Ariz. Admin. Code § 20-6-B1601

Current through Register Vol. 30, No. 40, October 4, 2024

Section R20-6-B1601 - Applicability; Exemptions; Definitions; Severability; Prohibition Against Avoidance

A. Applicability. Part B of this Article shall apply to reinsurance treaties that cede liabilities pertaining to Covered Policies, as that term is defined in subsection (C) of this Section, issued by any life insurance insurer domiciled in this state. Parts A and B of this Article shall both apply to such reinsurance treaties provided, that in the event of a direct conflict between the provisions of Part B and Part A, the provisions of Part B shall apply but only to the extent of the conflict.

B. Exemptions. Part B of this Article does not apply to the following situations:

1. Reinsurance of:

a. Policies that satisfy the criteria for exemption set forth in A.R.S. § 20-510 and which are issued before the later of:

i. The effective date of this Part B; and

ii. The date on which the ceding insurer begins to apply the provisions of VM-20 to establish the ceded policies' statutory reserves, but in no event later than January 1, 2020;

b. Portions of policies that satisfy the criteria for exemption set forth in A.R.S. § 20-510 and which are issued before the later of:

i. The effective date of this Part B; and

ii. The date on which the ceding insurer begins to apply the provisions of VM-20 to establish the ceded policies' statutory reserves, but in no event later than January 1, 2020;

c. Any universal life policy that meets all of the following requirements:

i. Secondary guarantee period, if any, if five years or less;

ii. Specified premium for the secondary guarantee period is not less that the net level reserve premium for the secondary guarantee period based on the Director's Standard Ordinary (CSO) 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 and implied schedule of maximum gross premiums required in order to continue coverage in force for a period in excess of one year.

2. Reinsurance ceded to an assuming insurer that meets the applicable requirements of A.R.S. § 20-3602(F); or

3. Reinsurance ceded to an assuming insurer that meets the applicable requirements of A.R.S. §§ 20-3602(C), (D), or (E), and that, in addition:

a. 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 the Statement of Statutory Accounting Principles No. 1 ("SSAP 1"); and

b. Is not a Company Action Level Event, Regulatory Action Level Event, Authorized Control Level Event, or Mandatory Control Level Event as those terms are defined in A.R.S. § 20-488 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; or

4. Reinsurance ceded to an assuming insurer that meets the applicable requirements of A.R.S. §§ 20-3602(C), (D), or (E), and that, in addition:

a. Is not an affiliate, as that term is defined in A.R.S. § 20-481, 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 ten states including its 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 RBC as that term is defined in A.R.S. § 20-488 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, 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

5. Reinsurance ceded to an assuming insurer that meets the requirements of A.R.S. § 20-3604(D)(2); or

6. Reinsurance not otherwise exempt under subsections (B)(1) through (B)(5) of this Section if the Director, 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:

a. The risks are clearly outside of the intent and purpose of this Part B;

b. The risks are included within the scope of this regulation only as a technicality; and

c. The application of this Part B to those risks is not necessary to provide appropriate protection to policyholders. The Director shall publicly disclose any decision made pursuant to this subsection (B)(6) to exempt a reinsurance treaty from this Part B, as well as the general basis for the decision including a summary of the treaty.

C. Part B Definitions:

1. "Actuarial Method" means the methodology used to determine the Required Level of Primary Security, as described in Section R20-6-B1602.

2. "Covered Policies" means policies, other than Grandfathered Policies and policies that are not exempt under subsection (B) of this Section, of the following policy types:

a. Life insurance policies with guaranteed nonlevel gross premiums and/or guaranteed nonlevel benefits, except for flexible premium universal life insurance policies; or

b. 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.

3. "Grandfathered Policies" means Covered Policies that were:

a. Issued prior to January 1, 2015; and

b. Ceded, as of December 31, 2014, as part of a reinsurance treaty that would not have met one of the exemptions set forth in subsection (B) of this Section.

4. "Non-Covered Policies" means any policy that does not meet the definition of Covered Policies, including Grandfathered Policies.

5. "Other Security" means any security acceptable to the Director other than security meeting the definition of Primary Security.

6. "Primary Security" means the following forms of security:

a. Cash meeting the requirements of A.R.S. § 20-3603(B)(1);

b. Securities listed by the Securities Valuation Office meeting the requirements of A.R.S. § 20-3603(B)(2), 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 excluding 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 treaties:

i. Commercial loans in good standing of CM3 quality and higher:

ii. Policy loans; and

iii. 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.

7. "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.

8. "Valuation Manual" means the Valuation Manual adopted by the NAIC as described in A.R.S. § 20-510, with all amendments adopted by the NAIC that are effective for the financial statement date on which credit for reinsurance is claimed.

9. "VM-20" means "Requirements for Principle-Based Reserves for Life Products" including all relevant definitions from the Valuation Manual.

D. Severability. If any provision of this Part B is held invalid, the remainder shall not be affected.

E. Prohibition against avoidance. No insurer that has Covered Policies to which this Part B applies, as set forth in subsection (A) of this Section, 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 the action, transaction, or arrangement or series is to avoid the requirements of this Part B or to circumvent its purpose and intent.

Ariz. Admin. Code § R20-6-B1601

Renumbered and amended from R20-6-1610 by final rulemaking at 28 A.A.R. 493, effective 4/9/2022.