(a) No insurer
subject to this chapter shall, on account of reinsurance ceded, reduce any
liability or establish any asset in any financial statement filed with the
commissioner if the terms of the reinsurance agreement, in substance or effect,
provide for any of the following conditions:
(1) Renewal expense allowances provided, or
to be provided, to the ceding insurer by the reinsurer in an 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). The expenses
include commissions, premium taxes, and direct expenses, including, but not
limited to, billing, valuation, claims, and maintenance expended by the company
at the time the business is reinsured;
(2) The ceding insurer will 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;
provided, however, 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 a deprivation of
surplus or assets;
(3) The ceding
insurer is required to reimburse the reinsurer for negative experience under
the reinsurance agreement; provided, however, that offsetting experience
refunds against current and prior year losses under the agreement and payment
by the ceding insurer of an amount equal to the current and prior year losses
under the agreement when the ceding insurer voluntarily terminates in force
reinsurance 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, such as a provision giving the
reinsurer the right to increase reinsurance premiums or risk and expense
charges to excessive levels, forcing the ceding company to terminate
prematurely the reinsurance treaty;
(4) The ceding insurer must, at specific
points in time scheduled in the agreement, terminate or automatically recapture
all or part of the reinsurance ceded;
(5) The reinsurance agreement involves the
possible payment of reinsurance premiums or other fees or charges by the ceding
insurer to the reinsurer of amounts greater than from income realized from the
reinsured policies;
(6) The
agreement does not transfer all of the significant risk inherent in the
business being reinsured. The table entitled Exhibit A at the end of this
chapter and made a part of this chapter identifies the risks to be considered
significant for a representative sampling of products or types of business. For
products not specifically included, the risks determined to be significant
shall be consistent with Exhibit A;
(7) 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
this section) either transfer the underlying assets to the reinsurer or legally
segregate the assets in a trust or escrow account or otherwise establish a
mechanism satisfactory to the commissioner which legally segregates the
underlying assets.
Notwithstanding the requirements of this subsection, the
assets supporting the reserves for the following classes of business and any
other classes of business which do not have a significant credit quality
reinvestment or disintermediation risk may be held by the ceding company
without segregation:
(i) Health
insurance, including long term care and long term disability;
(ii) Traditional non-participating
permanent;
(iii) Traditional
participating permanent;
(iv)
Adjustable premium permanent;
(v)
Indeterminate premium permanent; or
(vi) Universal life fixed premium with no
dump-in premiums allowed.
The associated formula for determining the reserve interest
rate adjustment must reflect the ceding company's investment earnings and
incorporate all realized and unrealized gains and losses reflected in the
statutory statement. The following is an acceptable formula:
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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; and
Y is the prior year cash and invested assets plus investment
income due and accrues less borrowed money;
(8) Settlements are made less frequently than
quarterly or payments due from the reinsurer are not made in cash within ninety
days of the settlement date;
(9)
The ceding insurer is required to make representations or warranties not
reasonably related to the business being reinsured;
(10) The ceding insurer is required to make
representations or warranties about future performance of the business being
reinsured; or
(11) The reinsurance
agreement is entered into for the principal purpose of producing significant
surplus aid for the ceding insurer and does not transfer 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.
(b)
Notwithstanding subsection (a), an insurer subject to this chapter may, with
the prior approval of the commissioner, take any reserve credit or establish
any asset as the commissioner may deem consistent with Hawaii law and with any
actuarial interpretations or standards adopted by the commissioner.
(c) A ceding insurer shall file with the
commissioner any agreements entered into after the effective date of this
chapter which involve reinsurance of business issued before the effective date
of the agreement, along with any subsequent amendments, within thirty days from
the date of execution. Each filing shall include a detailed description of the
financial impact of the transaction. The actuary who signs the ceding insurer's
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 shall, upon request by the
commissioner, describe the actuarial work performed for inclusion in the
financial statements and shall demonstrate that the work conforms to the
requirements of this chapter.
Any increase in surplus net of federal income tax resulting
from arrangements described in this subsection 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 four 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
of the annual statement as earnings emerge from the business reinsured.
For example, on the last day of calendar year N, company XYZ
pays a $20,000,000 initial commission and expense allowance to company ABC for
reinsuring an existing block of business. Assuming a thirty-four per cent tax
rate, the net increase in surplus at inception is $13,200,000 ($20,000,000 -
$6,800,000) which is reported as income on the "commissions and expense
allowance on reinsurance ceded" line of the summary of operations.
At the end of year N+1 the business has earned $4,000,000. ABC
has paid $500,000 in profit and risk charges in arrears for the year and has
received a $1,000,000 experience refund. ABC's annual statement would report
$1,650,000 (sixty-six per cent of ($4,000,000 - $1,000,000 - $500,000) up to a
maximum of $13,200,000) on the "commissions and expense allowance on
reinsurance ceded" line of the summary of operations, and $1,650,000 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.