3 Colo. Code Regs. § 702-3-3-4-5

Current through Register Vol. 47, No. 24, December 25, 2024

Section 3 CCR 702-3-3-4-5 - Accounting Requirements

All ceding insurers are responsible for establishing appropriate statutory gross reserves and reflecting appropriate credit for reinsurance, if any, for their reinsured business. A reinsurance agreement that does not comply with this regulation will be considered as a valid contract, unless terminated or voided by the parties to the agreement, where all terms and obligations are in effect, but no credit for reinsurance is permitted to be taken by the ceding insurer. The ceding insurer shall comply with the applicable provisions of law and this regulation before taking any credit for reinsurance in any financial statement for any reinsurance agreement.

A. No insurer subject to this regulation 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 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;

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, 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;

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 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 the 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 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 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 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. The following table identifies for a representative sampling of products or type 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 the following risk category table:

Risk categories:

a. Morbidity;

b. Mortality;

c. Lapse Risk;

d. Credit Quality Risk;

e. Reinvestment Risk; and

f. Disintermediation Risk.

RISK CATEGORY	a	b	c	d	e	f
Health Insurance - other than LTC /LTD	+	0	+	0	0	0
Health Insurance - LTC/LTD	+	0	+	+	+	0
Immediate Annuities	0	+	0	+	+	0
Single Premium Deferred Annuities	0	0	+	+	+	+
Flexible Premium Deferred Annuities	0	0	+	+	+	+
Guaranteed Interest Contracts	0	0	0	+	+	+
Other Annuity Deposit Business	0	0	+	+	+	+
Single Premium Whole Life	0	+	+	+	+	+
Traditional Non-Par Permanent	0	+	+	+	+	+
Traditional Non-Par Term	0	+	+	0	0	0
Traditional Par Permanent	0	+	+	+	+	+
Traditional Par Term	0	+	+	0	0	0
Adjustable Premium Permanent	0	+	+	+	+	+
Indeterminate Premium Permanent	0	+	+	+	+	+
Universal Life Flexible Premium	0	+	+	+	+	+
Universal Life Fixed Premium	0	+	+	+	+	+
Universal Life Fixed Premium (dump-in premiums allowed)	0	+	+	+	+	+
Key: + Significant
0 Insignificant

7. 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 Paragraph 7.b.) 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 commissioner which legally segregates, by contract or contract provision, the underlying assets.

b. Notwithstanding the requirements of Paragraph 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 such assets:

(1) Health Insurance - LTC/LTD;

(2) Traditional Non-Par Permanent;

(3) Traditional Par Permanent;

(4) Adjustable Premium Permanent;

(5) Indeterminate Premium Permanent; and

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

8. The formula for determining the reserve interest rate adjustment does not use a formula that reflects the ceding company's investment earnings and/or fails to incorporate 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" is the net investment income as identified in the Annual Statement. "CG" is capital gains less capital losses as identified in the Annual Statement. "X" is the current year cash and invested assets plus investment income due and accrued less borrowed money, all as identified in the Annual Statement. "Y" is the same as "X" but for the prior year;

9. Settlements are made less frequently than quarterly or payments due from the reinsurer are not made in cash within ninety (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; or

13. The reinsurance agreement contains provisions whereby the obligation of the assuming insurer to pay claims is conditioned upon some other event, such as the payment of reinsurance considerations. This does not preclude the reinsurer's ability to terminate the agreement for breach or default of contract terms.

B. The following situations require the establishment of additional liabilities or limitations to credits taken by the ceding insurer:

1. Credit for reinsurance shall be allowed only to the degree of the risk transferred;

2. The ceding insurer shall not take any credit for reinsurance in excess of the gross reserve it has established for the portion of the business or risks being reinsured;

3. If commissions or other similar allowances received or credited to the ceding insurer are required to be repaid to the reinsurer, other than from emerging profits of the portion of the business reinsured, based on contract provisions or on future experience of the reinsured business, a liability shall be established or the credit for reinsurance reduced by the maximum amount of such future tentative repayment; and

4. If the reinsurance agreement provides for financial guarantees by the ceding insurer to the reinsurer, a liability shall be established for the present value of such guarantee (using assumptions equal to the applicable statutory reserve basis on the business reinsured).

C. Notwithstanding Subsection 5.A., an insurer subject to this regulation may, with the prior approval of the commissioner, take such credit for reinsurance or establish such asset as the commissioner may deem consistent with § 10-3-702, C.R.S, Colorado Insurance Regulation 3-3-3, or other actuarial interpretations or standards adopted by the Division.

D. Retroactive reinsurance.

1. Agreements entered into after the effective date of this regulation which involve the reinsurance of business issued prior to the effective date of the agreements, along with any subsequent amendments thereto, shall be filed by the ceding company with the commissioner within thirty (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's actuarial opinion with respect to valuation of reserves shall consider this regulation and any applicable actuarial standards of practice when determining the proper credit in financial statements filed with the Division. The actuary should maintain adequate documentation and be prepared upon request to describe the actuarial work performed for inclusion in the financial statements and to demonstrate that such work conforms to this regulation.

2. Any increase in surplus net of federal income tax resulting from arrangements described in Subsection 5.D.1. shall be identified separately on the insurer's Annual Statement as a surplus item, and listed as an aggregate write-ins for gains and losses in surplus in the "Capital and Surplus" account of the Annual Statement's Balance Sheet. Further, the surplus increase shall be recognized as income and shall be reflected on a net of tax basis in the "Reinsurance ceded" line, on the "Statement of Income" page of the Annual Statement as earnings emerge from the business reinsured.

For 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) that 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 "Summary of Operations."

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 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 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. The experience refund would be reported separately as a miscellaneous income item in the "Summary of Operations."

3 CCR 702-3-3-4-5

37 CR 20, October 25,2014, effective 11/15/2014

37 CR 20, October 25,2014, effective 1/1/2015

37 CR 23, December 10, 2014, effective 1/1/2015

38 CR 17, September 10, 2015, effective 10/1/2015

39 CR 05, March 10, 2016, effective 4/1/2016

39 CR 14, July 25, 2016, effective 8/15/2016

39 CR 23, December 10, 2016, effective 1/1/2017

40 CR 03, February 10, 2017, effective 3/15/2017

40 CR 05, March 10, 2017, effective 4/1/2017

40 CR 13, July 10, 2017, effective 8/1/2017

40 CR 17, September 10, 2017, effective 11/1/2017

43 CR 06, March 25, 2020, effective 4/15/2020

44 CR 03, February 10, 2021, effective 3/15/2021

44 CR 23, December 10, 2021, effective 1/1/2022

46 CR 03, February 10, 2023, effective 3/2/2023