Section 1
Authority.
This regulation is adopted and promulgated by the Department
of Financial Regulation pursuant to
8 V.S.A. §
3634a(e), as well as
8 V.S.A. §
15(a).
Section 2 Purpose and Intent.
The purpose and intent of this regulation is to establish
uniform, national standards governing reserve financing arrangements pertaining
to life insurance policies containing guaranteed nonlevel gross premiums,
guaranteed nonlevel benefits and universal life insurance policies with
secondary guarantees; and to ensure that, with respect to each such financing
arrangement, funds consisting of Primary Security and Other Security, as
defined in Section
5 of this
Regulation, are held by or on behalf of ceding insurers in the forms and
amounts required herein. In general, reinsurance ceded for reserve financing
purposes has one or more of the following characteristics: some or all of the
assets used to secure the reinsurance treaty or to capitalize the reinsurer (1)
are issued by the ceding insurer or its affiliates; or (2) are not
unconditionally available to satisfy the general account obligations of the
ceding insurer; or (3) create a reimbursement, indemnification or other similar
obligation on the part of the ceding insurer or any if its affiliates (other
than a payment obligation under a derivative contract acquired in the normal
course and used to support and hedge liabilities pertaining to the actual risks
in the policies ceded pursuant to the reinsurance treaty).
Section 3 Applicability.
This regulation shall apply to reinsurance treaties that cede
liabilities pertaining to Covered Policies, as that term is defined in Section
5B, issued by any life insurance company domiciled in this state. This
regulation and DFR Insurance Regulation No. 97-3 (Credit for Reinsurance) shall
both apply to such reinsurance treaties; provided, that in the event of a
direct conflict between the provisions of this regulation and DFR Insurance
Regulation No. 97-3 (Credit for Reinsurance), the provisions of this regulation
shall apply, but only to the extent of the conflict.
Section 4 Exemptions from this Regulation.
This regulation does not apply to the situations described in
Subsections A through F.
A.
Reinsurance of:
(1) Policies that satisfy the
criteria for exemption set forth in DFR Insurance Regulation No. 99-3(6)(F) or
No. 99-3(6)(G) (Valuation of Life Insurance Policies) that are issued before
the effective date of this regulation.
(2) Portions of policies that satisfy the
criteria for exemption set forth in DFR Insurance Regulation No. 99-3(6)(E)
(Valuation of Life Insurance Policies) that are issued before the effective
date of this regulation.
(3) Any
universal life policy that meets all of the following requirements:
(a) Secondary guarantee period, if any, is
five (5) years or less;
(b)
Specified premium for the secondary guarantee period is not less than the net
level reserve premium for the secondary guarantee period based on the
Commissioners Standard Ordinary (CSO) valuation tables and valuation interest
rate applicable to the issue year of the policy; and
(c) The initial surrender charge is not less
than one hundred percent (100%) of the first year annualized specified premium
for the secondary guarantee period;
(4) Credit life insurance;
(5) Any variable life insurance policy that
provides for life insurance, the amount or duration of which varies according
to the investment experience of any separate account or accounts; or
(6) Any group life insurance certificate
unless the certificate provides for a stated or implied schedule of maximum
gross premiums required in order to continue coverage in force for a period in
excess of one year.
B.
Reinsurance ceded to an assuming insurer that meets the applicable requirements
of
8 V.S.A. §
3634a(b)(4)(A) (Credit for
Reinsurance); or
C. Reinsurance
ceded to an assuming insurer that meets the applicable requirements of
8 V.S.A. §
3634a(b)(1), §
3634a(b)(2), or § 3634a(b)(3)(A) (Credit for Reinsurance), and that, in
addition:
(1) Prepares statutory financial
statements in compliance with the NAIC Accounting Practices and Procedures
Manual, without any departures from NAIC statutory accounting practices and
procedures pertaining to the admissibility or valuation of assets or
liabilities that increase the assuming insurer's reported surplus and are
material enough that they need to be disclosed in the financial statement of
the assuming insurer pursuant to Statement of Statutory Accounting Principles
No. 1 ("SSAP 1"); and
(2) Is not in
a Company Action Level Event, Regulatory Action Level Event, Authorized Control
Level Event, or Mandatory Control Level Event as those terms are defined in
8 V.S.A. §§
8301 et seq. when its RBC is calculated in
accordance with the life risk-based capital report including overview and
instructions for companies, as the same may be amended by the NAIC from time to
time, without deviation; or
D. Reinsurance ceded to an assuming insurer
that meets the applicable requirements of
8 V.S.A. §
3634a(b)(1), §
3634a(b)(2) or § 3634a(b)(3)(A) (Credit for Reinsurance), and that, in
addition:
(1) Is not an affiliate, as that
term is defined in
8 V.S.A. §
3681(1) (Holding Companies
and Subsidiaries), of:
(a) The insurer ceding
the business to the assuming insurer; or
(b) Any insurer that directly or indirectly
ceded the business to that ceding insurer;
(2) Prepares statutory financial statements
in compliance with the NAIC Accounting Practices and Procedures
Manual;
(3) Is both:
(a) Licensed or accredited in at least 10
states (including its state of domicile), and
(b) Not licensed in any state as a captive,
special purpose vehicle, special purpose financial captive, special purpose
life reinsurance company, limited purpose subsidiary, or any other similar
licensing regime; and
(4) Is not, or would not be, below 500% of
the Authorized Control Level RBC as that term is defined in
8 V.S.A. §§
8301 et seq. (Risk Based Capital for
Insurers) when its Risk-Based Capital (RBC) is calculated in accordance with
the life risk- based capital report including overview and instructions for
companies, as the same may be amended by the NAIC from time to time, without
deviation, and without recognition of any departures from NAIC statutory
accounting practices and procedures pertaining to the admission or valuation of
assets or liabilities that increase the assuming insurer's reported surplus;
or
E. Reinsurance ceded
to an assuming insurer that meets the requirements of
8 V.S.A. §
3634a(e)(4) (Credit for
Reinsurance); or
F. Reinsurance not
otherwise exempt under Subsections A through E if the commissioner, after
consulting with the NAIC Financial Analysis Working Group (FAWG) or other group
of regulators designated by the NAIC, as applicable, determines under all the
facts and circumstances that all of the following apply:
(1) The risks are clearly outside of the
intent and purpose of this regulation (as described in Section
2
above);
(2) The risks are included
within the scope of this regulation only as a technicality; and
(3) The application of this regulation to
those risks is not necessary to provide appropriate protection to
policyholders. The commissioner shall publicly disclose any decision made
pursuant to this Section 4F to exempt a reinsurance treaty from this
regulation, as well as the general basis therefor (including a summary
description of the treaty).
Section 5 Definitions.
A. "Actuarial Method" means the methodology
used to determine the Required Level of Primary Security, as described in
Section
6.
B. "Covered Policies" means the following:
Subject to the exemptions described in Section
4,
Covered Policies are those policies, other than Grandfathered Policies, of the
following policy types:
(1) Life insurance
policies with guaranteed nonlevel gross premiums and/or guaranteed nonlevel
benefits, except for flexible premium universal life insurance policies;
or,
(2) Flexible premium universal
life insurance policies with provisions resulting in the ability of a
policyholder to keep a policy in force over a secondary guarantee
period.
C.
"Grandfathered Policies" means policies of the types described in Subsections
B1 and B2 above that were:
(1) Issued prior to
January 1, 2015; and
(2) Ceded, as
of December 31, 2014, as part of a reinsurance treaty that would not have met
one of the exemptions set forth in Section
4
had that section then been in effect.
D. "Non-Covered Policies" means any policy
that does not meet the definition of Covered Policies, including Grandfathered
Policies.
E. "Required Level of
Primary Security" means the dollar amount determined by applying the Actuarial
Method to the risks ceded with respect to Covered Policies, but not more than
the total reserve ceded.
F.
"Primary Security" means the following forms of security:
(1) Cash meeting the requirements of
8 V.S.A. §
3634a(c)(1) (Credit for
Reinsurance);
(2) Securities listed
by the Securities Valuation Office meeting the requirements of
8 V.S.A. §
3634a(c)(2) (Credit for
Reinsurance), but excluding any synthetic letter of credit, contingent note,
credit-linked note or other similar security that operates in a manner similar
to a letter of credit, and excluding any securities issued by the ceding
insurer or any of its affiliates; and
(3) For security held in connection with
funds-withheld and modified coinsurance reinsurance treaties:
(a) Commercial loans in good standing of CM3
quality and higher;
(b) Policy
Loans; and
(c) Derivatives acquired
in the normal course and used to support and hedge liabilities pertaining to
the actual risks in the policies ceded pursuant to the reinsurance
treaty.
G.
"Other Security" means any security acceptable to the commissioner other than
security meeting the definition of Primary Security.
H. "Valuation Manual" means the valuation
manual adopted by the NAIC as described in Section 11B(1) of the Standard
Valuation Law, with all amendments adopted by the NAIC that are effective for
the financial statement date on which credit for reinsurance is
claimed.
Section 6 The
Actuarial Method.
A. Actuarial Method
(1) The Actuarial Method to establish the
Required Level of Primary Security for each reinsurance treaty subject to this
regulation shall be VM-20, applied on a treaty-by-treaty basis, including all
relevant definitions, from the Valuation Manual as then in effect, applied as
follows: For Covered Policies described in Section 5B(1) above, the Actuarial
Method is the greater of the Deterministic Reserve or the Net Premium Reserve
(NPR) regardless of whether the criteria for exemption testing can be met.
However, if the Covered Policies do not meet the requirements of the Stochastic
Reserve exclusion test in the Valuation Manual, then the Actuarial Method is
the greatest of the Deterministic Reserve, the Stochastic Reserve, or the NPR.
In addition, if such Covered Policies are reinsured in a reinsurance treaty
that also contains Covered Policies described in Section 5B(2) above, the
ceding insurer may elect to instead use paragraph 2 below as the Actuarial
Method for the entire reinsurance agreement. Whether Paragraph 1 or 2 are used,
the Actuarial Method must comply with any requirements or restrictions that the
Valuation Manual imposes when aggregating these policy types for purposes of
principle-based reserve calculations.
(2) For Covered Policies described in Section
5B(2) above, the Actuarial Method is the greatest of the Deterministic Reserve,
the Stochastic Reserve, or the NPR regardless of whether the criteria for
exemption testing can be met.
(3)
Except as provided in Paragraph (4) below, the Actuarial Method is to be
applied on a gross basis to all risks with respect to the Covered Policies as
originally issued or assumed by the ceding insurer.
(4) If the reinsurance treaty cedes less than
one hundred percent (100%) of the risk with respect to the Covered Policies
then the Required Level of Primary Security may be reduced as follows:
(a) If a reinsurance treaty cedes only a
quota share of some or all of the risks pertaining to the Covered Policies, the
Required Level of Primary Security, as well as any adjustment under
Subparagraph (c) below, may be reduced to a pro rata portion in accordance with
the percentage of the risk ceded;
(b) If the reinsurance treaty in a non-exempt
arrangement cedes only the risks pertaining to a secondary guarantee, the
Required Level of Primary Security may be reduced by an amount determined by
applying the Actuarial Method on a gross basis to all risks, other than risks
related to the secondary guarantee, pertaining to the Covered Policies, except
that for Covered Policies for which the ceding insurer did not elect to apply
the provisions of VM-20 to establish statutory reserves, the Required Level of
Primary Security may be reduced by the statutory reserve retained by the ceding
insurer on those Covered Policies, where the retained reserve of those Covered
Policies should be reflective of any reduction pursuant to the cession of
mortality risk on a yearly renewable term basis in an exempt
arrangement;
(c) If a portion of
the Covered Policy risk is ceded to another reinsurer on a yearly renewable
term basis in an exempt arrangement, the Required Level of Primary Security may
be reduced by the amount resulting by applying the Actuarial Method including
the reinsurance section of VM-20 to the portion of the Covered Policy risks
ceded in the exempt arrangement, except that for Covered Policies issued prior
to Jan 1, 2017, this adjustment is not to exceed [cx/ (2 * number of
reinsurance premiums per year)] where cx is calculated using the same mortality
table used in calculating the Net Premium Reserve; and
(d) For any other treaty ceding a portion of
risk to a different reinsurer, including but not limited to stop loss, excess
of loss and other non- proportional reinsurance treaties, there will be no
reduction in the Required Level of Primary Security.
It is possible for any combination of Subparagraphs (a), (b),
(c), and (d) above to apply. Such adjustments to the Required Level of Primary
Security will be done in the sequence that accurately reflects the portion of
the risk ceded via the treaty. The ceding insurer should document the rationale
and steps taken to accomplish the adjustments to the Required Level of Primary
Security due to the cession of less than one hundred percent (100%) of the
risk.
The Adjustments for other reinsurance will be made only with
respect to reinsurance treaties entered into directly by the ceding insurer.
The ceding insurer will make no adjustment as a result of a retrocession treaty
entered into by the assuming insurers.
(5) In no event will the Required Level of
Primary Security resulting from application of the Actuarial Method exceed the
amount of statutory reserves ceded.
(6) If the ceding insurer cedes risks with
respect to Covered Policies, including any riders, in more than one reinsurance
treaty subject to this Regulation, in no event will the aggregate Required
Level of Primary Security for those reinsurance treaties be less than the
Required Level of Primary Security calculated using the Actuarial Method as if
all risks ceded in those treaties were ceded in a single treaty subject to this
Regulation;
(7) If a reinsurance
treaty subject to this Regulation cedes risk on both Covered and Non-Covered
Policies, credit for the ceded reserves shall be determined as follows:
(a) The Actuarial Method shall be used to
determine the Required Level of Primary Security for the Covered Policies, and
Section 7 shall be used to determine the reinsurance credit for the Covered
Policy reserves; and
(b) Credit for
the Non-Covered Policy reserves shall be granted only to the extent that
security, in addition to the security held to satisfy the requirements of
Subparagraph (a), is held by or on behalf of the ceding insurer in accordance
with
8 V.S.A. §
3634a(b) and § 3634a(c)
(Credit for Reinsurance). Any Primary Security used to meet the requirements of
this Subparagraph may not be used to satisfy the Required Level of Primary
Security for the Covered Policies.
B. Valuation used for Purposes of
Calculations
For the purposes of both calculating the Required Level of
Primary Security pursuant to the Actuarial Method and determining the amount of
Primary Security and Other Security, as applicable, held by or on behalf of the
ceding insurer, the following shall apply:
(1) For assets, including any such assets
held in trust, that would be admitted under the NAIC Accounting Practices and
Procedures Manual if they were held by the ceding insurer, the valuations are
to be determined according to statutory accounting procedures as if such assets
were held in the ceding insurer's general account and without taking into
consideration the effect of any prescribed or permitted practices;
and
(2) For all other assets, the
valuations are to be those that were assigned to the assets for the purpose of
determining the amount of reserve credit taken. In addition, the asset spread
tables and asset default cost tables required by VM-20 shall be included in the
Actuarial Method if adopted by the NAIC's Life Actuarial (A) Task Force no
later than the Dec. 31st on or immediately preceding the valuation date for
which the Required Level of Primary Security is being calculated. The tables of
asset spreads and asset default costs shall be incorporated into the Actuarial
Method in the manner specified in VM-20.
Section 7 Requirements Applicable to Covered
Policies to Obtain Credit for Reinsurance; Opportunity for Remediation.
A. Requirements
Subject to the exemptions described in Section
4
and the provisions of Section 7B, credit for reinsurance shall be allowed with
respect to ceded liabilities pertaining to Covered Policies pursuant to
8 V.S.A. §
3634a(b) or § 3634a(c)
(Credit for Reinsurance) if, and only if, in addition to all other requirements
imposed by law or regulation, the following requirements are met on a
treaty-by-treaty basis:
(1) The ceding
insurer's statutory policy reserves with respect to the Covered Policies are
established in full and in accordance with the applicable requirements of
8 V.S.A. §§
3791
et seq. and related regulations and actuarial guidelines, and credit claimed
for any reinsurance treaty subject to this regulation does not exceed the
proportionate share of those reserves ceded under the contract; and
(2) The ceding insurer determines the
Required Level of Primary Security with respect to each reinsurance treaty
subject to this regulation and provides support for its calculation as
determined to be acceptable to the commissioner; and
(3) Funds consisting of Primary Security, in
an amount at least equal to the Required Level of Primary Security, are held by
or on behalf of the ceding insurer, as security under the reinsurance treaty
within the meaning of
8 V.S.A. §
3634a(c) (Credit for
Reinsurance), on a funds withheld, trust, or modified coinsurance basis;
and
(4) Funds consisting of Other
Security, in an amount at least equal to any portion of the statutory reserves
as to which Primary Security is not held pursuant to Paragraph (3) above, are
held by or on behalf of the ceding insurer as security under the reinsurance
treaty within the meaning of
8 V.S.A. §
3634a(c) (Credit for
Reinsurance); and
(5) Any trust
used to satisfy the requirements of this Section 7 shall comply with all of the
conditions and qualifications of DFR Insurance Regulation No. 97-3(12) (Credit
for Reinsurance), except that:
(a) Funds
consisting of Primary Security or Other Security held in trust, shall for the
purposes identified in Section 6B, be valued according to the valuation rules
set forth in Section 6B, as applicable; and
(b) There are no affiliate investment
limitations with respect to any security held in such trust if such security is
not needed to satisfy the requirements of Section 7A(3); and
(c) The reinsurance treaty must prohibit
withdrawals or substitutions of trust assets that would leave the fair market
value of the Primary Security within the trust (when aggregated with Primary
Security outside the trust that is held by or on behalf of the ceding insurer
in the manner required by Section 7A(3)) below 102% of the level required by
Section 7A(3) at the time of the withdrawal or substitution; and
(d) The determination of reserve credit under
Subsection of DFR Insurance Regulation No. 97-3(12)(E) (Credit for Reinsurance)
shall be determined according to the valuation rules set forth in Section 6B,
as applicable; and
(6)
The reinsurance treaty has been approved by the commissioner.
B. Requirements at Inception Date
and on an On-going Basis; Remediation
(1) The
requirements of Section 7A must be satisfied as of the date that risks under
Covered Policies are ceded (if such date is on or after the effective date of
this regulation) and on an ongoing basis thereafter. Under no circumstances
shall a ceding insurer take or consent to any action or series of actions that
would result in a deficiency under Section 7A(3) or 7A(4) with respect to any
reinsurance treaty under which Covered Policies have been ceded, and in the
event that a ceding insurer becomes aware at any time that such a deficiency
exists, it shall use its best efforts to arrange for the deficiency to be
eliminated as expeditiously as possible.
(2) Prior to the due date of each Quarterly
or Annual Statement, each life insurance company that has ceded reinsurance
within the scope of Section
3
shall perform an analysis, on a treaty-by-treaty basis, to determine, as to
each reinsurance treaty under which Covered Policies have been ceded, whether
as of the end of the immediately preceding calendar quarter (the valuation
date) the requirements of Sections 7A(3) and 7A(4) were satisfied. The ceding
insurer shall establish a liability equal to the excess of the credit for
reinsurance taken over the amount of Primary Security actually held pursuant to
Section 7A(3), unless either:
(a) The
requirements of Section 7A(3) and 7A(4) were fully satisfied as of the
valuation date as to such reinsurance treaty; or
(b) Any deficiency has been eliminated before
the due date of the Quarterly or Annual Statement to which the valuation date
relates through the addition of Primary Security and/or Other Security, as the
case may be, in such amount and in such form as would have caused the
requirements of Section 7A(3) and 7A(4) to be fully satisfied as of the
valuation date.
(3)
Nothing in Section 7B(2) shall be construed to allow a ceding company to
maintain any deficiency under Section 7A(3) or 7A(4) for any period of time
longer than is reasonably necessary to eliminate it.
Section 8 Severability.
If any provision of this regulation is held invalid, the
remainder shall not be affected.
Section
9 Prohibition against Avoidance.
No insurer that has Covered Policies as to which this
regulation applies (as set forth in Section
3)
shall take any action or series of actions, or enter into any transaction or
arrangement or series of transactions or arrangements if the purpose of such
action, transaction or arrangement or series thereof is to avoid the
requirements of this regulation, or to circumvent its purpose and intent, as
set forth in Section
2.
Section 10 Effective Date.
This regulation shall become effective October 3, 2022 and
shall pertain to all Covered Policies in force as of and after that
date.
