Section 1103.30 Accounting
Requirements
a) No insurer subject to this Part shall, for reinsurance ceded,
reduce any liability or establish any asset in any financial statement filed
with the Division if, by the terms of the reinsurance agreement, in substance
or effect, any of the following conditions exist:
1) 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 bases 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;
2) 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, including but not limited to modified coinsurance reserve
adjustments, interest and adjustments on funds withheld, and tax
reimbursements, shall not be considered to be a deprivation of surplus;
3) 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 nor
payment by the ceding insurer of an amount equal to the current and prior
years' losses under the agreement upon voluntary terminations of in-force
reinsurance by ceding insurer shall be considered a reimbursement to the
reinsurer for negative experience. Voluntary termination does not include
situations where termination occurs because of unreasonable provisions that
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;
4) The ceding insurer shall, 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 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 that are
greater than the direct premiums collected by the ceding company;
6) The treaty does not transfer all of the significant risk
inherent in the business being reinsured. Exhibit A of this Part identifies,
for a representative sampling of products or type of business, the risks
considered to be significant. For products not specifically included, the
risks determined to be significant shall be consistent with Exhibit A;
7) Requirements concerning credit quality, reinvestment or
disintermediation risk.
A) 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 subsection (a)(7)(B)) either
transfer the underlying assets to the reinsurer or legally segregate such
assets in a trust account or escrow account or otherwise establish a mechanism that
segregates, by contract or contract provision, the underlying assets.
B) Notwithstanding the requirements of subsection (a)(7)(A), the
assets supporting the reserves for the following classes of business and any
classes of business that do not have a significant credit quality, reinvestment
or disintermediation risk may be held by the ceding company without segregation
of those assets; Health Insurance LTC/LTD, Traditional Non-Par Permanent,
Traditional Par Permanent, Adjustable Premium Permanent, Indeterminate Premium
Permanent, Universal Life Fixed Premium (no dump-in premiums allowed). The
associated formula for determining the reserve interest rate adjustment shall
use a formula that 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:
|
Rate
|
=
|
2(I + CG)
|
|
(X + Y - I - CG)
|
i) I is the net investment income
ii) CG is capital gains less capital losses
iii) X is the current year cash and invested assets plus
investment income due and accrued less borrowed money
iv) Y is the same as X but for the prior year;
8) Settlements are made less frequently than quarterly or
payments due from the reinsurer are not made in cash within 90 days after 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;
11) The amount of the total admitted assets of the ceding
insurance company less the amount of all funds withheld by any reinsurer as a
result of all reinsurance treaties is less than the total gross amount
available to policyholders either through the exercise of policy cash surrender
or loan provisions;
12) The reinsurance agreement is entered into for the principal
purpose of producing significant surplus aid for the ceding company typically
on a temporary basis, while not transferring all of the significant risks
inherent in the business reinsured, and the remaining liability to the ceding
insurer remains basically unchanged.
b) Requirements for reinsurance of in-force business.
1) Agreements entered into after January 5, 1994, along with any
subsequent amendments to those agreements, that involve the reinsurance of
business issued prior to the effective date of the agreements or amendments
must meet the requirements of Section 174 of the Illinois Insurance Code [215
ILCS 5/174]. 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 Part and any applicable actuarial standards of practice when
determining the proper credit in financial statements filed with the Division.
The actuary shall maintain documentation and be prepared to describe the
actuarial work performed for inclusion in the financial statements and to
demonstrate that such work conforms to this Part.
2) As earnings emerge from the business reinsured, any increase in
surplus net of federal income tax resulting from arrangements described in
subsection (b)(1) shall be identified separately on the insurer's statutory
financial statements as a surplus item in the "Change in Surplus as a
result of Reinsurance" line for companies filing on the Life, Accident and
Health blank and in the "Aggregate write-ins for gains (or losses) in
Surplus" line for companies filing on the Property and Casualty blank and
Health blank and recognition of the surplus increase as income shall be
reflected on a net of tax basis in the "Commissions and Expense allowances
on reinsurance ceded" line for companies filing on the Life, Accident and
Health blank and in the "Aggregate write-in for miscellaneous income"
for companies filing on the Property and Casualty blank.
For example,
on the last date 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) that is reported on the
"Change in Surplus as a result of Reinsurance" line of the Summary of
Operations. $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 the 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
allowances on reinsurance ceded" line of the Summary of Operations, and - $1.65
million on the "Change in Surplus as a result of Reinsurance" line of
the Summary of Operations. The experience refund would be reported separately
as an "Aggregate write-in for miscellaneous income" item in the
Summary of Operations.
(Source: Amended at 30 Ill.
Reg. 7766, effective April 6, 2006)
