Virginia Law

Chapter 280. Rules Establishing Standards for Life, Annuity, and Accident and Sickness Reinsurance Agreements

14VAC5-280-10. Definitions.

The following words and terms, when used in this chapter, shall have the following meaning unless the context clearly indicates otherwise:

"Commission" means State Corporation Commission.

"Insurer" means a cooperative nonprofit life benefit company, a mutual assessment life, accident and sickness insurer, a fraternal benefit society, a health services plan, a dental services plan, or an optometric services plan licensed under Title 38.2 of the Code of Virginia; and also any insurance company, whether known as a life and health insurer, a property and casualty insurer, or a reciprocal, which is licensed in Virginia and authorized to write any class of life insurance, annuities, or accident and sickness insurance.

"Life and health business" means (i) a class of insurance defined by §§ 38.2-102 through 38.2-109 of the Code of Virginia or (ii) any product or service sold or offered by a person organized and licensed in Virginia under Chapter 38 (§ 38.2-3800 et seq., cooperative nonprofit life benefit companies), Chapter 39 (§ 38.2-3900 et seq., mutual assessment life, accident and sickness insurers), Chapter 41 (§ 38.2-4100 et seq., fraternal benefit societies), Chapter 42 (§ 38.2-4200 et seq., health services plans), Chapter 43 (§ 38.2-4300 et seq., health maintenance organizations), or Chapter 45 (§ 38.2-4500 et seq., dental or optometric services plans) of Title 38.2 of the Code of Virginia.

Statutory Authority

§§ 12.1-13 and 38.2-223 of the Code of Virginia.12.1-13 and 38.2-223

Historical Notes

Derived from Regulation 41, Case No. INS910220, § 1, effective December 1, 1991; amended, Case No. INS940204, Virginia Register Volume 11, Issue 11, eff. April 1, 1995; Volume 30, Issue 1, eff. September 16, 2013.

14VAC5-280-20. Purpose.

The purpose of this regulation is: (i) to set forth standards for reinsurance agreements involving life and health business in order that the financial statements of the insurers utilizing such agreements properly reflect the financial condition of the ceding insurer; (ii) to recognize that insurers offering life insurance, annuities, or accident and sickness insurance routinely enter into reinsurance agreements that yield legitimate relief to the ceding insurer from strain to surplus; and (iii) to remind insurers that it is improper for a licensed insurer, in the capacity of ceding insurer, to enter into reinsurance agreements for the principal purpose of producing significant surplus aid for the ceding insurer, typically on a temporary basis, while not transferring all of the significant risks inherent in the business being reinsured. In substance or effect, the expected potential liability to the ceding insurer remains basically unchanged by the reinsurance transaction, notwithstanding certain risk elements in the reinsurance agreement, such as catastrophic mortality or extraordinary survival.

The commission believes that insurers should be precluded from claiming the surplus relief created by the terms of such agreements as referred to herein and described in 14VAC5-280-40 of this chapter, since the recognition of such surplus would be in conflict with:

1. The provisions of §§ 38.2-1300 and 38.2-1301 of the Code of Virginia requiring insurers to file financial statements and reports that disclose full and accurate knowledge of their affairs and condition;

2. The provisions of Article 3.1 (§ 38.2-1316.1 et seq.) of Chapter 13 of Title 38.2 of the Code of Virginia relating to reinsurance reserve credits and a ceding insurer's ability to reduce liabilities or establish assets for reinsurance ceded; and

3. The provisions of §§ 38.2-1038 and 38.2-1040 of the Code of Virginia concerning the manner in which the commission may respond to an insurer whose condition or continued operation may be hazardous to policyholders, creditors and the public in this Commonwealth.

Statutory Authority

§§ 12.1-13, 38.2-223 and 38.2-1316.7 of the Virginia Code.

Historical Notes

Derived from Regulation 41, Case No. INS910220, § 2, effective December 1, 1991; amended, Case No. INS940204, Virginia Register Volume 11, Issue 11, eff. April 1, 1995.

14VAC5-280-30. Scope.

This chapter shall apply to the life and health business of all domestic insurers and to the life and health business of all other licensed insurers who are not subject to substantially similar provisions in their states of domicile or entry.

This chapter shall not apply to assumption reinsurance, yearly renewable term reinsurance or certain nonproportional reinsurance such as stop loss or catastrophe reinsurance; however, nothing herein shall in any way limit or prevent the application of Article 3.1 (§ 38.2-1316.1 et seq.) of Chapter 13 or any other provision in Title 38.2 of the Code of Virginia to any type of insurer, business or reinsurance regardless of whether such application entails a standard or principle set forth in this chapter.

Statutory Authority

§§ 12.1-13 and 38.2-223 of the Code of Virginia.

Historical Notes

Derived from Regulation 41, Case No. INS910220, § 3, effective December 1, 1991; amended, Case No. INS940204, Virginia Register Volume 11, Issue 11, eff. April 1, 1995; Volume 30, Issue 1, eff. September 16, 2013.

14VAC5-280-40. Accounting and actuarial requirements.

A. No insurer subject to this chapter shall, for reinsurance ceded, reduce any liability or establish any asset in any financial statement filed with the commission if, by the terms of the reinsurance agreement, in substance or effect, any of the following conditions exist:

1. The reserve credit taken by the ceding insurer is not in compliance with the laws of this Commonwealth, particularly the provisions of Title 38.2 of the Code of Virginia and related rules, regulations and administrative pronouncements, including actuarial interpretations or standards adopted by the commission.

2. 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 under the agreement nor payment by the ceding insurer of an amount equal to the current and prior years' losses under the agreement upon voluntary termination of in-force reinsurance by that ceding insurer, shall be considered such 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. 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.

3. The ceding insurer can be deprived of surplus or assets (i) at the reinsurer's option; or (ii) automatically upon the occurrence of some event, such as the insolvency of the ceding insurer or the appointment of a receiver; or (iii) upon the unilateral termination or reduction of reinsurance coverage by the reinsurer or by the terms of the reinsurance contract. 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 to be such a deprivation of surplus or assets.

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 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 which are greater than the direct premiums collected by the ceding company.

6. 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 basis 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.

7. The terms or operating effect of the reinsurance agreement are such that it does not transfer all of the significant risk inherent in the business being reinsured. The table at Exhibit 1 identifies for a representative sampling of products or types of business, the risks which are considered to be significant. For products not specifically included, the risks determined to be significant shall be consistent with this table.

8. 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 subdivision 8 b of this subsection) either transfer the underlying assets to the reinsurer or legally segregate such assets in a trust or escrow account or otherwise establish a mechanism satisfactory to the commission which legally segregates, by contract or contract provision, the underlying assets.

b. Notwithstanding the requirements of subdivision 8 a of this subsection, the assets supporting the reserves for the following classes of business and any classes of business which do not have a significant credit quality, reinvestment or disintermediation risk may be held by the ceding company without segregation of such assets:

(1) Health Insurance - Long Term Care/Long Term Disability

(2) Traditional Nonparticipating Permanent

(3) Traditional Participating Permanent

(4) Adjustable Premium Permanent

(5) Indeterminate Premium Permanent

(6) Universal Life Fixed Premium (no dump-in premiums allowed)

The associated formula for determining the reserve interest rate adjustment must use a formula which reflects the ceding company's investment earnings and incorporates all realized and unrealized gains and losses reflected in the statutory statement. An acceptable formula appears at Exhibit 2.

9. Settlements are made less frequently than quarterly or payments due from the reinsurer are not made in cash within 90 days of the settlement date.

10. The ceding insurer is required to make representations or warranties not reasonably related to the business being reinsured.

11. The ceding insurer is required to make representations or warranties about future performance of the business being reinsured.

12. The reinsurance agreement is entered into for the principal purpose of producing significant surplus aid for the ceding insurer, typically on a temporary basis, while not transferring 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. Compliance with the conditions of subsection A of this section is not to be interpreted to diminish the requirement of Article 3.1 (§ 38.2-1316.1 et seq.) of Chapter 13 of Title 38.2 of the Code of Virginia that the reserve credits taken must be based upon the actual liability assumed by the reinsurer to reimburse the ceding company for benefits that the ceding company is obligated to pay under its direct policies and which gave rise to the requirement of statutory reserves.

C. The ceding insurer's actuary responsible for the valuation of the reinsured business shall consider this chapter and any applicable actuarial standards of practice when determining the proper reinsurance credit in financial statements filed with the commission. The actuary should maintain adequate documentation and be prepared upon request to describe the actuarial work that substantiates the reserves, reserve credits or any other reserve adjustments reported in the financial statement and to demonstrate to the satisfaction of the commission that such work conforms to the provisions of this chapter.

D. Notwithstanding subsection A of this section, an insurer subject to this regulation may, with the prior approval of the commission, take such reserve credit or establish such asset as the commission may deem consistent with the laws of this Commonwealth, particularly the provisions of Title 38.2 of the Code of Virginia and related rules, regulations and administrative pronouncements, including actuarial interpretations or standards adopted by the commission. All of the insurer's financial statements filed with the commission pursuant to § 38.2-1300 or 38.2-1301 of the Code of Virginia shall thereafter disclose the reduction in liability or the establishment of an asset.

E. 1. Each agreement entered into after March 31, 1995, which involves the reinsurance of business issued prior to the effective date of the agreement, along with any subsequent amendments thereto, shall be filed by the ceding insurer with the commission within 30 days from its date of execution. 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 be subject to the standards set forth in subsection C of this section.

2. Any increase in surplus net of federal income tax resulting from arrangements described in subdivision 1 of this subsection shall be identified separately on the insurer's statutory financial statement as a surplus item (e.g., as part of the aggregate write-ins for gains and losses in surplus in the Capital and Surplus Account reported at page 4 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" portions of the Annual Statement (e.g., Exhibit 1 and Summary of Operations for the life insurer's blue blank and the Underwriting Exhibit and Statement of Income for the property and casualty insurer's yellow blank) as earnings emerge from the business reinsured.

Example: On the last day 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) which is reported on the "Aggregate write-ins for gains and losses in surplus" line in the Capital and Surplus Account. $6.8 million (34% of $20 million) is reported as income (on the "Commissions and expense allowances on reinsurance ceded" line of the life insurer's Summary of Operations or as "Other underwriting expenses incurred" on the property and casualty insurer's Statement of Income).

At the end of year N+1 the business has earned $4 million. ABC has paid $0.5 million in profit and risk charges in arrears for the year and has received a $1 million experience refund. Company ABC's annual statement (blue blank) would report $1.65 million (66% of ($4 million - $1 million - $0.5 million) up to a maximum of $13.2 million) on the "Commissions and expense allowance on reinsurance ceded" line of the Summary of Operations, and -$1.65 million on the "Aggregate write-ins for gains and losses in surplus" line of the Capital and Surplus Account. In addition, the experience refund would be reported separately as a miscellaneous income item in a life insurer's Summary of Operations and the "Other Income" segment of the property and casualty insurer's Underwriting and Investment Exhibit, Statement of Income.

Statutory Authority

§§ 12.1-13 and 38.2-223 of the Code of Virginia.

Historical Notes

Derived from Regulation 41, Case No. INS910220, § 4, effective December 1, 1991; amended, Case No. INS940204, Virginia Register Volume 11, Issue 11, eff. April 1, 1995; Volume 30, Issue 1, eff. September 16, 2013.

14VAC5-280-50. Written agreements.

A. No reinsurance agreement or amendment to any agreement may be used to reduce any liability or to establish any asset in any financial statement filed with the commission, unless the agreement, amendment or a letter of intent has been duly executed by both parties no later than the "as of date" of the financial statement.

B. In the case of a letter of intent, a reinsurance agreement or an amendment to a reinsurance agreement must be executed within a reasonable period of time, not exceeding 90 days from the execution date of the letter of intent, in order for credit to be granted for the reinsurance ceded.

C. The reinsurance agreement shall at all times set forth the names of all parties to the agreement.

D. The reinsurance agreement shall contain provisions which provide that:

1. The agreement shall constitute the entire agreement between the parties with respect to the business being reinsured thereunder and that there are no understandings between the parties other than as expressed in the agreement; and

2. Any change or modification to the agreement shall be null and void unless made by amendment to the agreement and signed by both parties.

Statutory Authority

§§ 12.1-13, 38.2-223 and 38.2-1316.7 of the Virginia Code.

Historical Notes

Derived from Regulation 41, Case No. INS910220, § 5, effective December 1, 1991; amended, Case No. INS940204, Virginia Register Volume 11, Issue 11, eff. April 1, 1995.

14VAC5-280-60. Existing agreements.

Notwithstanding 14VAC5-280-40 A of this chapter, insurers subject to this regulation may continue to reduce liabilities or establish assets in financial statements filed with the commission for reinsurance ceded under types of reinsurance agreements described in 14VAC5-280-20 and 14VAC5-280-40, provided:

1. The agreements were executed and in force prior to April 1, 1995;

2. The reduction of the liability or the asset established for the reinsurance ceded is reduced to 0 by December 31, 1995;

3. The reduction of the liability or the establishment of the asset was not prohibited by the commission's Rules Establishing Standards for Life, Annuity, and Accident and Sickness Reinsurance Agreements, which were adopted, effective December 1, 1991, by order of the commission entered October 24, 1991, in Case No. 910220 and which were in effect immediately prior to April 1, 1995, the effective date of these revised rules, and is otherwise permissible under all other applicable provisions of the laws of this Commonwealth, particularly the provisions of Title 38.2 of the Code of Virginia and related rules, regulations and administrative pronouncements, including actuarial interpretations or standards adopted by the commission; and

4. The commission is notified, on or before June 30, 1995, of the existence of such reinsurance agreements and all corresponding reserve credits taken or assets established in the ceding insurer's 1994 Annual Statement.

Statutory Authority

§§ 12.1-13, 38.2-223 and 38.2-1316.7 of the Virginia Code.

Historical Notes

Derived from Regulation 41, Case No. INS910220, § 6, effective December 1, 1991; amended, Case No. INS940204, Virginia Register Volume 11, Issue 11, eff. April 1, 1995.

14VAC5-280-70. Severability.

If any provision in this chapter or its application to any person or circumstance is for any reason held to be invalid by a court, the remainder of this chapter and the application of the provisions to other persons or circumstances shall not be affected.

Statutory Authority

§§ 12.1-13 and 38.2-223 of the Code of Virginia.

Historical Notes

Derived from Regulation 41, Case No. INS910220, § 7, effective December 1, 1991; amended, Case No. INS940204, Virginia Register Volume 11, Issue 11, eff. April 1, 1995; Volume 30, Issue 1, eff. September 16, 2013.

14VAC5-280-70:1. EXHIBIT 1. SIGNIFICANT RISKS TABLE.

EXHIBIT 1. SIGNIFICANT RISKS TABLE

14VAC5-280-70:2. EXHIBIT 2. SAMPLE FORMULA FOR DETERMINING RESERVE INTEREST RATE ADJUSTMENT.

EXHIBIT 2. SAMPLE FORMULA FOR DETERMINING RESERVE INTEREST RATE ADJUSTMENT

(Terms and data are as defined in the NAIC Annual Statement blank)

Where: I is the net investment income

CG is realized and unrealized capital gains less realized and unrealized capital losses

X is the current year cash and invested assets plus investment income due and accrued less borrowed money

Y is the same as X but for the prior year