S.D. Admin. R. 20:06:30:02

Current through Register Vol. 50, page 159, June 17, 2024

Section 20:06:30:02 - Conditions prohibiting reductions in liability or establishment of assets

An insurer subject to this chapter may not, for reinsurance ceded, reduce a liability or establish an 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 billing, valuation, claims, and maintenance, expected by the company at the time the business is reinsured;

(2) The ceding insurer may 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. However, 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, is not considered to be a deprivation of surplus or assets;

(3) The ceding insurer is required to reimburse the reinsurer for negative experience under the reinsurance agreement. However, 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 is considered a reimbursement to the reinsurer for negative experience. Voluntary termination does not include situations in which 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;

(4) The ceding insurer is required, at specific times scheduled in the agreement, to 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 realized from sources other than income from the reinsured policies. For example, a ceding company may not pay reinsurance premiums or other fees or charges to a reinsurer which are greater than the direct premiums collected by the ceding company;

(6) The agreement does not transfer all of the significant risk inherent in the business being reinsured. The table in § 20:06:30:05 identifies for a representative sampling of products or type of business the risks which are considered to be significant. For products not specifically included in the table, the risks determined to be significant must be consistent with the table;

(7) 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 § 20:06:30:03, either transfer the underlying assets to the reinsurer or legally segregate them in a trust or escrow account or otherwise establish a mechanism satisfactory to the director which legally segregates, by contract or contract provision, the underlying assets;

(8) Settlements are made less frequently than quarterly or payments due from the reinsurer are not made in cash within 90 days after the settlement date;

(9) The ceding insurer is required to make representations or warranties not reasonably related to the business being reinsured;

(10) The ceding insurer is required to make representations or warranties about future performance of the business being reinsured; or

(11) 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.

S.D. Admin. R. 20:06:30:02

22 SDR 52, effective 10/25/1995.

General Authority: SDCL 58-14-17.

Law Implemented: SDCL 58-14-17.