will earn less than expected
f - disintermediation risk that interest rates rise and policy loans and surrenders increase or maturing contracts do not renew at anticipated rates of renewal
"+" means significant risk, "o" means insignificant risk
History: Eff. 10/21/92, Register 124; am 7/9/93, Register 127; am 11/25/94, Register 132; am 4/20/97, Register 142; am 11/21/2004, Register 172
Authority: AS 21.06.090
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Last modified 7/05/2006