(1) Scope. This rule applies to all domestic life and accident and health insurers and to all other authorized life and accident and health insurers which are not subject to a substantially similar regulation in their domiciliary state. This rule also applies to authorized property and casualty insurers with respect to their accident and health business. This rule does not apply to assumption reinsurance, yearly renewable term reinsurance, or certain nonproportional reinsurance, such as stop loss or catastrophe reinsurance.
    (2) Accounting Requirements.
    (a) An insurer subject to this rule shall not, for reinsurance ceded, reduce any liability or establish any asset in any financial statement filed with the Office 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 all direct expenses, such as billing, valuation, claims and maintenance, expected by the company at the time the business is reinsured;
    2. The ceding insurer can 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, except 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 to be such a deprivation of surplus or assets;
    3. The ceding insurer is required to reimburse the reinsurer for negative experience under the reinsurance agreement, except that 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 shall be considered such 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 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 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 by the ceding insurer to the reinsurer of amounts other than from income realized from the reinsured policies. 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.a. The reinsurance agreement does not transfer all of the significant risk inherent in the business being reinsured. The table entitled “”Risk Category”” in this subparagraph identifies, for a representative sampling of products or types of business, the risks which are considered to be significant. For products not specifically included, the risks determined to be significant shall be consistent with this table.
    b. The risk categories are designated by the letters “”a”” through “”f”” in the table below. The references are as follows:
    (I) The letter “”a”” refers to morbidity.
    (II) The letter “”b”” refers to mortality.
    (III) The letter “”c”” refers to lapse. For purposes of this rule, the term “”lapse”” is the risk that a policy will voluntarily terminate prior to the recoupment of a statutory surplus strain experienced at issue of the policy.
    (IV) The letter “”d”” refers to credit quality. For purposes of this rule, the term “”credit quality”” 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. This term excludes market value declines due to changes in interest rates.
    (V) The letter “”e”” refers to reinvestment. For purposes of this rule, the term “”reinvestment”” 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.
    (VI) The letter “”f”” refers to disintermediation. For purposes of this rule, the term “”disintermediation”” 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. As a result, 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.
    c. For purposes of the table below, the plus sign (+) means that the risk is significant and the zero (0) means that the risk is insignificant.
    d. For purposes of the table below, the term “”LTC”” refers to Long Term Care Insurance and the term “”LTD”” refers to Long Term Disability Insurance.
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)

    7.a. 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 subparagraph b., below), either transfer the underlying assets to the reinsurer or legally segregate such assets in a trust or escrow account or otherwise establish a mechanism accomplishing the same end which legally segregates, by contract or contract provision, the underlying assets.
    b. Notwithstanding the requirements of sub-subparagraph a., above, the assets supporting the reserves for the following classes of business and any classes of business which do not have a significant credit quality, reinvestment, or disintermediation risk may be held by the ceding company without segregation of such assets: health insurance (including long term care insurance and long term disability insurance); traditional non-par permanent; traditional par permanent; adjustable premium permanent; indeterminate premium permanent; and universal life fixed premium (no dump-in premiums allowed).
    c. In determining the reserve interest rate adjustment, the formula must reflect the ceding company’s investment earnings and incorporate all realized and unrealized gains and losses reflected in the statutory statement. The following is an acceptable formula.
Note that the line references are for the 2001 National Association of Insurance Commissioners (NAIC) Annual Statement and are supplied as a convenient reference. Line references may be different in subsequent annual statements.
Rate = 2* (I + CG) R (X + Y – I – CG)
Where:
I
Is the net investment income (Exhibit 2, Line 16, Column 7)

CG
Is capital gains less capital losses (Exhibit 3, Line 9, Column 4 plus Exhibit 4, Line 9, Column 4)

X
Is the current year cash and invested assets (Page 2, Line 11, Column 1)

Plus investment income due and accrued (Page 2, Line 18, Column 1) less

Borrowed money (Page 3, Line 22, Column 1)

Y
Is the same as X but for the prior year
    8. Settlements are made less frequently than quarterly or payments due from the reinsurer are not made in cash within ninety (90) days of 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.
    11. The reinsurance agreement is entered into for the principal purpose of producing significant surplus relief 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.
    (b) Notwithstanding paragraph (2)(a), an insurer subject to this rule may, with the prior approval of the Office, take such reserve credit or establish such asset if the Office finds that the insurer would otherwise not meet the minimum surplus requirements of Florida Statutes § 624.408, and if the insurer has submitted and the Office has approved a plan for eliminating such reserve credit or asset.
    (c)1. Any agreement which is subject to this rule and which is entered into after the effective date of this rule which involve the reinsurance of business issued prior to the effective date of the agreements, along with any subsequent amendments thereto, shall be filed by the ceding company with the Office within thirty (30) days from its date of execution. Each filing shall include data detailing the financial impact of the transaction.
    2. Any increase in surplus net of federal income tax resulting from arrangements described in subparagraph (2)(a)1., above, shall be identified separately in the insurer’s statutory financial statement as a surplus item (aggregate write-ins for gains and losses in surplus in the Capital and Surplus Account, page 4 of the NAIC Annual Statement) and recognition of the surplus increase as income shall be reflected on a net of tax basis in the “”Reinsurance ceded”” line, page 4 of the NAIC Annual Statement, as earnings emerge from the business reinsured.
    3. The following is an example of the accounting treatment prescribed in subparagraph (2)(a)2., above:
On the last day of calendar year N, company XYZ pays a $20.0 million initial commission and expense allowance to company ABC for reinsuring an existing block of business. Assuming a 34% tax rate, the net increase in surplus at inception is $13.2 million ($20.0 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 (34% of $20.0 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 (66% 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.
    (3) Written Agreements.
    (a) No reinsurance agreement or amendment to any agreement shall be used to reduce any liability or to establish any asset in any financial statement filed with the Office, unless the agreement, amendment, or a binding letter of intent has been duly executed by both parties no later than the “”as of date”” of the financial statement.
    (b) In the case of a letter of intent, a reinsurance agreement or an amendment to a reinsurance agreement must be executed within a reasonable period of time, not exceeding ninety (90) days from the execution date of the letter of intent, in order for credit to be granted for the reinsurance ceded.
    (c) The reinsurance agreement shall contain provisions which provide:
    1. That the agreement shall constitute the entire agreement between the parties with respect to the business being reinsured thereunder and that there are no understandings between the parties other than as expressed in the agreement; and,
    2. That any change or modification to the agreement shall be null and void unless made by amendment to the agreement and signed by both parties.
    3. That the reinsurance is payable by the reinsurer on the basis of the liability of the ceding insurer under the contract or contracts reinsured without diminution because of insolvency of the ceding insurer, and that payments by the reinsurer will be made directly to the ceding insurer or its receiver. However, the reinsurance agreement need not contain this provision if either of the following applies:
    a. The reinsurance agreement specifically provides payment by the reinsurer to the named insured, assignee, or named beneficiary of the policy issued by the ceding insurer in the event of the insolvency of the ceding insurer; or
    b. The reinsurer, with the consent of the named insured, has assumed the policy obligations of the ceding insurer as direct obligations of the reinsurer in substitution for the obligations of the ceding insurer to the named insured.
    (4) Existing Agreements. Insurers subject to this rule 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 rule, would not be entitled to recognition of the reserve credits or assets; provided, however, that the reinsurance agreements shall have been in compliance with the statutory provisions and rules which were effective immediately preceding the effective date of this rule.
    (5) Actuarial Opinion. The ceding insurer’s actuary who signs the financial statement actuarial opinion with respect to valuation of reserves shall consider this rule and any applicable actuarial standards of practice when determining the proper credit in financial statements filed with this Office. The actuary shall maintain adequate documentation and be prepared upon request to describe the actuarial work performed for inclusion in the financial statements and to demonstrate that such work conforms to this rule.
Rulemaking Authority 624.308(1), 624.424(1), 624.610(12), (14) FS. Law Implemented 624.307(1), 624.424(1), 624.610(4), (6), (10), (11), (12), 625.012(8), 626.9641(1)(d), (h), 631.051, 631.061, 631.071, 631.081 FS. History-New 1-30-91, Formerly 4-108.010, Amended 3-28-96, 10-13-02, Formerly 4-144-010.