| (iii) 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 determined 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 before January 1, 2017, this adjustment may not 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
(iv) for any other reinsurance agreement ceding a portion
of risk to a different reinsurer, including stop loss, excess of loss,
and other nonproportional reinsurance agreements, the required level
of primary security may not be reduced.
(v) if any combination of clauses (i), (ii), (iii),
and (iv) of this subparagraph applies, the adjustments to the required
level of primary security must be made in the sequence that accurately
reflects the portion of the risk ceded under the reinsurance agreement.
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 100% of the risk.
(vi) the adjustments for other reinsurance may be made
with respect only to reinsurance agreements that the ceding insurer
directly entered into. The ceding insurer may make no adjustment as
a result of a retrocession treaty that the assuming insurers enter
into.
(E) The required level of primary security resulting
from application of the actuarial method may never exceed the amount
of statutory reserves ceded.
(F) If the ceding insurer cedes risks with respect
to covered policies, including any riders, in more than one reinsurance
agreement subject to this section, the aggregate required level of
primary security for those reinsurance agreements may not be less
than the required level of primary security calculated using the actuarial
method as if all risks ceded in those reinsurance agreements were
ceded in a single agreement subject to this section.
(G) If a reinsurance agreement subject to this section
cedes risks on both covered and non-covered policies, credit for the
ceded reserves will be determined as follows:
(i) the actuarial method must be used to determine
the required level of primary security for the covered policies, and
subsection (e) of this section must be used to determine the reinsurance
credit for the covered policy reserves; and
(ii) credit for the non-covered policy reserves will
be granted only to the extent that security, in addition to the security
held to satisfy the requirements of clause (i) of this subparagraph,
is held by or on behalf of the ceding insurer in accordance with Insurance
Code §§493.102, 493.104, and 493.108, as well as §493.1033,
concerning Credit Allowed for Certain Certified Reinsurers; §493.1034,
concerning, concerning Certain Associations May Be Certified Reinsurers; §493.1035,
concerning Qualified Jurisdictions, §493.1036, concerning Requirements
for Certified Reinsurer; §493.1037, concerning Certification
by National Association of Insurance Commissioners; and §493.1038,
concerning Suspension or Revocation of Accreditation or Certification;
Inactive Status. Any primary security used to meet the requirements
of this clause may not be used to satisfy the required level of primary
security for the covered policies.
(2) Valuation used for purposes of calculations. For
calculating the required level of primary security under 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
valuations apply:
(A) for assets, including assets held in trust, that
would be admitted under the NAIC Accounting Practices and Procedures
Manual if the ceding insurer held the assets, the valuations are to
be determined according to statutory accounting procedures as if the
assets were held in the ceding insurer's general account and without
taking into consideration the effect of any prescribed or permitted
practices; and
(B) for all other assets, the valuations are those
assigned to the assets for determining the amount of reserve credit
taken. In addition, the asset spread tables and asset default cost
tables required by VM-20 must be included in the actuarial method
if the tables are adopted by the NAIC's Life Actuarial (A) Task Force
not later than the December 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 must be incorporated
into the actuarial method in accordance with VM-20.
(e) Requirements applicable to covered policies to
obtain credit for reinsurance; opportunity for remediation.
(1) General requirements. Subject to subsection (c)
of this section and paragraph (2) of this subsection, credit for reinsurance
will be allowed with respect to ceded liabilities related to covered
policies under Insurance Code §§493.102, 493.1033 - 493.1038,
493.104, and 493.108, only if, in addition to all other requirements
imposed by law or rule, the following requirements are met on a reinsurance
agreement-by-reinsurance agreement basis:
(A) the ceding insurer's statutory policy reserves
with respect to the covered policies are established in full and in
accordance with Insurance Code Chapter 425, Subchapter B, and related
rules and actuarial guidelines. Credit claimed for any reinsurance
agreement subject to this section may not exceed the proportionate
share of those reserves ceded under the reinsurance agreement;
(B) the ceding insurer determines the required level
of primary security with respect to each reinsurance agreement subject
to this section and provides support for its calculation that the
Commissioner finds acceptable;
(C) 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
agreement within the meaning of Insurance Code §493.104 on a
funds withheld, trust, or modified coinsurance basis;
(D) 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 under subparagraph (C) of this paragraph,
are held by or on behalf of the ceding insurer as security under the
reinsurance agreement within the meaning of Insurance Code §493.104;
(E) any trust used to satisfy the requirements of this
subsection must comply with all of the conditions and qualifications
of §7.609 of this title, except that:
(i) funds consisting of primary security or other security
held in trust, must be valued for subsection (d)(2) of this section
according to the valuation rules in subsection (d)(2) of this section,
as applicable;
(ii) there are no affiliate investment limitations
for any security held in the trust if the security is not needed to
satisfy the requirements of paragraph (1)(C) of this subsection;
(iii) the reinsurance agreement must prohibit withdrawals
or substitutions of trust assets that would leave the fair market
value of the primary security in the trust when aggregated with primary
security outside the trust that is held by or on behalf of the ceding
insurer in the manner paragraph (1)(C) of this subsection requires
at less than 102% of the level that paragraph (1)(C) of this subsection
requires at the time of the withdrawal or substitution; and
(iv) the determination of reserve credit under §7.609
of this title will be determined according to the valuation rules
in subsection (d)(2) of this section, as applicable; and
(F) the Commissioner has approved the reinsurance agreement.
(2) Requirements at inception date and on an ongoing
basis; remediation.
(A) The requirements of paragraph (1) of this subsection
must be satisfied as of the date that risks under covered policies
are ceded if that date is on or after the effective date of this section
and on an ongoing basis after that date. A ceding insurer may never
take or consent to any action or series of actions that would result
in a deficiency under paragraph (1)(C) or (D) of this subsection with
respect to any reinsurance agreement under which covered policies
have been ceded. In the event a ceding insurer becomes aware at any
time that such a deficiency exists, it must use its best efforts to
arrange to eliminate the deficiency as expeditiously as possible.
(B) Before the due date of each quarterly or annual
statement, each life insurance company that has ceded reinsurance
within the scope of subsection (b) of this section must perform an
analysis, on a reinsurance agreement-by-reinsurance agreement basis,
to determine, as to each reinsurance agreement under which covered
policies have been ceded, whether as of the end of the immediately
preceding calendar quarter (the valuation date) the requirements of
paragraph (1)(C) and (D) of this subsection were satisfied. The ceding
insurer must establish a liability equal to the excess of the credit
for reinsurance taken over the amount of primary security actually
held under paragraph (1)(C) of this subsection, unless:
(i) the requirements of paragraph (1)(C) and (D) of
this subsection were fully satisfied as of the valuation date as to
the reinsurance agreement; or
(ii) 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 or other security,
or both, in the amount and in the form that would have caused the
requirements of paragraph (1)(C) and (D) of this subsection to be
fully satisfied as of the valuation date.
(C) Nothing in paragraph (2)(B) of this subsection
may be construed to allow a ceding company to maintain any deficiency
under paragraph (1)(C) and (D) of this subsection longer than is reasonably
necessary to eliminate the deficiency.
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