Chapter Ins 55

Chapter Ins 55

LIFE AND HEALTH REINSURANCE AGREEMENTS

Ins 55.01   Scope.

Ins 55.02   Accounting requirements.

Ins 55.03   Written agreements.

Ins 55.04   Effect of failure to comply.

Ins 55.05   Applicability.

Ins 55.01 Ins 55.01 Scope.

Ins 55.01(1) (1) This chapter applies only to:

Ins 55.01(1)(a) (a) Domestic life and accident and health insurers;

Ins 55.01(1)(b) (b) Licensed life and accident and health insurers which are not subject to a substantially similar rule or law in their state of domicile; and

Ins 55.01(1)(c) (c) Licensed property and casualty insurers which are not subject to a substantially similar rule or law in their state of domicile with respect to their accident and health business.

Ins 55.01(2) (2) This rule does not apply to assumption reinsurance, yearly renewable term reinsurance or nonproportional reinsurance such as stop loss or catastrophe reinsurance.

Ins 55.01 History History: Cr. Register, July, 1993, No. 451, eff. 8-1-93.

Ins 55.02 Ins 55.02 Accounting requirements.

Ins 55.02(1) (1) No insurer may, for reinsurance ceded, reduce any liability or establish any asset in any financial statement filed with the office of the commissioner of insurance if, by the terms of the reinsurance agreement, in substance or effect, any of the following conditions exist:

Ins 55.02(1)(a) (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.

Ins 55.02(1)(b) (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, other than 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.

Ins 55.02(1)(c) (c) The ceding insurer is required to reimburse the reinsurer for negative experience under the reinsurance agreement, other than 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. Voluntary termination does not include situations where termination occurs because of unreasonable provisions which allow the reinsurer to reduce its risk under the agreement, including, but not limited to, a provision which provides that it is the right of the reinsurer to increase reinsurance premiums or risk and expense charges to excessive levels which forces the ceding company to prematurely terminate the reinsurance agreement.

Ins 55.02(1)(d) (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.

Ins 55.02(1)(e) (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 or the ceding insurer is required to pay reinsurance premiums, or other fees or charges, to a reinsurer which are greater than the direct premiums collected by the ceding company.

Ins 55.02(1)(f) (f) The treaty does not transfer all of the significant risk inherent in the business being reinsured.

Ins 55.02(1)(g) (g)

Ins 55.02(1)(g)1. 1. Except as provided by subd. 2., the credit quality, reinvestment, or disintermediation risk is significant for the business reinsured and the ceding company does not 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.

Ins 55.02(1)(g)2. 2. The assets supporting the reserves for classes of business which do not have a significant credit quality, reinvestment or disintermediation risk, for the following classes of business, may be held by the ceding company without segregation of the assets:

Ins 55.02(1)(g)2.a. a. Health Insurance - LTC/LTD

Ins 55.02(1)(g)2.b. b. Traditional Non-Par Permanent

Ins 55.02(1)(g)2.c. c. Traditional Par Permanent

Ins 55.02(1)(g)2.d. d. Adjustable Premium Permanent

Ins 55.02(1)(g)2.e. e. Indeterminate Premium Permanent

Ins 55.02(1)(g)2.f. f. Universal Life Fixed Premium (no dump-in premiums allowed)

Ins 55.02(1)(g)3. 3. 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 statutory statement. The following is an acceptable formula:

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

Ins 55.02(1)(h) (h) Settlements are made less frequently than quarterly or payments due from the reinsurer are not made in cash within 90 days of the settlement date.

Ins 55.02(1)(i) (i) The ceding insurer is required to make representations or warranties not reasonably related to the business being reinsured.

Ins 55.02(1)(j) (j) The ceding insurer is required to make representations or warranties about future performance of the business being reinsured.

Ins 55.02(1)(k) (k) 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.

Ins 55.02(2) (2) For the purpose of this chapter, the following table identifies for a representative sampling of products or type of business, the risks which are considered to be significant. If a product is not specifically included in the table, the risks for the product shall be determined to be significant in a manner consistent with this table. Risk categories are:

Ins 55.02(2)(a) (a) Morbidity.

Ins 55.02(2)(b) (b) Mortality.

Ins 55.02(2)(c) (c) 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.

Ins 55.02(2)(d) (d) Credit Quality (C1)-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.

Ins 55.02(2)(e) (e) Reinvestment (C3)-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.

Ins 55.02(2)(f) (f) Disintermediation (C3)-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 asset 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

- See PDF for table

Ins 55.02(3) (3) An insurer may, with the prior written approval of the commissioner, take reserve credit or establish an asset for ceded reinsurance which does not comply with sub. (1) or (2).

Ins 55.02(4) (4) An insurer which enters into a reinsurance agreement which involves the reinsurance of business issued prior to the effective date of the agreements, and any subsequent amendments to such a reinsurance agreement, shall file the agreement with the commissioner within 30 days from its date of its execution. An insurer shall include with the filing data detailing the financial impact of the transaction.

Ins 55.02(5) (5) A 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 commissioner. 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 rule.

Ins 55.02(6) (6) An insurer shall, in the insurer’s statutory financial statement, show:

Ins 55.02(6)(a) (a) Any increase in surplus net of federal income tax resulting from arrangements described in sub. (4) separately as a surplus item (aggregate write-ins for gains and losses in surplus in the capital and surplus account); and

Ins 55.02(6)(b) (b) Recognition of the surplus increase as income 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.

Ins 55.02 Note Note: The following is an example of the application of s. Ins 55.02 (6): 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. 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 ($4 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.

Ins 55.02 History History: Cr. Register, July, 1993, No. 451, eff. 8-1-93.

Ins 55.03 Ins 55.03 Written agreements. An insurer may not reduce any liability or establish any asset in any financial statement filed with the office of the commissioner of insurance, based on a reinsurance agreement or amendment to any agreement unless:

Ins 55.03(1) (1) The agreement, amendment or a binding letter of intent has been duly executed by all parties no later than the date for which the financial statement is reporting the financial condition of the insurer;