Ohio Admin. Code 3901-3-07
This rule shall apply to all domestic life insurers and to all other licensed life insurers which are not subject to a substantially similar regulation in their state of domicile. This rule shall also apply to all domestic property and casualty insurers with respect to their accident and health business and to all other licensed property and casualty insurers with respect to their accident and health business which are not subject to a substantially similar regulation in their state of domicile. This rule shall not apply to assumption reinsurance, yearly renewable term reinsurance or certain nonproportional reinsurance such as stop loss or catastrophe reinsurance.
The purpose of this rule is to facilitate the department's surveillance of the financial condition of insurers by establishing accounting requirements for insurers to reduce any liability or establish any asset in any financial statement filed with the department based on reinsurance ceded by the insurer. These requirements are to ensure that financial statements accurately reflect the financial condition of a ceding insurer, and that a ceding insurer has not reduced liabilities or established assets through the improper use of reinsurance reserve credits.
This rule is issued under the authority vested in the superintendent under sections 3901.041, 3901.62 and 3901.77 of the Revised Code.
Risk categories:
This is the risk that a policy will voluntarily terminate prior to the recoupment of a statutory surplus strain experienced at issuance of the policy.
This is the risk that invested assets supporting the reinsured business will decrease in value. The main hazards are that assets will default or that there will be a decrease in earning power. It excludes market value declines due to changes in interest rate.
This is the risk that interest rates will fall and funds reinvested (coupon payments or monies received upon asset maturity or call) will therefore earn less than expected. If asset durations are less than liability durations, the mismatch will increase.
This is the risk that interest rates rise and policy loans and surrenders increase or maturing contracts do not renew at anticipated rates of renewal. If asset durations are greater than the liability durations, the mismatch will increase. Policyholders will move their funds into new products offering higher rates. The company may have to sell assets at a loss to provide for these withdrawals.
+ - Significant 0 - Insignificant
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 0 + + + + +
Dump-in premiums allowed
*LTC = Long term care insurance
LTD = Long term disability insurance
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. The following is an acceptable formula:
Rate = 2 (I + CG)
-----------------
X + Y - I - CG
Where: I is the net investment income
CG is capital gains less 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
{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 thirty-four per cent 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 (thirty-four percent 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 $.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 (sixty-six percent 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.}
Insurers subject to this regulation shall reduce to zero by December 31, 1997 any reserve credits or assets established with respect to reinsurance agreements entered into prior to the effective date of this rule which, under the provisions of this regulation would not be entitled to recognition of the reserve credits or assets; provided, however, that the reinsurance agreements shall have been in compliance with laws or rules in existence immediately preceding the effective date of this rule.
If any section, term, or paragraph of this rule is adjudged invalid for any reason, such judgment shall not affect, impair or invalidate any other section, term or paragraph of this rule, but the remaining section, terms and paragraph shall be and continue in full force and effect.
Ohio Admin. Code 3901-3-07
Promulgated Under: 119.03
Statutory Authority: 3901.041
Rule Amplifies: 3901.62, 3901.77
Prior Effective Dates: 10/20/1991, 12/31/1995, 04/13/2006
Promulgated Under: 119.03
Statutory Authority: 3901.041
Rule Amplifies: 3901.62, 3901.77
Prior Effective Dates: 10/20/1991, 12/31/1995, 4/13/2006