3 Alaska Admin. Code § 21.615

Current through September 25, 2024

Section 3 AAC 21.615 - Term and universal life insurance reserve financing

(a) The purpose and intent of this section is to (i) establish uniform, national standards governing reserve financing arrangements pertaining to (A) life insurance policies containing (i) guaranteed nonlevel gross premiums; and (ii) guaranteed nonlevel benefit and (B) universal life insurance policies with secondary guarantees; and (2) ensure that, with respect to each such financing arrangement, funds consisting of primary security and other security are held by or on behalf of ceding insurers in the forms and amounts required under this section (b) In general, reinsurance ceded for reserve financing purposes has one or more of the following characteristic with respect to some or all of the assets used to secure the reinsurance treaty or to capitalize the reinsurer:

(1) the assests are issued by the ceding insurer or its affiliates;

(2) the assests are not unconditionally available to satisfy the general account obligations of the ceding insurer or

(3) the assests create a reimbursement, indemnification or other similar obligation on the part of the ceding insurer or any of its affiliates, other than a payment obligation under a derivative contract acquired in the normal course and used to support and hedge liabilities pertaining to the actual risks in the policies ceded under to-the reinsurance treaty.

(c) This section applies to reinsurance treaties that cede liabilities pertaining to covered policies, as defined in 3 AAC 21.695(14), issued by a life insurance company domiciled in this state.

(d) The actuarial method to establish the required level of primary security for each reinsurance treaty subject to this section is VM-20, applied on a treaty-by-treaty basis, including all relevant definitions, from the valuation manual as then in effect, applied as follows:

(1) for covered policies described in 3 AAC 21.695(14)(A), the actuarial method is the greater of the Deterministic Reserve or the Net P remium Reserve (NPR) regardless of whether the criteria for exemption testing can be met However, if the covered policies do not meet the requirements of the Stochastic Reserve exclusion test in the valuation manual, then the actuarial method is the greatest of the Deterministic Reserve, the Stochastic Reserve or the NPR. In addition, if the covered policies are reinsured in a reinsurance treaty that also contains covered policies described in 3 AAC 21.695(14)(B). the ceding insurer may elect to instead use (2) of this subsection as the actuarial method for the entire reinsurance agreement; Wheather this paragraph (4) or (2) of this subsection is used the actuarial method must comply with the requirements or restrictions that the valuation manual imposes when aggregating these policy types for purposes of principle based reserve calculations;

(2) for covered policies described in 3 AAC 21.695(14)(B), the actuarial method is the greatest of the Deterministic Reserve, the Stochastic Reserve, or the NPR regardless of whether the criteria for exemption testing can be met;

(3) except as provided in (4) of this subsection, the actuarial method is to be applied on a gross basis to all risks with respect to the covered policies as originally issued or assumed by the ceding insurer;

(4) if the reinsurance treaty cedes less than 100 percent of the risk with respect to the covered policies the required level of primary security may be reduced as follows:

(A) if a reinsurance treaty cedes only a quota share of some or all of the risks pertaining to the covered policies, the required level of primary security, as well as an adjustment under (C) of this paragraph, may be reduced to a pro rata portion in accordance with the percentage of the risk ceded;

(B) if the reinsurance treaty in a non-exempt arrangement cedes only the risks pertaining to a secondary guarantee, the required level of primary security may be reduced by an amount determined by applying the actuarial method on a gross basis to all risks, other than risks related to the secondary guarantee, pertaining to the covered policies, except that for covered policies for which the ceding insurer did not elect to apply the provisions of VM-20 to establish statutory reserves, the required level of primary security may be reduced by the statutory reserve retained by the ceding insurer on those covered policies, where the retained reserve of those covered policies must be reflective of a reduction according to the cession of mortality risk on a yearly renewable term basis in an exempt arrangement;

(C) if a portion of the covered policy risk is ceded to another reinsurer on a yearly renewable term basis in an exempt arrangement, the required level of primary security may be reduced by the amount resulting by applying the actuarial method including the reinsurance section of VM-20 to the portion of the covered policy risks ceded in the exempt arrangement, except that for covered policies issued before Jan 1, 2017, this adjustment is not to exceed [ex/ (2 * number of reinsurance premiums per year)] where ex is calculated using the same mortality table used in calculating the NPR; and

(D) for other treaties ceding a portion of risk to a different reinsurer, including stop loss, excess of loss, and other non-proportional reinsurance treaties, there will be no reduction in the required level of primary security; (5) for a reduction of the required level of primary security under (4) of this subsection, a combination of (4)(A)-(D) of this subsection may apply The adjustments to the required level of primary security will be done in the sequence that accurately reflects the portion of the risk ceded by means of the treaty The ceding insurer must document the rationale and steps taken to accomplish the adjustments to the required level of primary security due to the cession of less than 100 percent of the risk The adjustments for other reinsurance will be made only with respect to reinsurance treaties entered into directly by the ceding insurer The ceding insurer will make no adjustment as a result of a retrocession treaty entered into by the assuming insurer

(6) the required level of primary security resulting from application of the actuarial method may not exceed the amount of statutory reserves ceded;

(7) the ceding insurer cedes risks with respect to covered policies, including riders, in more than one reinsurance treaty subject to this section the aggregate required level of primary security for those reinsurance treaties may not be less than the required level of primary security calculated using the actuarial method as if all risks ceded in those treaties were ceded in a single treaty subject to this section;

(8) a reinsurance treaty subject to this section cedes risk on both covered and non-covered policies, credit for the ceded reserves shall be determined as follows:

(A) the actuarial method shall be used to determine the required level of primary security for the covered policies, and (e) - (h) of this section shall be used to determine the reinsurance credit for the covered policy reserves; and

(B) credit for the non-covered policy reserves shall be granted only to the extent that security, in addition to the security held to satisfy the requirements of (A) of this paragraph, is held by or on behalf of the ceding insurer in accordance AS 21.12.020(a) -(f); The primary security used to meet the requirements of this subparagraph may not be used to satisfy the required level of primary security for the covered policies.

(e) For the purposes of both calculating the required level of primary security according to the actuarial method and determining the amount of primary security and other security, as applicable, held by or on behalf of the ceding insurer, the following shall apply:

(1) for assets, including assets held in trust, that would be admitted under the Accounting Practices and Procedures Manual of the National Association of Insurance Commissioner if they were held by the ceding insurer, the valuations are to be determined according to statutory accounting procedures as if the assets were held in the ceding insurer's general account and without taking into consideration the effect of the prescribed or permitted practices; and

(2) for all other assets, the valuations are to be those that were assigned to the assets for the purpose of determining the amount of reserve credit taken In addition, the asset spread tables and asset default cost tables required by VM-20 shall be included in the actuarial method if adopted by the National Association of Insurance Commisiioner (A) Task Force not later than December 31 on or immediately preceding the valuation date for which the required level of primary security is being calculated The tables of asset spreads and asset default costs shall be incorporated into the actuarial method in the manner specified in VM-20.

(f) Subject to the exemptions described in (j) of this section, and the provisions of (g) - (i) of this section, credit for reinsurance shall be allowed with respect to ceded liabilities pertaining to covered policies under AS 21.12.020(a) - (f) if, in addition to all other requirements imposed by law or regulation, the following requirements are met on a treaty-by-treaty basis:

(1) the ceding insurer's statutory policy reserves with respect to the covered policies are established in full and in accordance with the applicable requirements of AS 21.18.110-21.18.112 and related regulations and actuarial guidelines, and credit claimed for a reinsurance treaty subject to this section does not exceed the proportionate share of those reserves ceded under the contract;

(2) the ceding insurer determines the required level of primary security with respect to each reinsurance treaty subject to this section and provides support for its calculation as determined to be acceptable to the director;

(3) funds consisting of primary security, in an amount at least equal to the required level of primary security, are held by or on behalf of the ceding insurer, as security under the reinsurance treaty within the meaning of AS 21.12.020(c), on a funds withheld, trust, or modified coinsurance basis;

(4) funds consisting of other security, in an amount at least equal to the portion of the statutory reserves as to which primary security is not held under (3) of this subsection, are held by or on behalf of the ceding insurer as security under the reinsurance treaty within the meaning of AS 21.12.020(c);

(5) a trust used to satisfy the requirements of this subsection and (g) of this section shall comply with all of the conditions and qualifications of 3 AAC 21.665, except that

(A) funds consisting of primary security or other security held in trust, shall for the purposes identified in (e) of this section, be valued according to the valuation rules set out in (e) of this section, as applicable;

(B) there are no affiliate investment limitations with respect to the security held in a trust if the security is not needed to satisfy the requirements of (3) this subsection;

(C) the reinsurance treaty must prohibit withdrawals or substitutions of trust assets that would leave the fair market value of the primary security within the trust, when aggregated with primary security outside the trust that is held by or on behalf of the ceding insurer in the manner required by (3) of this subsection, below 102 percent of the level required by (3) of this subsection at the time of the withdrawal or substitution; and

(D) the determination of reserve credit under 3 AAC 21.665(l) shall be determined according to the valuation rules set out in (e) of this section, as applicable; and

(6) the reinsurance treaty has been approved by the director.

(g) The requirements of (f) of this section must be satisfied as of the date that risks under covered policies are ceded and on an ongoing basis thereafter, (A) ceding insurer may not take or consent to an action or series of actions that would result in a deficiency under (f)(3) or (4) of this section with respect to a reinsurance treaty under which covered policies have been ceded, and if a ceding insurer becomes aware when a deficiency exists, it shall use its best efforts to arrange for the deficiency to be eliminated as expeditiously as possible.

(h) Before the due date of each quarterly or annual statement, each life insurance company that has ceded reinsurance within the scope of (c) of this section shall perform an analysis, on a treaty-by-treaty basis, to determine, as to each reinsurance treaty under which covered policies have been ceded, whether is of the end of the immediately preceding calendar quarter the requirements of (f)(3) or (4) of this section were satisfied. The ceding insurer shall establish a liability equal to the excess of the credit for reinsurance taken over the amount of primary security actually held under (f)(3) of this section, unless either

(1) the requirements of (f)(3) or (4) of this section were fully satisfied as of the valuation date as to the reinsurance treaty; or

(2) a deficiency has been eliminated before the due date of the quarterly or annual statement to which the valuation date relates through the addition of primary security or other security, as the case may be, in the amount and in a form as would have caused the requirements of (f)(3) or (4) of this section to be fully satisfied as of the valuation date,

(i) Nothing in (h)(2) of this section allows a ceding company to maintain a deficiency under(f)(3) or (4) of this section for a period of time longer than is reasonably necessary to eliminate it.

(j) This section does not apply to the following situations:

(1) the reinsurance of

(A) policies that satisfy the criteria for exemption set out in 3 AAC 21.915(e) - (h) and that are issued before effective date of this section;

(B) portions of policies that satisfy the criteria for exemption set out in 3 AAC 21.915(c) and that are issued before effective date of this section

(C) a universal life policy that meets all of the following requirements:

(i) any secondary guarantee period is five years or less;

(ii) specified premium for the secondary guarantee period is not less than the net level reserve premium for the secondary guarantee period based on the Commissioners Standard Ordinary 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 percent of the first year annualized specified premium for the secondary guarantee period;

(D) credit life insurance;

(E) a variable life insurance policy that provides for life insurance, the amount or duration of which varies according to the investment experience of the separate account or accounts; or

(F) a group life insurance certificate unless the certificate provides for a stated or implied schedule of maximum gross premiums required 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 AS 21.12.020(a)(4);

(3) reinsurance ceded to an assuming insurer that meets the applicable requirements of AS 21.12.020(a)(1) - (3), and that, in addition

(A) prepares statutory financial statements in compliance with the Accounting Practices and Procedures Manual of the National Association Association of Insurance Commissioner (NAIC) without 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 according to Statement of Statutory Accounting Principles No. 1 ("SSAP 1"); and

(B) is not in a company action level event, regulatory action level event, authorized control level event, or mandatory control level event as those terms are defined in AS 21.14 defined in AS 21.14 when its risk-based capital is calculated in accordance with the life risk-based capital report including overview and instructions for companines National Association of Insurance Commissioner from time to time, without deviation;

(4) reinsurance ceded to an assuming insurer that meets the applicable requirements of AS 21.12.020(a)(1) - (3), and that, in additio in

(A) is not an affiliate, as that term is defined in AS 21.22.200, of:

(i) the insurer ceding the business to the assuming insurer; or

(ii) an 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 10 states, including its state of domicile and

(ii) not licensed in a state as a captive, special purpose vehicle, special purpose financial captive, special purpose life reinsurance company, limited purpose subsidiary, or other similar licensing regimes; and

(D) is not, or would not be, below 500 percent of the authorized control level risk based capital as that term is defined in AS 21.14.200 when its risk based capital 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 National Association of Insurance Commissioner from time to time, without deviation, and without recognition of departures from National Association of Insurance Commissioner statutory accounting practices and procedures pertaining to the admission or valuation of assets or liabilities that increase the assuming insurer's reported surplus;

(5) reinsurance ceded to an assuming insurer that meets the requirements of AS 21.12.020(g)(2)(D); or

(6) reinsurance not otherwise exempt under paragraph (1) - (5) of this subsection if the director, after consulting with the National Association of Insurance Commissioner Financial Analysis Working Group (FAWG) or other group of regulators designated by the National Association of Insurance Commissioner, 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 section;

(B) the risks are included within the scope of this section only as a technicality; and

(C) the application of this section to those risks is not necessary to provide appropriate protection to policy holders The director shall publicly disclose a decision made under this paragraph to exempt a reinsurance treaty from this section, as well as the general basis, including a summary description of the treaty.

(k) An insurer that has covered policies as to which this section applied as set out in (c) of this section may not take any action or series of actions, or enter into any transaction or arrangement or series of transactions or arrangements if the purpose of this action, transaction arrangement or series is to avoid the requirements of this section, or to circumvent its purpose and intent, as set out in (a) and (b) of this section.

(l) any provision of this section is held invalid, the remainder is not affected,

3 AAC 21.615

Eff. 12/26/2019, Register 232, January 2020; am 12/23/2021, Register 240, January 2022

Authority:AS 21.06.090

AS 21.12.020