| (a) Definitions. The following words and terms have
the following meanings when used in this section unless the context
clearly indicates otherwise.
(1) Actuarial method--the methodology used to determine
the required level of primary security under subsection (d) of this
section.
(2) Covered policy--subject to the exemptions described
in subsection (c) of this section, a covered policy, other than a
grandfathered policy, that is one of the following policy types:
(A) a life insurance policy with guaranteed nonlevel
gross premiums or guaranteed nonlevel benefits, or both, but not a
flexible premium universal life insurance policy except as provided
by subparagraph (B) of this paragraph; or
(B) a flexible premium universal life insurance policy
with provisions allowing a policyholder to keep the policy in force
over a secondary guarantee period.
(3) Grandfathered policy--a policy described by paragraph
(2)(A) and (B) of this subsection that is:
(A) issued before January 1, 2015; and
(B) ceded, as of December 31, 2014, as part of a reinsurance
agreement that would not have been exempt under subsection (c) of
this section had that subsection been in effect for the reinsurance
agreement.
(4) Non-covered policy--a policy that does not meet
the definition of covered policy, including grandfathered policy.
(5) Other security--any security, other than primary
security, acceptable to the Commissioner.
(6) Primary security--
(A) cash as described by Insurance Code §493.104;
(B) securities listed by the Securities Valuation Office
as described by Insurance Code §493.104, excluding:
(i) any synthetic letters of credit, contingent notes,
credit-linked notes, or other similar securities that operate in a
manner similar to a letter of credit; and
(ii) any securities issued by the ceding insurer or
any of its affiliates; and
(C) for security held in connection with funds-withheld
and modified coinsurance reinsurance agreements:
(i) commercial loans in good standing with a risk-based
capital risk category of CM3 or higher category;
(ii) policy loans; and
(iii) derivatives acquired in the normal course and
used to support and hedge liabilities related to the actual risks
in the policies ceded under the reinsurance agreement.
(7) Required level of primary security--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.
(8) Valuation manual--the valuation manual defined
by Insurance Code §425.052 and described by §3.9901 of this
title (relating to Valuation Manual) in effect for the financial statement
date on which credit for reinsurance is claimed.
(9) VM-20--"Requirements for Principle-Based Reserves
for Life Products," including all relevant definitions, from the valuation
manual.
(b) Applicability. This section applies only to reinsurance
agreements that cede liabilities related to covered policies issued
by a life insurance company domiciled in this state. In the event
of a direct conflict between this section and another provision in
Chapter 7, Subchapter F, of this title, this section applies to the
extent of the conflict.
(c) Exemptions and public disclosure. This section
does not apply to:
(1) reinsurance of:
(A) policies that satisfy the criteria for exemption
in §3.4506 of this title (relating to Calculation of Minimum
Valuation Standard for Policies with Guaranteed Nonlevel Gross Premiums
or Guaranteed Nonlevel Benefits (Other than Universal Life Policies)),
subsections (f) or (g) of this section; and that are issued before
the later of:
(i) the effective date of this section; or
(ii) the date on which the ceding insurer begins to
apply VM-20 to establish the ceded policies' statutory reserves, but
not later than January 1, 2020;
(B) portions of policies that satisfy the criteria
for exemption in §3.4506(e) of this title and that are issued
before the later of:
(i) the effective date of this section; and
(ii) the date on which the ceding insurer begins to
apply VM-20 to establish the ceded policies' statutory reserves, but
not later than January 1, 2020;
(C) any universal life policy that meets all of the
following requirements:
(i) secondary guarantee period, if any, is five years
or less;
(ii) 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 valuation
tables and valuation interest rate applicable to the issue year of
the policy; and
(iii) the initial surrender charge is not less than
100% of the first-year annualized specified premium for the secondary
guarantee period;
(D) credit life insurance;
(E) 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
(F) any group life insurance certificate unless the
certificate provides for a stated or implied schedule of maximum gross
premiums required to continue coverage in force for more than one
year;
(2) reinsurance ceded to an assuming insurer that meets
the applicable requirements of Insurance Code Chapter 493, Subchapter
D;
(3) reinsurance ceded to an assuming insurer that meets
the applicable requirements of Insurance Code §493.102, concerning
Credit for Reinsurance Generally, and §493.103, concerning Accredited
Reinsurer, and that:
(A) prepares statutory financial statements that comply
with the NAIC Accounting Practices and Procedures Manual, without
any departures from NAIC statutory accounting practices and procedures
related to the admissibility or valuation of assets or liabilities
that:
(i) increase the assuming insurer's reported surplus;
and
(ii) are material enough that they must be disclosed
in the financial statement of the assuming insurer under Statement
of Statutory Accounting Principles No. 1; and
(B) is not in a company action level event, regulatory
action level event, authorized control level event, or mandatory control
level event as described in §7.402 of this title (relating to
Risk-Based Capital and Surplus Requirements for Insurers and HMOs)
when the assuming insurer's Risk-Based Capital is calculated in accordance
with the life risk-based capital report including overview and instructions
for companies, under §7.402 of this title;
(4) reinsurance ceded to an assuming insurer that meets
the applicable requirements of Insurance Code §493.102 and §493.103,
and that:
(A) is not an affiliate, as defined in Insurance Code §823.003,
concerning Classification as Affiliate or Subsidiary, of:
(i) the insurer ceding the business to the assuming
insurer; or
(ii) any insurer that directly or indirectly ceded
the business to that ceding insurer;
(B) prepares statutory financial statements in compliance
with the NAIC Accounting Practices and Procedures Manual;
(C) is both:
(i) licensed or accredited in at least 10 states, including
the assuming insurer's state of domicile; and
(ii) 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
(D) is not or would not be below 500% of the authorized
control level risk-based capital as that term is described in §7.402
of this title when its risk-based capital is calculated in accordance
with the life risk-based capital report, including overview and instructions
for companies under §7.402 of this title, and without recognition
of any departures from NAIC statutory accounting practices and procedures
related to the admission or valuation of assets or liabilities that
increase the assuming insurer's reported surplus;
(5) reinsurance ceded to an assuming insurer that:
(A) meets the conditions of Insurance Code §493.108;
(B) is certified under Insurance Code Chapter 493,
Subchapter C; or
(C) maintains at least $250 million in capital and
surplus when determined in accordance with the NAIC Accounting Practices
and Procedures Manual, including all amendments adopted by the NAIC,
excluding the impact of any permitted or prescribed practices; and
is
(i) licensed in at least 26 states; or
(ii) licensed in at least 10 states, and licensed or
accredited in a total of at least 35 states; or
(6) reinsurance not otherwise exempt under paragraphs
(1) - (5) of this subsection if the Commissioner, after consulting
with the NAIC Financial Analysis Working Group or other group of regulators
designated by the NAIC, as applicable, determines under all the facts
and circumstances that:
(A) the risks are clearly outside the intent and purpose
of this section;
(B) the risks are included within the scope of this
section only as a technicality; and
(C) the application of this section to those risks
is not necessary to provide appropriate protection to policyholders.
(7) The Commissioner will publicly disclose any decision
made under this subsection to exempt a reinsurance agreement from
this section. The disclosure will include the general basis for the
decision and a summary description of the reinsurance agreement.
(d) The actuarial method.
(1) Requirements generally. The actuarial method to
establish the required level of primary security for each reinsurance
agreement subject to this section is VM-20, applied on a reinsurance
agreement-by-reinsurance agreement basis, including all relevant definitions,
from the valuation manual as then in effect, applied as follows:
(A) For covered policies described in subsection (a)(2)(A)
of this section, the actuarial method is the greater of the deterministic
reserve or the net premium reserve regardless of whether the criteria
for exemption testing can be met, except:
(i) 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 net premium reserve; and
(ii) if the covered policies are reinsured in a reinsurance
agreement that contains covered policies described in subsection (a)(2)(B)
of this section, in addition to those described in subsection (a)(2)(A)
of this section, the ceding insurer may elect to use the method set
out in subparagraph (B) of this paragraph as the actuarial method
for the entire reinsurance agreement. Whether the method set out in
subparagraph (A) or (B) of this paragraph is 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.
(B) For covered policies described in subsection (a)(2)(B)
of this section, the actuarial method is the greatest of the deterministic
reserve, the stochastic reserve, or the net premium reserve, regardless
of whether the criteria for exemption testing can be met.
(C) Except as provided in subparagraph (D) of this
paragraph, the actuarial method must be applied on a gross basis to
all risks related to the covered policies as originally issued or
assumed by the ceding insurer.
(D) If the reinsurance agreement cedes less than 100%
of the risk related to the covered policies, the required level of
primary security may be reduced as follows:
(i) if a reinsurance agreement cedes only a quota share
of some or all of the risks related to the covered policies, the required
level of primary security and any adjustment under clause (iii) of
this subparagraph may be reduced to a pro rata portion in accordance
with the percentage of the risk ceded;
(ii) if the reinsurance agreement in a nonexempt arrangement
cedes only the risks related 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
reflect any reduction under the cession of mortality risk on a yearly
renewable term basis in an exempt arrangement;
Cont'd... |
