HAR §16-20-3. Accounting requirements

(a) No insurer subject to this chapter shall, on account of reinsurance ceded, reduce any liability or establish any asset in any financial statement filed with the commissioner if the terms of the reinsurance agreement, in substance or effect, provide for any of the following conditions: (1) Renewal expense allowances provided, or to be provided, to the ceding insurer by the reinsurer in an 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). The expenses include commissions, premium taxes, and direct expenses, including, but not limited to, billing, valuation, claims, and maintenance expended by the company at the time the business is reinsured; (2) The ceding insurer will 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; provided, however, 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 a deprivation of surplus or assets; (3) The ceding insurer is required to reimburse the reinsurer for negative experience under the reinsurance agreement; provided, however, that offsetting experience refunds against current and prior year losses under the agreement and payment by the ceding insurer of an amount equal to the current and prior year losses under the agreement when the ceding insurer voluntarily terminates in force reinsurance shall not be considered a reimbursement to the reinsurer for negative experience. Voluntary termination does not include situations where termination occurs because of unreasonable provisions which allow the reinsurer to reduce its risk 20-2 §16-20-3 under the agreement, such as a provision giving the reinsurer the right to increase reinsurance premiums or risk and expense charges to excessive levels, forcing the ceding company to terminate prematurely 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 of reinsurance premiums or other fees or charges by the ceding insurer to the reinsurer of amounts greater than from income realized from the reinsured policies; (6) The agreement does not transfer all of the significant risk inherent in the business being reinsured. The table entitled Exhibit A at the end of this chapter and made a part of this chapter identifies the risks to be considered significant for a representative sampling of products or types of business. For products not specifically included, the risks determined to be significant shall be consistent with Exhibit A; (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 this section) either transfer the underlying assets to the reinsurer or legally segregate the assets in a trust or escrow account or otherwise establish a mechanism satisfactory to the commissioner which legally segregates the underlying assets. Notwithstanding the requirements of this subsection, the assets supporting the reserves for the following classes of business and any other classes of business which do not have a significant credit quality reinvestment or disintermediation risk may be held by the ceding company without segregation: (i) Health insurance, including long term care and long term disability; (ii) Traditional non-participating permanent; (iii) Traditional participating permanent; (iv) Adjustable premium permanent; (v) Indeterminate premium permanent; or (vi) Universal life fixed premium with no dump-in premiums allowed. The associated formula for determining the reserve interest rate adjustment must reflect the ceding company’s investment earnings and incorporate all realized and unrealized gains and losses 20-3