HAR §16-187-105. The actuarial method

(a) The actuarial method to establish the required level of primary security for each reinsurance treaty subject to this chapter shall be 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 section 16-187-104, "Covered policies," subsection (1), the actuarial method is the greater of the deterministic reserve or the net premium reserve 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 net premium reserve. In addition, if such covered policies are reinsured in a reinsurance treaty that also contains covered policies described in section 16-187-104, "Covered policies," subsection (2), the ceding insurer may elect to instead use subsection (a)(2) as the actuarial method for the entire reinsurance agreement. Whether subsection (a)(1) or (a)(2) are used, the actuarial method must comply with any 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 section 16-187-104, "Covered policies," subsection (2), the actuarial method is the greatest of the deterministic reserve, the stochastic reserve, or the net premium reserve regardless of whether the criteria for exemption testing can be met. (3) Except as provided in subsection (a)(4), the actuarial method is to be applied on a gross basis to all risks with respect to the §16-187-105 187-10 covered policies as originally issued or assumed by the ceding insurer. (4) If the reinsurance treaty cedes less than one hundred percent (100%) of the risk with respect to the covered policies, then 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 any adjustment under subparagraph (C), 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 should be reflective of any reduction pursuant 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 §16-187-105 187-11 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 prior to January 1, 2017, this adjustment is not to exceed [cx/ (2 * number of reinsurance premiums per year)] where cx is calculated using the same mortality table used in calculating the net premium reserve; and (D) For any other treaty ceding a portion of risk to a different reinsurer, including but not limited to stop loss, excess of loss and other non- proportional reinsurance treaties, there will be no reduction in the required level of primary security. (b) It is possible for any combination of subsections (a)(4)(A), (a)(4)(B), (a)(4)(C), and (a)(4)(D) to apply. Such adjustments to the required level of primary security will be done in the sequence that accurately reflects the portion of the risk ceded via the treaty. The ceding insurer should document the rationale and steps taken to accomplish the adjustments to the required level of primary security due to the cession of less than one hundred percent (100%) of the risk. (c) 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 insurers. (d) In no event will the required level of primary security resulting from application of the actuarial method exceed the amount of statutory reserves ceded. (e) If the ceding insurer cedes risks with respect to covered policies, including any riders, in §16-187-105 187-12 more than one reinsurance treaty subject to this chapter, in no event will the aggregate required level of primary security for those reinsurance treaties 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 chapter. (f) If a reinsurance treaty subject to this chapter cedes risk on both covered and non-covered policies, credit for the ceded reserves shall be determined as follows: (1) The actuarial method shall be used to determine the required level of primary security for the covered policies, and section 16-187-107 shall be used to determine the reinsurance credit for the covered policy reserves; and (2) 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 paragraph (1), is held by or on behalf of the ceding insurer in accordance with section 431:4A- 101 and 431:4A-102, HRS. Any primary security used to meet the requirements of this paragraph may not be used to satisfy the required level of primary security for the covered policies. [Eff 7/28/22;] (Auth: HRS §§431:2-201, 431:4A-104) (Imp: HRS §§431:4A-101 through 431:4A-104) §16-187-106 Valuation used for purposes of calculations. For the purposes of both calculating the required level of primary security pursuant 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 any such assets held in trust, that would be admitted under the §16-187-107 187-13 National Association of Insurance Commissioners Accounting Practices and Procedures Manual if they were held by the ceding insurer, the valuations are to be determined according to statutory accounting procedures as if such assets were held in the ceding insurer’s general account and without taking into consideration the effect of any 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 Commissioners’ Life Actuarial (A) Task Force no later than the December 31st 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. [Eff 7/28/22;] (Auth: HRS §§431:2-201, 431:4A- 104) (Imp: HRS §§431:4A-101 through 431:4A-104) §16-187-107 Requirements applicable to covered policies to obtain credit for reinsurance; opportunity for remediation. (a) Subject to the exemptions described in section 16-187-103 and the provisions of subsection (b), credit for reinsurance shall be allowed with respect to ceded liabilities pertaining to covered policies pursuant to sections 431:4A-101 and 431:4A-102, HRS, if, and only if, in addition to all other requirements imposed by law or regulation, §16-187-107 187-14 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 section 431:5-307, HRS, and related regulations and actuarial guidelines, and credit claimed for any reinsurance treaty subject to this regulation 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 chapter and provides support for its calculation as determined to be acceptable to the commissioner; (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 section 431:4A-102, HRS, on a funds withheld, trust, or modified coinsurance basis; (4) Funds consisting of other security, in an amount at least equal to any portion of the statutory reserves as to which primary security is not held pursuant to paragraph (3), are held by or on behalf of the ceding insurer as security under the reinsurance treaty within the meaning of section 431:4A- 102, HRS; (5) Any trust used to satisfy the requirements of this section shall comply with all of the conditions and qualifications of section 16- 168-11, except that: (A) Funds consisting of primary security or other security held in trust, shall for the purposes identified in section 16- 187-106, be valued according to the §16-187-107 187-15 valuation rules set forth in section 16-187-106, as applicable; and (B) There are no affiliate investment limitations with respect to any security held in such trust if such security is not needed to satisfy the requirements of subsection (a)(3); (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 subsection (a)(3)) below one hundred two percent (102%) of the level required by subsection (a)(3) at the time of the withdrawal or substitution; and (D) The determination of reserve credit under section 16-168-11(d)(3) shall be determined according to the valuation rules set forth in section 16-187-106, as applicable; and (6) The reinsurance treaty has been approved by the commissioner. (b) The requirements of subsection (a) must be satisfied as of the date that risks under covered policies are ceded (if such date is on or after the effective date of this regulation) and on an ongoing basis thereafter. Under no circumstances shall a ceding insurer take or consent to any action or series of actions that would result in a deficiency under subsection (a)(3) or (a)(4) with respect to any reinsurance treaty under which covered policies have been ceded, and in the event that a ceding insurer becomes aware at any time that such a deficiency exists, it shall use its best efforts to arrange for the deficiency to be eliminated as expeditiously as possible. (c) Prior to the due date of each quarterly or annual statement, each life insurance company that has §16-187-107 187-16 ceded reinsurance within the scope of section 16-187- 102 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 as of the end of the immediately preceding calendar quarter (the valuation date) the requirements of subsections (a)(3) and (a)(4) 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 pursuant to subsection (a)(3), unless either: (1) The requirements of subsections (a)(3) and (a)(4) were fully satisfied as of the valuation date as to such reinsurance treaty; or (2) Any 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 and/or other security, as the case may be, in such amount and in such form as would have caused the requirements of subsections (a)(3) and (a)(4) to be fully satisfied as of the valuation date. (d) Nothing in subsection (c) shall be construed to allow a ceding company to maintain any deficiency under subsection (a)(3) or (a)(4) for any period of time longer than is reasonably necessary to eliminate it. [Eff 7/28/22;] (Auth: HRS §§431:2-201, 431:4A- 104) (Imp: HRS §§431:4A-101 through 431:4A-104)