National Association of Insurance Commissioners - …€¦ · Web viewin agenda item 2017-28 - Attachment Q2. The Informal Life and Health Drafting Group is not recommending adoption

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Statutory Accounting Principles (E) Working GroupMaintenance Agenda Submission Form

Form A

Issue: Reinsurance Credit

Check (applicable entity):P/C Life Health

Modification of existing SSAPNew Issue or SSAPInterpretation

Description of Issue:Regulators brought to the attention of the Working Group concerns regarding short-duration health reinsurance contracts which were termed quota share treaties but had features that limited the reinsurer’s risk. Concerns were noted that the reinsurance contracts were reported as meeting the “risk transfer” requirements under statutory accounting, but were not meeting “risk-transfer” requirements under U.S. GAAP. In addition, concerns were raised on whether similar reinsurance contracts that may meet risk transfer requirements for statutory accounting were taking a larger reinsurance accounting benefit than appropriate because the risk limiting features in the reinsurance contracts were limiting the actual amount of risks transferred. The Working Group directed NAIC staff to research and prepare an agenda item for subsequent discussion. Subsequent to this direction, the Working Group also received a referral from the Financial Analysis (E) Working Group noting additional concerns with short-duration contacts in particular and with a request that reinsurance disclosures designed to identify contracts with risk limiting features or noncompliant contracts that are required for SSAP No. 62R also be in SSAP No. 61R (See Activity to Date).

This agenda item addresses reinsurance risk transfer and accounting issues for clarification in statutory accounting primarily focused on reinsurance of short-duration products.

Overview of SSAP No. 61R (See Authoritative Literature in appendix for quotes of referenced material)

1. The scope of SSAP No. 61R is reinsurance of life deposit type and accident and health contracts. 2. While the majority of life contracts are long-duration, health has both long-duration (examples are long-

term care and long-term disability) and short-duration products (example is group comprehensive health).3. SSAP No. 61R explicitly quotes more of the FAS 113 long-duration contract risk transfer guidance. 4. Because SSAP No. 61R has more of a life contract (long-duration) focus it does not explicitly quote as

much of short-duration risk transfer guidance from U.S. generally accepted accounting principles (GAAP) as SSAP No. 62R—Property and Casualty Reinsurance.

5. SSAP No. 61R adopts the following:a. GAAP guidance - FASB Statement No. 113, Accounting and Reporting for Reinsurance of Short-

Duration and Long-Duration Contracts (FAS 113) with modifications; FAS 113 provides general risk transfer guidance but the majority of the guidance is different based on the classification categories of long-duration contracts and short-duration contracts. (FAS 113 requirements were incorporated into FASB codification primarily in ASC 944-20 and the key risk transfers aspects of FAS 113 are unchanged by FASB codification.)

b. Appendix A-791—Life and Health Reinsurance Agreements (Appendix A-791) is based on NAIC Model Law 791—Life and Health Reinsurance Agreements (Model 791). It provides criteria for reinsurance accounting for proportional reinsurance contracts (see additional detail in following pages). Reinsurance contracts which receive reinsurance accounting under Appendix A-791 do not contain identified features which negate risk transfer. In addition, Appendix A-791 identifies

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significant risk categories by line of business that must be 100% ceded. The major risk categories are morbidity, mortality, lapse, credit quality, reinvestment and disintermediation. The current version of Model 791 was adopted by the NAIC in 1992.

c. Appendix A-785 is based on NAIC Model Law 785- Credit for Reinsurance (Model 785) which contains detailed information regarding when collateral is required and what types of collateral are acceptable in order to obtain credit for reinsurance. In general, collateral is required for unauthorized reinsurers and there is a sliding scale of collateral required for certified reinsurers. Model 785 is not the focus of this agenda item.

SSAP No. 61R adopts FAS 113 with modifications (See Authoritative Literature in appendix for quotes of referenced material)

SSAP No. 61R, paragraph 78, adopts FAS 113 with modifications noting that the statutory accounting principles established, reflect much more detailed guidance which differ substantially from GAAP. The documented list of statutory accounting modifications from FAS 113 includes 7 listed topics which are summarized below:

1. Reinsurance accounting reserve credits reduce reserves for policies, claims and unpaid claims (¶78.a.);2. First year and renewal ceding commissions on indemnity reinsurance of new business are recognized as

income and ceding commissions on ceded in-force business are included in the calculation of initial gain or loss (¶78b);

3. Initial gains on indemnity reinsurance of in-force blocks of business have unique accounting treatment which restricts the gains to the ceding entity until profits emerge (¶78d).

4. SSAP No. 61R prohibits recognition of a gain or loss in connection with the sale, transfer or reinsurance of an in-force block of business between affiliated entities in a non-economic transaction (¶78e).

5. SSAP No. 61R requires that a liability be established through a provision reducing surplus for unsecured reinsurance recoverables from unauthorized reinsurers (¶78f).

6. SSAP No. 61R prescribes offsetting certain reinsurance premiums (¶78g).7. SSAP No. 61R, paragraph 78 explicitly notes the modifications to the FAS 113 risk transfer requirements

regarding differences in GAAP and SAP classification of investment contracts, but does not note other modifications. The modification identifies contracts with insignificant mortality or morbidity risk.(¶78c).

78c. As discussed in SSAP No. 50, statutory accounting defines deposit-type contracts as those contracts which do not include any mortality or morbidity risk. GAAP defines investment contracts as those that do not subject the insurance enterprise to significant policyholder mortality or morbidity risk. (The distinction is any mortality or morbidity risk for statutory purposes vs. significant mortality or morbidity risk for GAAP purposes.) Therefore, a contract may be considered an investment contract for GAAP purposes, and that same contract may be considered other than deposit-type for statutory purposes. A reinsurance treaty covering contracts that have insignificant mortality or morbidity risk (i.e., contracts classified as other than deposit-type contracts for statutory purposes, but investment contracts for GAAP purposes) that does not transfer that mortality or morbidity risk, but does transfer all of the significant risk inherent in the business being reinsured (e.g., lapse, credit quality, reinvestment or disintermediation risk) qualifies for reinsurance accounting for statutory reporting purposes, but would not qualify for reinsurance accounting treatment for GAAP purposes;

A-791 (See Authoritative Literature in appendix for quotes of referenced material)

The Model 791 proceedings citations (formerly known as the legislative history) notes that in 1985 the model was developed to prohibit reinsurance surplus aid abuses. Major revisions to Model 791 which are consistent with Appendix A-791, were adopted in 1992. The intent of the 1992 revisions was to provide more information to regulators on risk transfer, liability transfer and other considerations in regard to “surplus aid”


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reinsurance contracts in order to promote more uniformity in their treatment. Included as part of the revision was a name change from “Model Regulation—Life Reinsurance Agreements” to “Life and Health Reinsurance Agreements Model Regulation.” While a review of the minutes, proceedings citations and the model indicate that Model 791 includes accident and health within its scope; most of the guidance in Model 791 is focused on life and the small amount of health specific guidance provided is secondary.

Scope – Appendix A-791 excludes assumption reinsurance, yearly renewable term reinsurance and certain non-proportional reinsurance such as stop loss or catastrophe reinsurance. Appendix A-791 refers the reader to paragraphs 19 and 20 of SSAP No. 61R for yearly renewable term reinsurance and non-proportional reinsurance. Therefore, the primary focus of Appendix A-791 is proportional reinsurance agreements.

The preamble to Model 791 notes that there are legitimate forms of surplus relief and forms that are improper. This preamble is similar to paragraph 2.k. of Appendix A-791, but includes additional information regarding intent. This preamble paragraph was noted in the 1992 minutes as significant to enforcing the provisions of the model; however, this paragraph is not included in Appendix A-791.

Appendix A-791 includes reinsurance contract provisions or functions that require deposit accounting by prohibiting reinsurance reserve credit (loss reserve reductions) or establishment of assets related to the reinsurance contracts that contain specified clauses and or functions. Loss reserve reductions and establishment of admitted reinsurance assets is referred to as reinsurance accounting or reinsurance credit. Appendix A-791 also contains a chart which notes “significant risks” inherent in lines of business reinsured. It notes that 100% of the identified significant risks must be reinsured to allow any reinsurance accounting treatment. Appendix A-791, paragraphs 2, 4, and 5 seek to ensure that the reinsurer has taken on the risks that result in the reinsurer “standing in the shoes” meaning that the reinsurer is in the same economic position as the ceding entity. Appendix A-791 also provides guidance that contract features which result in “impermanent” risk transfer or surplus aid which result in deposit accounting.

Summary of Appendix A-791, by paragraph is below:

Appendix A-791, paragraph 2 provides a list of items that can prohibit reinsurance accounting (resulting in deposit accounting instead). If any of the noted conditions are present in substance or effect, then the ceding entity is prohibited from establishing assets or reducing liabilities based on that reinsurance contract.

a. Renewal expense allowances are not enough to cover future administrative expenses (unless a liability is established for the present value of the shortfall).

b. Ceding insurer can be deprived of surplus/assets at the reinsurer’s option or automatically on the occurrence of an event (termination for nonpayment of premium or other amounts due is an exception).

c. Ceding insurer is required to reimburse the reinsurer for negative experience under the contract. Exceptions: netting losses against gains for experience refunds and payments upon voluntary recapture. It notes that a reinsurer cannot force recapture by excessive premium increases.

d. The ceding insurer must, at scheduled points in time terminate or recapture the contract.e. The reinsurance agreement has the possibility of payments from the ceding company that

exceed the direct premiums charged to the insured.f. The treaty does not transfer 100% of the identified significant risks inherent in the business

being reinsured. A table of product types and significant risks are identified (morbidity, mortality, lapse, credit quality, reinvestment, disintermediation). Short-duration health is required to transfer all of the morbidity and lapse risks.

g. The assets are not transferred or are not put in a segregated account when credit quality, reinvestment, and disintermediation risk are required to be transferred.


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h. Settlements are made less frequently than quarterly.i. The ceding company must make warranties not reasonably related to the business being reinsuredj. The ceding company must make warranties about the future performance of the business being

reinsured.k. 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.

Paragraph 3 provides accounting guidance regarding reinsurance of in-force blocks of business, which requires restriction of surplus gains until profits emerge

Paragraphs 4-5 are contract features that are required to be present to achieve reinsurance accounting.

Paragraph 4: Letter of intent (or signed treaty) must be in place before the as-of date of the financial statement in order to apply reinsurance accounting.

Paragraph 5: Treaty must be signed within 90 days after the execution of a letter of intent.

Appendix A-791 also contains questions and answers for certain paragraphs that were incorporated from actuarial guideline JJJ. The questions and answers provide practical implementation information and are helpful regarding intent of some items. The rest of Actuarial Guideline JJJ was incorporated in Actuarial Guideline 33 Determining CARVM Reserves for Annuity Contracts with Elective Benefits, to provide guidance on elective versus non-elective benefits and language which described integrated benefit streams. Therefore, Actuarial Guideline JJJ does not currently exist as a separate guideline.

Current Issues

FAS 113 and Appendix A-791

The FAS 113 risk transfer guidance is adopted by reference, and is also affected by the modifications to FAS 113 listed in SSAP No. 61R. Such modifications include the differences between GAAP and SAP classification of certain contracts, such as contracts that statutory accounting classifies as other than deposit type contracts and GAAP classifies as investment type contracts. Appendix A-791 plays a crucial role in the application of risk transfer guidance for proportional life and health reinsurance contracts. However, both the FAS 113 and Appendix A-791 have to be reviewed in conjunction with each other. The interaction of SSAP No. 61R guidance with Appendix A-791 needs to be more explicit in SSAP No. 61R.

Appendix A-791 creates differences between GAAP and SAP definitions of risk transfer for proportional life and health reinsurance contracts. The SAP risk transfer threshold for proportional life and health reinsurance contracts can be either higher or lower than GAAP depending on the facts and circumstances. The different standard in Appendix A-791 applies to products that both GAAP and SAP classify as insurance and to products in which there are differences in insurance or non-insurance classification between GAAP and SAP. The provisions of Appendix A-791 result in reinsurance accounting only for proportional reinsurance contracts that 1) do not result in “impermanent” surplus and 2) result in the reinsurer being in a relatively equivalent economic position as the direct writer. Below are some examples of the different results that can occur:

1. GAAP and SAP are different - For a proportional reinsurance on products that both GAAP and SAP classify as an insurance contract, Appendix A-791 creates a different standard for determining risk transfer than GAAP. This standard can be either higher or lower than GAAP risk transfer requirements depending on the facts and circumstances.


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a. Appendix A-791 requires 100% of identified significant risks to be transferred. b. Appendix A-791 has several features that are prohibited in reinsurance contracts and also

requires certain contractual features. These requirements and prohibitions are to ensure that the reinsurer is in a similar economic positon as the ceding entity.

c. Appendix A-791 does not require reasonable possibility of significant loss to the reinsurer for proportional reinsurance contracts; however, as noted above, a reinsurance contract that complies with Appendix A-791 will result in a reinsurer that is in a similar economic position as the ceding entity.

To the extent a proportional reinsurance contract does not transfer 100% of the identified risks SAP has a higher threshold, because GAAP would allow reinsurance accounting for reinsurance contracts with less than 100% of the identified significant risks provided the reinsurer has reasonable possibility of loss. For these reinsurance contracts SAP (Appendix A-791) would require deposit accounting.

To the extent that a proportional contract transfers 100% of the identified risks and the reinsurer does not have a reasonable possibility of loss, SAP has a lower threshold because it would allow reinsurance accounting and GAAP would require deposit accounting.

To the extent that a proportional contract has reasonable possibility of loss to the reinsurer, but the reinsurance contract contains features prohibited by Appendix A-791, the SAP standard would require deposit accounting and be stricter than GAAP which would allow reinsurance accounting.

2. SAP allows reinsurance accounting in situations that GAAP prohibits - For a life or health product that GAAP classifies as an investment contract and SAP classifies as an insurance contract, SAP allows proportional reinsurance contracts which are compliant with Appendix A-791 to receive reinsurance accounting treatment. GAAP prohibits reinsurance accounting for these underling products because the products do not contain sufficient insurance risk. This is an intentional difference between SSAP No. 61R and FAS 113 and was necessary because some products are classified as life or other than deposit type insurance in statutory accounting based on the inclusion of any mortality or morbidity risk. The same products would likely be classified as an investment type contract for GAAP because the morbidity and mortality risk is not significant. SSAP No. 61R notes that a FAS 113 modification allows the transfer of risk for other than deposit type products if the reinsurance contract transfers 100% of the identified significant risks of the contract. Under FAS 113 such a reinsurance contract would not be classified as an investment contract, and not as insurance, due to the insignificant insurance risk. This is an intentional difference that can result in reinsurance accounting treatment for statutory accounting but not for GAAP.

Nonproportional Guidance in SSAP No. 61R

The rest of the text on risk transfer in SSAP No. 61R includes some of the FAS 113 long-duration guidance, and the rest of FAS 113 is adopted with the noted modifications by reference. SSAP No. 62R is more explicit on evaluation of non-proportional contracts and contains more of the FAS 113 short-duration risk transfer guidance. As a result SSAP No. 62R is clearer than SSAP No. 61R regarding risk transfer for reinsurance contracts which transfer less than all of the insurance risks, such as non-proportional reinsurance contracts. SSAP No. 61R, paragraph 38, notes that reinsurance accounting for non-proportional reinsurance contracts is determined in a way that is similar to how property and casualty reinsurance accounting is determined. This agenda item recommends additional language on nonproportional contracts for SSAP No., 61R.


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Amount of Reinsurance Accounting Credit

Additional language in SSAP No. 61R and SSAP No. 62R is recommended to clarify that reinsurance contracts which pass reinsurance risk transfer can and will result in different reinsurance accounting credit (financial benefits) based on the terms and circumstances of the reinsurance contracts. There appears to be a misunderstanding that passing risk transfer always results in full proportional reinsurance accounting credit. However, a reinsurance contract which passes risk transfer still has to have the amount of reinsurance accounting credit separately determined. An example of this concept is that a catastrophe reinsurance treaty can pass risk transfer and still result in no initial reinsurance accounting credit. Principles-based guidance on the separate calculation of the reinsurance accounting credit would be beneficial for SSAP No. 61R and SSAP No. 62R.

Provisions of Appendix A-791 that Prohibit Reinsurance Accounting

a. Expected potential liability remains unchanged

Some of the short-duration reinsurance contracts that were brought to the attention of the Working Group were noted as RBC relief treaties and had a primary purpose of providing capital relief (as opposed to surplus relief). These reinsurance contracts were noted as not having an impact to the ceding entity’s expected liabilities – (e.g., the total liabilities were basically unchanged). Reflecting reinsurance accounting for a proportional reinsurance treaty when the surplus of the ceding entity remain basically unchanged in substance or effect would seem to be a violation of Appendix A-791, paragraph 2.k. Appendix A-791 Life and Health Reinsurance agreements prohibit reducing reinsurance liabilities of establishing reinsurance assets of a ceding entity if:

k. 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.

b. All (100%) of the identified significant risks

Note that Appendix A-791, paragraph 2.f. requires all (100%) of the identified significant risks to be transferred. To the extent that the reinsuring clause or risk limiting features prevent all of the significant risk identified being transferred, the contract would not be eligible for reinsurance accounting treatment under Appendix A-791.

c. Proportional versus non-proportional reinsurance contracts

Appendix A-791 is for proportional reinsurance contracts and SSAP No. 61R includes additional guidance on risk transfer for non-proportional reinsurance contracts. SSAP No. 61R, paragraph 38 on non-proportional reinsurance, notes that reinsurance accounting credit is determined in a way that is similar to the way property and casualty reinsurance accounting credit is determined. This is because these modes of reinsurance more closely follow property and casualty indemnification principles than life insurance formula basis and these coverages are very similar to excess insurance on property and casualty products. In determining the appropriate reserve credit, the probability of a loss penetrating to the reinsurer's level of coverage (using reasonable assumptions) must be multiplied by the expected amount of recovery. That means that the determination of the amount of acceptable reinsurance accounting credit should take into account the amounts that the reinsurer is reasonably expected to pay.


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Reinsurance contracts with large sliding scale commissions, loss corridors and other risk limiting features raise questions regarding whether a reinsurance contract that starts out as being labeled proportional, is proportionate in substance, or if the risk limiting features cause the contract to perform more like a non-proportional contract. Barron’s dictionary of Insurance Terms notes proportional reinsurance is:

A type of reinsurance whereby the reinsurer shares losses in the same proportion as it shares premium and policy amounts.

The FAWG referral, noted in the activity to date section, provides a similar concern and seems to describe a contract that would not be compliant with Appendix A-791 paragraphs 2.k. and 2.f.:

Some of the short-duration health reinsurance contracts that regulators have brought to the attention of the Working Group and noted by the Financial Analysis (E) Working Group utilize loss corridors, sliding scale commissions, or other risk-limiting features to significantly limit the risk transferred to the reinsurer. Often these limitations result in a quota share reinsurance agreement operating more like an excess of loss reinsurance agreement, but the ceding insurer is accounting for the contract as if full, proportional reinsurance were in place. In certain cases, the ceding insurers have lost millions of dollars on certain blocks of business and even reached insolvency, while the reinsurers have continued to recognize profits on the contracts.

Some treaties that were labeled as proportional do not operate proportionately when the risk limiting features in total are considered and some treaties seem to be taking a larger reinsurance accounting credit than the risk transferred under the contract indicates or are taking a reinsurance accounting credit when transfer is not indicated. Note that classifying a contract as proportional when it is not, or taking a reinsurance accounting credit when a contract is not compliant with SSAP No. 61R and Appendix A-791, can result in either an inappropriate reinsurance accounting credit or result in a reinsurance accounting credit that is greater than allowed when the cash flows of the contract are evaluated for the possibility of loss.

Disclosure (See Authoritative Literature in appendix for quotes of referenced material)

The short-duration health reinsurance contracts that were brought to the attention of the Working Group members have risk limiting features. SSAP No. 62R—Property and Casualty Reinsurance, paragraphs 93-98, began requiring audited disclosures in the statutory annual statement interrogatories and supplements related to reinsurance contracts with risk limiting features in 2006. The purpose of the disclosures is to identify certain reinsurance contracts with risk limiting features with provisions that limit losses below the stated quota share percentage or delay timely reimbursement for further regulatory review. The disclosures also require reporting entities to affirm that they have verified risk transfer in the reinsurance contracts which received prospective reinsurance accounting credit.

The FAWG referral noted health disclosure concerns noting:

While P&C insurers are required to disclose some of these features in the interrogatories, health insurers are not, and FAWG continues to be surprised by the fact that GAAP seems to prevent some of these contracts from being recorded as meeting risk transfer requirements while SAP may not. Although the number of P&C companies reporting these features and differences in GAAP/SAP reporting may be limited, they appear to be more prevalent in troubled company situations and are being offered by otherwise well-regarded reinsurers.

This agenda item recommends additional disclosures for SSAP No. 61R

Existing Authoritative Literature:Relevant quotes from the following are in Exhibit B:


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SSAP No. 61R—Life, Deposit-Type, and Accident and Health Reinsurance SSAP No. 62R—Property and Casualty Reinsurance Statement of Financial Accounting Standards No. 113, Accounting and Reporting for Reinsurance of

Short-Duration and Long-Duration Contracts Appendix A-791 Life And Health Reinsurance Agreements

In researching reinsurance risk transfer in SSAP No. 61R, staff notes the following key points: SSAP No. 61R, paragraph 78 adopts the FAS 113 with modifications. FAS 113 requirements were incorporated into FASB codification primarily in ASC 944-20 and the

key risk transfers aspects of FAS 113 are unchanged by FASB codification. SSAP No. 61R includes a risk transfer discussion that is similar to the long-duration risk transfer

discussion in FAS 113, however slightly more GAAP text on risk transfer was explicitly incorporated into SSAP No. 62R.

In addition to the FAS 113 risk transfer requirements, SSAP No. 61R, paragraph 79 incorporates requirements from the Credit for Reinsurance (Model 785) and the Life and Health Reinsurance (Model 791).

Model 785 contains detailed information regarding when collateral is required and what types of collateral are acceptable in order to obtain credit for reinsurance. In general, collateral is required for unauthorized reinsurers and there is a sliding scale of collateral required for certified reinsurers.

Model 791 contains examples of contract clauses that negate risk transfer and identifies significant insurance risk that must be ceded in full. (summarized above)

Model 791 excludes yearly renewable term (YRT) which is a type of life reinsurance under which the risks, but not the permanent plan reserves, are transferred to the reinsurer for a premium that varies each year with the amount at risk and the ages of the insured. Although the model excludes YRT, most of the requirements from paragraph 2 and 3 of A-791 are required to be followed in SSAP No. 61R. This agenda item is not focused on Yearly Renewable Term reinsurance contracts.

Activity to Date (issues previously addressed by the SAPWG, Emerging Accounting Issues WG, SEC, FASB, other State Departments of Insurance or other NAIC groups):

At the 2016 Fall National Meeting the chair of the Working Group, Mr. Bruggeman stated that he had been contacted by a regulator regarding the application of reinsurance risk transfer under SSAP No. 61R—Life, Deposit-Type, and Accident and Health Reinsurance. The Working Group directed NAIC staff to research this issue and, if necessary, prepare an interpretation or draft changes to SSAP No. 61R for future discussion. In providing more detail on the issue, Mr. Bruggeman stated that reporting entities may be concluding that risk-transfer requirements under U.S. GAAP are higher than the risk-transfer requirements under SSAP No. 61R. As both requirements are based on the same standard in Statement of Financial Accounting Standards No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts, he stated that this reporting entity interpretation is difficult to substantiate. NAIC staff was directed to provide subsequent information on their research.

Risk Limiting Features (E) Working Group was inactive in 2016, but it is charged with reviewing risk transfer guidance for property and casualty reinsurance. This group will re-activate this year and work on clarifying aspects of Financial Condition Examiner’s Handbook and Financial Analysis Handbook guidance.

The Financial Analysis (E) Working Group (FAWG) provided a referral to the Statutory Accounting Principles (E) Working Group in April 2017, which also noted and risk limiting features concerns and including for property and casualty entities and concerns regarding health disclosures. The following provides a summary of this referral:


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The referral notes that the FAWG has recently discussed a number of troubled and potentially troubled insurers that have participated in quota share/proportional reinsurance contracts with significant risk-limiting features. In many of these situations, the motivation for the contracts appears to be surplus relief, without a significant amount of insurance risk being transferred to the reinsurer. The contracts often utilize loss corridors, sliding scale commissions, or other risk-limiting features to significantly limit the risk transferred to the reinsurer. Often these limitations result in a quota share reinsurance agreement operating more like an excess of loss reinsurance agreement, but the ceding insurer is accounting for the contract as if full, proportional reinsurance were in place. In certain cases, the ceding insurers have lost millions of dollars on certain blocks of business and even reached insolvency, while the reinsurers have continued to recognize profits on the contracts. While P&C insurers are required to disclose some of these features in the interrogatories, health insurers are not, and FAWG continues to be surprised by the fact that GAAP seems to prevent some of these contracts from being recorded as meeting risk transfer requirements while SAP may not. Although the number of P&C companies reporting these features and differences in GAAP/SAP reporting may be limited, they appear to be more prevalent in troubled company situations and are being offered by otherwise well-regarded reinsurers. Therefore, FAWG suggests further changes to SAP to prevent these situations.

Information or issues (included in Description of Issue) not previously contemplated by the SAPWG:None

Convergence with International Financial Reporting Standards (IFRS): Statutory accounting and U.S. GAAP both have differences from IFRS regarding reinsurance risk transfer.

Staff Review Completed by:Robin Marcotte NAIC Staff July 2017

Staff Recommendation:NAIC staff recommends that the Working Group receive the referral from the Financial Analysis (E) Working Group, move this item to the active listing, categorized as nonsubstantive, and expose revisions to SSAP No. 61R, SSAP No. 62R, Appendix A-791 and the Master Glossary as illustrated in Exhibit A. The recommended course of action is summarized below, and the related revisions are illustrated on the following pages. The draft revisions and the noted exposure questions are recommended for exposure.

1. Risk transfer clarifications SSAP No. 61R—Life and Health Reinsurance – Expose clarifications to the guidance in SSAP No. 61R that emphasize categorizing reinsurance contracts correctly as either being proportional or non-proportional and make more explicit the interaction between Appendix A-791 which identifies the significant risks that must be 100% transferred for proportional reinsurance contracts and the remaining SSAP No. 61R risk transfer guidance. The proposed revisions also emphasize that the reinsurance accounting credit taken for reinsurance contracts that meet risk transfer criteria in SSAP No. 61R/ Appendix A-791 is only for the portion of risks actually transferred. Reinsurance credit should take into account all features of a contract including deductibles, loss ratio corridors, a loss caps, aggregate limits or any similar provisions.

2. Risk transfer clarifications SSAP No. 62R—Property and Casualty Reinsurance – Expose clarifications to the risk transfer guidance in SSAP No. 62R to make the existing guidance more clear reinsurance accounting credit taken for reinsurance contracts that meet risk transfer criteria only for the portion of risks actually transferred. These clarifications are intended to be consistent with the existing concepts highlighted in the SSAP No. 62R, paragraph 93 disclosure. This guidance notes that reinsurance contracts, which contain features that limit the reinsurer’s losses below the stated quota share percentage (e.g. a deductible, a loss ratio corridor, a loss cap, an aggregate limit or any similar provisions), should reduce the amount of reinsurance accounting credit taken by the effects of any


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applicable limiting provision(s).

3. Disclosures – Expose disclosures, for 2018 reporting year in SSAP No. 61R based on the existing reinsurance disclosures in SSAP No. 62R in paragraphs 93-98 (adapted as needed using concepts from A-791). The disclosures would be to assist regulators in identifying reinsurance contracts that may require from additional regulatory scrutiny regarding risk transfer and or compliance with A-791.

Exposure questions- Request comments regarding the scoping of the disclosures in SSAP No. 61R.

4. Updates to terminology –

a. Expose updates to the glossary in SSAP No. 61R for specific terms including the definition of proportional and non-proportional.

b. Expose clarifications to the existing descriptions of proportional and nonproportional in SSAP No. 62R, paragraph 5 which are consistent with the proposed revisions to SSAP No. 61R (along with edits to subparagraph numbering).

c. Expose updates to the Master Glossary to define how to classify short-duration and long-duration for statutory accounting. These are GAAP terms (quoted in Authoritative literature) which have historically not been adopted in statutory accounting, however, recent updates to SSAP No. 35R also referenced this terminology.

Exposure questions – Request comments on the current SSAP No. 61R glossary definitions, which are currently defined in a life specific context: coinsurance, modified coinsurance and retention. Request comments on if adding short-duration and long-duration terms (modified for statutory accounting differences in classification) to the Master Glossary would be useful especially in the context of adopted GAAP guidance.

5. Appendix A-791 updates to include the Model 791 preamble – Expose updates to Appendix A-791 to incorporate language from the preamble of Model Law 791. This language from the model is indicative of the intent behind the Model, which was to prevent reinsurance accounting for reinsurance contracts that provide temporary surplus aid without transferring all of the significant risks so that the expected potential liability of the ceding insurer remains “basically unchanged.” This includes much of the existing language in paragraph 2.k. of Appendix A-791, but also provides additional detail regarding intent.

Exposure questions – Request comments on whether additional clarifications are needed on the interaction of Appendix A-791 and the risk transfer guidance or if the proposed changes to SSAP No. 61R are sufficient. Would adding to the questions and answers in A-791 regarding application be useful? If so, what questions should be addressed?

Status:On August 6, 2017, the Statutory Accounting Principles (E) Working Group moved this item to the active listing, categorized as nonsubstantive, and exposed revisions to SSAP No. 61R—Life, Deposit-Type and Accident and Health Reinsurance, SSAP No. 62R—Property and Casualty Reinsurance and Appendix A-791—Life and Health Reinsurance, as illustrated in Exhibit A, to clarify reinsurance contracts risk transfer requirements and to provide clarifications that reinsurance accounting credit for contracts that pass risk transfer is only for the amount of risk ceded. The agenda item also updates terminology and incorporates new SSAP No. 61R disclosures to assist in reviewing contracts, similar to existing disclosures in SSAP No. 62R. On November 6, 2017, the Statutory Accounting Principles (E) Working Group received comments. The Working Group provided the following direction for the next phase of work on this project:


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1. NAIC staff was directed to work with Working Group and industry representatives to hold informal drafting calls to refine the exposure drafts for future Working Group consideration. The bi-weekly calls will generally be separate (P/C and Life) as feasible, with some combined calls for consistency issues.

2. The previously exposed revisions to add the GAAP definitions of short duration and long duration contracts to the master glossary would be removed going forward, as the comments from the Interested Parties and the ACLI responded that the proposed additional definitions were not helpful.

3. The suggested revisions to SSAP No. 62R, paragraph 29 on non-proportional reinsurance credit proposed by the interested parties provide a better starting point to redraft this paragraph. NAIC staff was directed to use this language and work with the informal drafting groups to add some non-proportional examples in the next phase of discussion. The proposed starting point language for SSAP No. 62R, paragraph 29 is as follows:

29. Reporting entities shall not record reinsurance credit for non-proportional reinsurance until such time as losses have been incurred on the underlying business, which exceed the attachment point of the applicable reinsurance contract(s).

Recommendation for 2018 Summer National Meeting Discussion

The Informal Property and Casualty Drafting Group and an Informal Life and Health Drafting Group both of which include regulators and industry representatives have held several calls and recommend exposing the revisions described below:

Recommendation:

1. Informal Property and Casualty Drafting Group - The drafting group recommends updates to SSAP No. 62R—Property and Casualty Reinsurance to incorporate GAAP guidance to be more consistent with ASC topic 994-20. The proposed revisions specifically incorporate more guidance from FASB Emerging Issues Task Force No. 93-6, Accounting for Multiple-Year Retrospectively Rated Contracts by Ceding and Assuming Enterprises (EITF 93-6) and its related interpretation EITF D-035, FASB Staff Views on Issue No. 93-6, "Accounting for Multiple-Year Retrospectively Rated Contracts by Ceding and Assuming Enterprises.” SSAP No. 62R already, adopts EITF 93-6 with modification; however, it is incorporated by reference rather than explicitly quoted. As the informal drafting groups agrees that SSAP No. 62R intends to match GAAP to the extent feasible, the drafting group has recommended revisions to SSAP No. 62R text, and the existing Appendix to assist with addressing the concerns noted in the agenda item. These concerns include ensuring that credit for reinsurance reported by the cedant is not greater than the amount of risk ceded.

Although the subgroup views the revisions as consistent updates, because of the extent of revisions, NAIC staff recommends categorizing these revisions to SSAP No. 62R as substantive and exposing the revisions to SSAP No. 62R as reflected in agenda item 2017-28 - Attachment Q1. (The attachment has several drafting notes to assist with review. These drafting notes are not planned to be in the final document.) During the exposure period, input on the effective date is also requested.

2. Informal Life and Health Drafting Group – The primary issue under discussion is how to provide clear pointers from SSAP No. 61R—Life and Health Reinsurance to the Appendix A-791 guidance so that users understand which contracts are subject to the guidance in the appendix, and to identify the


Ref #2017-28

contracts which not subject to the appendix. The challenge is providing clear guidance that does not conflict with the existing appendix A-791, which is an accreditation standard model law. The Informal Life and Health Drafting Group recommends a partial exposure to obtain wider feedback on the scope of Appendix A-791 and proposed disclosures. The Informal Life and Health Drafting Group has prepared updates to the Appendix A-791 Q&A to assist with further defining the applicability of the Appendix. The drafting group will continue to work on revisions to the body of the statement, but believes feedback on the exposed QA revisions will assist with drafting further revisions. In addition, the drafting group has prepared disclosures for exposure also.

NAIC staff recommends exposing revisions to the SSAP No. 61R disclosure and the A-791 Q&A as reflected in agenda item 2017-28 - Attachment Q2. The Informal Life and Health Drafting Group is not recommending adoption of these revisions until the other revisions to the guidance in SSAP No. 61R are developed.

On August 4, 2018, the Statutory Accounting Principles (E) Working Group:

1. Exposed substantive revisions to SSAP No. 62R—Property and Casualty Reinsurance to incorporate guidance from EITF 93-6, Accounting for Multiple-Year Retrospectively Rated Contracts by Ceding and Assuming Enterprises and from EITF D-035, FASB Staff Views on Issue No. 93-6.. (Drafting notes are not planned to be in the final document.) The Working Group also requested, input on the effective date. See attachment

2. Exposed nonsubstantive revisions to SSAP No. 61R—Life, Deposit-Type and Accident and Health Reinsurance to incorporate disclosures, The proposed revisions also update the question-and-answer guidance in Appendix A-791—Life and Health Reinsurance Agreements to clarify the applicability of A-791. Note that the exposure includes a request for comments on whether the proposed disclosures adequately address the Financial Analysis (E) Working Group referral. See attachment

Comments are requested on the following items related to the exposed SSAP No. 61R disclosures:

1. The drafting group discussion determined that the prior exposure for SSAP No. 61R, paragraph 83, which was based on SSAP No. 62, paragraph 94 with modifications to be consistent with A-791 was repetitive on compliance with A-791. The subgroup reviewed existing paragraph 94 a-d, in SSAP No. 62R and determined it was not useful in the context of SSAP No. 61R. Regulator and industry input is requested on any additional contract features that should be identified for disclosure.

2. Regulator input is requested regarding whether proposed disclosures would be sufficient.

3. Comments are requested regarding contracts identified for disclosure in paragraph 85 should be identified in the annual statement reinsurance schedule S with a signifier to avoid repeating details in the annual statement note, which may be in the statement schedule.


Ref #2017-28Exhibit A

August 2017 Exposed Revisions

August 2017 Exposed Revisions 1. Proposed revisions to SSAP No. 61R—Life and Health Reinsurance for exposure:

Transfer of Risk

17. Reinsurance agreements must transfer risk from the ceding entity to the reinsurer in order to receive the reinsurance accounting treatment discussed in this statement. If the terms of the agreement violate the risk transfer criteria contained herein, (i.e., limits or diminishes the transfer of risk by the ceding entity to the reinsurer), the agreement shall follow the guidance for Deposit Accounting. Determining whether a contract with a reinsurer provides indemnification against loss or liability relating to significant risks requires a complete understanding of the reinsurance contract and other contracts or agreements between the ceding entity and related reinsurers. A complete understanding includes an evaluation of all contractual features including those that limit the amount of significant risks to which the reinsurer is subject (such as through experience refunds, cancellation provisions, adjustable features, or additions of profitable lines of business to the reinsurance contract) . In addition, any contractual feature (such as through payment schedules or accumulating retentions from multiple years) that delays timely reimbursement violates the conditions of reinsurance accounting. (Drafting Note: Additional language from FAS 113, paragraph 8.)

18. Determining if a reinsurance contract should be characterized as proportional or non-proportional requires the evaluation of all of the reinsurance contract terms, including both the substance and the form of the reinsurance contract. Proportional reinsurance contracts are a type of reinsurance whereby the reinsurer shares losses in the same proportion as it shares premium and policy amounts. Contractual provisions that would limit the reinsurer’s losses below the stated reinsurance ceded percentage (e.g. a deductible, a loss ratio corridor, a loss cap, an aggregate limit or any similar provisions) which can cause the ceding entity to retain a proportion of the losses which is greater than the proportion of premium and risk ceded shall result in the reinsurance agreement being characterized as non-proportional. (Drafting Note: Provides clarification regarding proportional versus non-proportional, incorporates concepts from the existing disclosure in paragraph 94.)

20. This paragraph applies to all proportional life, deposit-type and accident and health reinsurance agreements, except for yearly renewable term reinsurance agreements and non-proportional reinsurance agreements such as stop loss and catastrophe reinsurance. All proportional reinsurance agreements covering products that transfer all (100%) of the significant risks identified in Appendix A-791, and which otherwise comply with Appendix A-791, shall follow the guidance for reinsurance accounting contained in this statement. All proportional reinsurance contracts covering products that do not provide for sufficient transfer of all of the significant risks identified in Appendix A-791 and otherwise comply with Appendix A-791 shall follow the guidance for Deposit Accounting as specified in Appendix A-791.

1921. Yearly renewable term (YRT) reinsurance agreements that transfer a proportionate share of mortality or morbidity risk inherent in the business being reinsured and do not contain any of the conditions described in Appendix A-791, paragraphs 2.b., 2.c., 2.d., 2.h., 2.i., 2.j. or 2.k., shall follow the guidance for reinsurance accounting, including paragraphs 55-5759-61 that apply to indemnity reinsurance. Contracts that fail to meet the requirements for reinsurance accounting shall follow the guidance for Deposit Accounting. For all treaties entered into on or after January 1, 2003, the deferral guidance in paragraph 3 of A-791 shall also apply to YRT agreements. Since YRT agreements only transfer the mortality or morbidity risks to the reinsurer, the recognition of income shall be reflected on a net of tax basis, as gains emerge based on the mortality or morbidity experience.

2021. For non-proportional reinsurance agreements such as stop loss and catastrophe reinsurance agreements, contract terms shall be evaluated to assess whether they transfer significant risk to the reinsurer. For example, prepayment schedules and accumulating retentions from multiple years are contractual features inherently designed to delay the timing of reimbursement to the ceding entity



limits the risk to the reinsurer. Regardless of what a particular feature might be called, any feature that can delay timely reimbursement violates the conditions for reinsurance accounting. Transfer of insurance risk requires that the reinsurer's payment to the ceding entity depend on and directly vary with the amount and timing of claims settled under the reinsured contracts. Contractual features that can delay timely reimbursement prevent this condition from being met. Reinsurance accounting shall apply to all non-proportional agreements that meet the following three requirements: 1) transfer significant risk; 2) do not contain any of the conditions described in Appendix A-791, paragraphs 2.b., 2.c., 2.d., 2.h., 2.i., 2.j. or 2.k., which prohibit reinsurance accounting; and 3) do not contain any provisions that protect the reinsurer from incurring a loss. Contracts that fail to meet the requirements for reinsurance accounting shall follow the guidance for Deposit Accounting. (Drafting Note: This notes that Appendix A-791 requirements that apply to YRT also apply to non-proportional contracts. At the Summer National meeting, the shaded text was referenced for clarity needed in the compound sentence.)

22. The ceding entity’s evaluation of whether it is reasonably possible for a reinsurer to realize a significant loss under a non-proportional reinsurance contract shall be based on the present value of all cash flows between the ceding and assuming entities under reasonably possible outcomes without regard to how the individual cash flows are characterized. The same interest rate shall be used to compute the present value of cash flows for each reasonably possible outcome tested. (Drafting Note: From SSAP No. 62R, paragraph 15 and FAS 113, paragraph 10. Although this is from the FAS 113 short-duration guidance, this is consistent with the existing SSAP No. 61R, paragraph 38 references to P&C concepts.)

23. Significance of loss for a non-proportional reinsurance contract shall be evaluated by comparing the present value of all cash flows, determined as described in paragraph 22, with the present value of the amounts paid or deemed to have been paid1 to the reinsurer. If, based on this comparison, the reinsurer is not exposed to the reasonable possibility of significant loss, the ceding entity shall be considered indemnified against loss or liability relating to insurance risk only if substantially all of the insurance risk relating to the reinsured portions of the underlying insurance contracts has been assumed by the reinsurer. In this narrow circumstance, the reinsurer's economic position is virtually equivalent to having written the insurance contract directly. This condition is met only if insignificant insurance risk is retained by the ceding entity on the retained portions of the underlying insurance contracts, so that the reinsurer's exposure to loss is essentially the same as the reporting entity's. (Drafting Note: From SSAP No. 62R, paragraph 16 and FAS 113, paragraph 11. Although this is from the FAS 113 short-duration guidance, this is consistent with the existing SSAP No. 61R, paragraph 38 references to P&C concepts.)

Credits for Ceded Reinsurance

3639. The credit taken by the ceding entity under the coinsurance arrangement is calculated using the same methodology and assumptions used in determining its policy and claim reserves. It is, of course, only for the percentage of the risk that was reinsured. Under modified coinsurance, the reserve credit is reduced by the modco deposit retained by the ceding entity. If the entity reinsures on a yearly renewable term basis, it is itself buying insurance for the portion of the ceded amount at risk. The amount of yearly renewable term reinsurance that is required on a given policy generally decreases each year as the entity's reserve increases. The net amount at risk may increase, however, on interest sensitive products such as universal life. The amount at risk on accident and health yearly renewal term reinsurance will remain level and the reinsurance premium will increase each year.

3740. The reserve credit taken by the ceding entity is reported as a reduction to the reserves and not as an asset of the entity. The ceding entity's reserve credit and assuming entity's reserve for yearly renewable term reinsurance shall be computed as the one year term mean reserve on the amount of

1 Payments and receipts under a reinsurance contract may be settled net. The ceding enterprise may withhold funds as collateral or may be entitled to compensation other than recovery of claims. Determining the amounts paid or deemed to have been paid (hereafter referred to as “amounts paid”) for reinsurance requires an understanding of all contract provisions.



insurance ceded. The ceding entity must use the same mortality and interest bases which were used for valuing the original policy before reinsurance. The credit may also be computed on a pro rata basis if the result is not materially different from the credit computed on the mean reserve basis. For all types of reinsurance, the ceding entity also takes credit for other amounts due from the reinsurer such as unpaid claims and claims incurred but not reported. If contemplated by the reinsurance contract, recognition of related assets and liabilities must occur (policy loans, due and deferred premiums, etc.).

41. Both proportional reinsurance and non-proportional reinsurance agreements that meet the conditions for reinsurance accounting shall only reflect reinsurance credit for the portion of risk which is ceded. Provisions that would limit the reinsurer’s losses (e.g. a deductible, a loss ratio corridor, a loss cap, an aggregate limit or any similar provisions) shall be reflected as reductions in coverage (claims and losses ceded) caused by any applicable risk limiting provision(s). (Drafting Note: This includes concepts from SSAP No. 61R, paragraph 38 and from SSAP No., 62R, paragraph 93 disclosure.)

3842. Non-proportional reinsurance is entered into on an annual basis to limit the claims experience of the ceding entity and thereby protect its financial integrity. When the period of the arrangement exceeds one year, the contract must be carefully reviewed to determine if the end result more closely follows proportional reinsurance or non-proportional reinsurance. No reserve credit is taken for non-proportional reinsurance unless the aggregate attachment point has in fact been penetrated. In order for an entity to reflect reserve credits on a prospective basis, the entity will need to demonstrate that the present value of expected recoveries using realistic assumptions, to be realized from the reinsurer are in excess of the present value of the reinsurance premiums guaranteed to be paid by the ceding entity under the terms of the contract. Because non-proportional reinsurance aggregates experience, and does not indemnify the ceding entity for each policy loss, the use of statutory assumptions underlying the insured policies is inappropriate for determining any reserve credit to be taken by the ceding entity. Historical experience, pricing assumptions and asset shares shall be considered in determining if the reinsurer may be reasonably expected to pay any claims. The reserve credit taken shall only reflect these reasonable expectations. This treatment of non-proportional reinsurance is similar to the way property and casualty (P&C) reinsurance is considered. This is because these modes of reinsurance more closely follow P&C indemnification principles than life insurance formula basis, and because these coverages are very similar to excess insurance on P&C products. In determining the appropriate reserve credit, the probability of a loss penetrating to the reinsurer's level of coverage (using reasonable assumptions) must be multiplied by the expected amount of recovery. This is the same as reserve credits on coinsurance where the probability of a claim (i.e., mortality) is multiplied by the expected return (i.e., death benefit). In that the coverage is for aggregate experience, the mortality assumptions underlying any one policy risk are inappropriate to analyze the appropriate credits for non-proportional coverage.

2. Proposed revisions to SSAP No. 62R—Property and Casualty Reinsurance regarding risk transfer for exposure:

Accounting for Prospective Reinsurance Agreements

26. Amounts paid for prospective reinsurance that meet the conditions for reinsurance accounting shall be reported as a reduction of written and earned premiums by the ceding entity and shall be earned over the remaining contract period in proportion to the amount of reinsurance protection provided or, if applicable, until the reinsurer's maximum liability under the agreement has been exhausted. If the amounts paid are subject to adjustment and can be reasonably estimated, the basis for amortization shall be the estimated ultimate amount to be paid. Reinstatement premium, if any, shall be earned over the period from the reinstatement of the limit to the expiration of the agreement.

27. Changes in amounts of estimated reinsurance recoverables shall be recognized as a reduction of gross losses and loss expenses incurred in the current period statement of income. Reinsurance recoverables on paid losses shall be reported as an asset, reinsurance recoverables on loss and loss adjustment expense payments, in the balance sheet. Reinsurance recoverables on



unpaid case-basis and incurred but not reported losses and loss adjustment expenses shall be netted against the liability for gross losses and loss adjustment expenses.

28. Prospective reinsurance agreements that meet the conditions for reinsurance accounting shall only reflect reinsurance credit (claims and loss reserves reduction) for the portion of risk which is ceded. Provisions that would limit the reinsurer’s losses (e.g. a deductible, a loss ratio corridor, a loss cap, an aggregate limit or any similar provisions) shall be reflected as reductions in coverage (claims and losses ceded) caused by any applicable risk limiting provision(s). (Drafting Note: This includes concepts from SSAP No. 62R, paragraph 93 disclosure.)

29. No reserve credit shall be taken for non-proportional reinsurance unless the aggregate attachment point has in fact been penetrated. In order for an entity to reflect reserve credits for non -proportional reinsurance on a prospective basis, the entity will need to demonstrate that the present value of expected recoveries, using realistic assumptions, to be realized from the reinsurer are in excess of the present value of the reinsurance premiums guaranteed to be paid by the ceding entity under the terms of the contract. Because non-proportional reinsurance aggregates experience and does not indemnify the ceding entity for each policy loss, the use of statutory assumptions underlying the insured policies is inappropriate for determining any reserve credit to be taken by the ceding entity. Historical experience, pricing assumptions shall be considered in determining if the reinsurer may be reasonably expected to pay any claims. The reserve credit taken shall only reflect these reasonable expectations. (Drafting Note: This includes concepts from SSAP No. 61R, paragraph 38.)

[3.] Proposed disclosures for SSAP No. 61R for exposure

81. Disclosures for paragraphs 81-85 annual statement interrogatories, which are required to be included with the annual audit report initially with audit reports on financial statements as of and for the period ended December 31, 2018 regarding reinsurance contracts. The disclosures required within paragraphs 81-85 shall be included in accompanying supplemental schedules of the annual audit report beginning in year-end 2018. These disclosures shall be limited to reinsurance contracts entered into, renewed or amended on or after January 1, 1996. This limitation applies to the annual audit report only and does not apply to the statutory annual statement interrogatories and the reinsurance summary supplemental filing. (Drafting Note: From SSAP No. 62R, paragraph 92)

82. Disclose if any risks are reinsured under a quota share reinsurance contract with any other entity that includes a provision that would limit the reinsurer’s losses below the stated quota share percentage (e.g. a deductible, a loss ratio corridor, a loss cap, an aggregate limit or any similar provisions). If true, indicate the number of reinsurance contracts containing such provisions and if the amount of reinsurance credit taken reflects the reduction in quota share coverage caused by any applicable limiting provision(s). (Drafting Note: From SSAP No. 62R, paragraph 93, and is also relevant to A-791 evaluations.)

83. Disclose if the reporting entity ceded any risk under any reinsurance contract (or under multiple contracts with the same reinsurer or its affiliates) for which during the period covered by the statement: (i) it recorded a positive or negative underwriting result greater than 5% of prior year-end surplus as regards policyholders or it reported calendar year written premium ceded or year-end loss and loss expense reserves ceded greater than 5% of prior year-end surplus as regards policyholders; (ii) it accounted for that contract as reinsurance and not as a deposit; and (iii) the contract(s) contain one or more of the following features or other features that would have similar results: (Drafting Note: From SSAP No. 62R, paragraph 94)

a. 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; (Drafting Note: From Appendix A-791, paragraph 2b)

b. 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; (Drafting Note: From Appendix A-791, paragraph 2c)

c. The ceding insurer must, at specific points in time scheduled in the agreement, terminate or automatically recapture all or part of the reinsurance ceded; (Drafting Note: From Appendix A-791, paragraph 2d)

d. The proportional reinsurance agreement involves the possible payment by the ceding insurer to the reinsurer of amounts other than from income realized from the reinsured policies. (Drafting Note: From Appendix A-791, paragraph 2e)

e. The proportional reinsurance agreement does not transfer all of the significant risk inherent in the business being reinsured as further described in Appendix A-791 paragraph 2 f. (Drafting Note: From Appendix A-791, paragraph 2f)

f. 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. (Drafting Note: From Appendix A-791, paragraph 2.k.)

g. Provisions which permit the reporting of losses, or 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 (unless there is no activity during the period). (Drafting Note: From SSAP No. 62R, paragraph 94.e. and Appendix A-791, paragraph 2.e.)

h. Payment schedule, accumulating retentions from multiple years or any features inherently designed to delay timing of the reimbursement to the ceding entity. (Drafting Note: From SSAP No. 62R, paragraph 94.f., also relevant to risk transfer guidance in SSAP No. 61R)

84. Disclose if the reporting entity ceded any risk under any short-duration or any non-proportional reinsurance contract (or multiple contracts with the same reinsurer or its affiliates) during the period covered by the financial statement, and either: (Drafting Note: From SSAP No. 62R, paragraph 97)

a. Accounted for that contract as reinsurance under statutory accounting principles (“SAP”) and as a deposit under generally accepted accounting principles (“GAAP”); or

b. Accounted for that contract as reinsurance under GAAP and as a deposit under SAP.



85. If affirmative disclosure is required for paragraph 84, explain in a supplemental filing why the contract(s) is treated differently for GAAP and SAP. (Drafting Note: From SSAP No. 62R, paragraph 98)

3.[4.] Update terms: Proposed terminology revisions to SSAP No. 61R, glossary, and to SSAP No. 62R from Barron’s Dictionary of Insurance Terms are illustrated below. In addition terms are also proposed for the Master Glossary.

a. Proposed SSAP No. 61R, glossary revisions :

GLOSSARY2

Non-proportional Reinsurance

A reinsurance arrangement in which a reinsurer makes payments to an insurer whose losses exceed a predetermined retention level.

Reinsurance that is not secured on individual lives for specific individual amounts of reinsurance, but rather reinsurance that protects the ceding entity's overall experience on its entire portfolio of business, or at least a broad segment of it. The most common forms of non-proportional reinsurance are stop loss reinsurance and catastrophe reinsurance.

Non-proportional reinsurance is a form of casualty insurance. Usually neither the premium nor continuance of coverage is guaranteed beyond a specified term.

Proportional Reinsurance

Reinsurance on a particular life for a specified amount or share generally, though not necessarily, secured at the time the policy is issued to the insured. The continuation of coverage guarantees for the reinsurance generally parallel those in the life insurance coverage reinsured. Most life reinsurance conducted in the United States is done so on a proportional basis.

A type of reinsurance whereby the reinsurer shares losses in the same proportion as it shares premium and policy amounts.

b. Proposed terminology update SSAP No. 62R—Property and Casualty Reinsurance – The concepts of proportional and non-proportional already exist in SSAP No. 62R, paragraph 5 and only minor edits are proposed. In addition, paragraph numbering in paragraph 5 is updated to be consistent with the format of the rest of the manual.

5. Reinsurance coverage can be pro rata (i.e., proportional reinsurance) where the reinsurer shares a pro rata portion of the losses and in the same proportion as it shares premium of the ceding entity or excess of loss (i.e., non-proportional) where the reinsurer, subject to a specified limit, indemnifies the ceding entity against the amount of loss in excess of a specified retention. Determining if a reinsurance contract should be categorized as proportional or non-proportional requires the evaluation of all of the reinsurance contract terms including both the substance and the form of the reinsurance contract. Most reinsurance agreements fall into one of the following categories:

I.a Treaty Reinsurance Contracts–Pro Rata:

2 Reinsurance Section Treaty Committee paper, "Discussion of Reinsurance Provisions in a Life Reinsurance Agreements," dated August 1, 1994, and the glossary contained in Life, Health, and Annuity Reinsurance, by John E. Tiller, Jr., FSA, and Denise Fagerbert, FSA (ACTEX Publications, Inc.) and Barron’s Dictionary of Insurance Terms.



Ai. Quota Share Reinsurance–The ceding entity is indemnified against a fixed percentage of loss on each risk covered in the agreement;

Bii.. Surplus Share Reinsurance–The ceding entity establishes a retention or "line" on the risks to be covered and cedes a fraction or a multiple of that line on each policy subject to a specified maximum cession;

IIb. Treaty Reinsurance Contracts-Excess of Loss:Ai.. Excess Per Risk Reinsurance–The ceding entity is indemnified, subject to a

specified limit, against the amount of loss in excess of a specified retention with respect to each risk covered by a treaty;

`Bii. Aggregate Excess of Loss Reinsurance–The ceding entity is indemnified against the amount by which the ceding entity's net retained losses incurred during a specific period exceed either a predetermined dollar amount or a percentage of the entity's subject premiums for the specific period subject to a specified limit;

IIIc. Treaty Reinsurance Contracts–Catastrophe: The ceding entity is indemnified, subject to a specified limit, against the amount of loss in excess of a specified retention with respect to an accumulation of losses resulting from a catastrophic event or series of events;

IVd. Facultative Reinsurance Contracts–Pro Rata: The ceding entity is indemnified for a specified percentage of losses and loss expenses arising under a specific insurance policy in exchange for that percentage of the policy's premium;

Ve. Facultative Reinsurance Contracts–Excess of Loss: The ceding entity is indemnified, subject to a specified limit, for losses in excess of its retention with respect to a particular risk.

c.[b.] Proposed short-duration and long-duration wording for Accounting Practices and Procedures Manual - Master Glossary (further formatting to be determined later):

Insurance contracts shall be classified as short-duration contracts or long-duration contracts depending on whether the contracts are expected to remain in force for an extended period.

Short-Duration – The factors that shall be considered in determining whether a particular contract can be expected to remain in force for an extended period are as follows for a short-duration contract: (Source 944-20-15-7)

a. The contract provides insurance protection for a fixed period of short-duration.

b. The contract enables the insurer to cancel the contract or to adjust the provisions of the contract at the end of any contract period, such as adjusting the amount of premiums charged or coverage provided.

Long-Duration – The factors that shall be considered in determining whether a particular contract can be expected to remain in force for an extended period are as follows for a long-duration contract: (Source 944-20-15-10)

a. The contract generally is not subject to unilateral changes in its provisions, such as a noncancelable or guaranteed renewable contract.

b. The contract requires the performance of various functions and services (including insurance protection) for an extended period.



c. The guidance for long-duration contracts applies, in part, to all of the following classes of long-duration contracts issued: (Source 944-20-15-11)

i. Universal life-type contracts, that is, long-duration insurance contracts with terms that are not fixed and guaranteed

ii. Limited-payment contracts, including limited-payment participating and limited-payment nonguaranteed-premium contracts that are not, in substance, universal life-type contracts

[i.] Except as noted in paragraph 944-20-15-3, -Pparticipating life insurance contracts including those issued by Mutual life insurance entities include assessment entities, fraternal benefit societies, and stock life insurance subsidiaries of mutual life insurance entities which meet the following criteria: (944-20-15-3):

(a) Participating life insurance contracts denote those that have both of the following characteristics:

(1) They are long-duration participating contracts that are expected to pay dividends to policyholders based on actual experience of the insurance entity.

(2) Annual policyholder dividends are paid in a manner that both: identifies divisible surplus and distributes that surplus in approximately the same proportion as the contracts are considered to have contributed to divisible surplus (commonly referred to in actuarial literature as the contribution principle).

Participating life insurance contracts described in c (iii) are permitted to account for those contracts in accordance with the Long-Duration guidance. The same accounting policy shall be applied consistently to all those participating life insurance contracts.

iii. Whole-life contract, that is, insurance that may be kept in force for a person’s entire life by paying one or more premiums

iv. Term life insurance, that is, insurance that provides a benefit if the insured dies within the period specified in the contract.

If insurance contracts have characteristics to the contracts cited in c.i. or c.ii. those contracts are Long-Duration Contracts. For example, universal disability contracts that have many of the same characteristics as universal life-type contracts, with the exception of providing disability benefits instead of life insurance benefits, shall be accounted for in a manner consistent with universal life-type contracts. (Source 944-20-15-12)



4.[5.] Proposed wording to incorporate elements from model 791 section 2, Preamble into Appendix A - 791:

2. Licensed insurers routinely enter into reinsurance agreements that yield legitimate relief to the ceding insurer from strain to surplus. However, it is improper for a licensed insurer, in the capacity of ceding insurer, to enter into reinsurance agreements 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 being reinsured. In such arrangements, in substance or effect, the expected potential liability to the ceding insurer remains basically unchanged by the reinsurance transaction, notwithstanding certain risk elements in the reinsurance agreement, such as catastrophic mortality or extraordinary survival. The terms of such agreements shall not be used to establish assets or reduce liabilities in order to ensure: 1) the proper reporting of the financial condition of the ceding insurer; 2) the ceding insurer is prevented from improperly reducing liabilities or establishing assets for reinsurance ceded; and 3) to avoid creating a situation that may be hazardous to policyholders. No insurer shall, for reinsurance ceded, reduce any liability or establish any asset in any statutory financial statement if, by the terms of the reinsurance agreement, in substance or effect, any of the following conditions exist:


Ref #2017-28Exhibit B

Excerpts of Authoritative Literature SSAP No. 61 – Revised—Life, Deposit-Type and Accident and Health Reinsurance (bolding added for

emphasis)

Transfer of Risk

17. Reinsurance agreements must transfer risk from the ceding entity to the reinsurer in order to receive the reinsurance accounting treatment discussed in this statement. If the terms of the agreement violate the risk transfer criteria contained herein, (i.e., limits or diminishes the transfer of risk by the ceding entity to the reinsurer), the agreement shall follow the guidance for Deposit Accounting. In addition, any contractual feature that delays timely reimbursement violates the conditions of reinsurance accounting.

18. This paragraph applies to all life, deposit-type and accident and health reinsurance agreements except for yearly renewable term reinsurance agreements and non-proportional reinsurance agreements such as stop loss and catastrophe reinsurance. All reinsurance agreements covering products that transfer significant risk shall follow the guidance for reinsurance accounting contained in this statement. All reinsurance contracts covering products that do not provide for sufficient transfer of shall follow the guidance for Deposit Accounting.

19. Yearly renewable term (YRT) reinsurance agreements that transfer a proportionate share of mortality or morbidity risk inherent in the business being reinsured and do not contain any of the conditions described in Appendix A-791, paragraphs 2.b., 2.c., 2.d., 2.h., 2.i., 2.j. or 2.k., shall follow the guidance for reinsurance accounting, including paragraphs 55-57 that apply to indemnity reinsurance. Contracts that fail to meet the requirements for reinsurance accounting shall follow the guidance for Deposit Accounting. For all treaties entered into on or after January 1, 2003, the deferral guidance in paragraph 3 of A-791 shall also apply to YRT agreements. Since YRT agreements only transfer the mortality or morbidity risks to the reinsurer, the recognition of income shall be reflected on a net of tax basis, as gains emerge based on the mortality or morbidity experience.

20. For non-proportional reinsurance agreements such as stop loss and catastrophe reinsurance agreements, contract terms shall be evaluated to assess whether they transfer significant risk to the reinsurer. For example, prepayment schedules and accumulating retentions from multiple years are contractual features inherently designed to delay the timing of reimbursement to the ceding entity limits the risk to the reinsurer. Regardless of what a particular feature might be called, any feature that can delay timely reimbursement violates the conditions for reinsurance accounting. Transfer of insurance risk requires that the reinsurer's payment to the ceding entity depend on and directly vary with the amount and timing of claims settled under the reinsured contracts. Contractual features that can delay timely reimbursement prevent this condition from being met. Reinsurance accounting shall apply to all non-proportional agreements that transfer significant risk and do not contain any provisions that protect the reinsurer from incurring a loss. Contracts that fail to meet the requirements for reinsurance accounting shall follow the guidance for Deposit Accounting.

Credits for Ceded Reinsurance

36. The credit taken by the ceding entity under the coinsurance arrangement is calculated using the same methodology and assumptions used in determining its policy and claim reserves. It is, of course, only for the percentage of the risk that was reinsured. Under modified coinsurance, the reserve credit is reduced by the modco deposit retained by the ceding entity. If the entity reinsures on a yearly renewable term basis, it is itself buying insurance for the portion of the ceded amount at risk. The amount of yearly renewable term reinsurance that is required on a given policy generally decreases each year as the entity's reserve increases. The net amount at risk may increase, however, on interest sensitive products such as universal life. The amount at risk on accident and health yearly renewal term reinsurance will remain level and the reinsurance premium will increase each year.

37. The reserve credit taken by the ceding entity is reported as a reduction to the reserves and not as an asset of the entity. The ceding entity's reserve credit and assuming entity's reserve for yearly renewable term reinsurance shall be computed as the one year term mean reserve on the amount of insurance ceded. The ceding entity must use the same mortality and interest bases which were used for valuing the original policy before reinsurance. The credit may also be computed on a pro rata basis if the



Excerpts of Authoritative Literatureresult is not materially different from the credit computed on the mean reserve basis. For all types of reinsurance, the ceding entity also takes credit for other amounts due from the reinsurer such as unpaid claims and claims incurred but not reported. If contemplated by the reinsurance contract, recognition of related assets and liabilities must occur (policy loans, due and deferred premiums, etc.).

38. Non-proportional reinsurance is entered into on an annual basis to limit the claims experience of the ceding entity and thereby protect its financial integrity. When the period of the arrangement exceeds one year, the contract must be carefully reviewed to determine if the end result more closely follows proportional reinsurance. No reserve credit is taken for non-proportional reinsurance unless the aggregate attachment point has in fact been penetrated. In order for an entity to reflect reserve credits on a prospective basis, the entity will need to demonstrate that the present value of expected recoveries using realistic assumptions, to be realized from the reinsurer are in excess of the present value of the reinsurance premiums guaranteed to be paid by the ceding entity under the terms of the contract. Because non-proportional reinsurance aggregates experience, and does not indemnify the ceding entity for each policy loss, the use of statutory assumptions underlying the insured policies is inappropriate for determining any reserve credit to be taken by the ceding entity. Historical experience, pricing assumptions and asset shares shall be considered in determining if the reinsurer may be reasonably expected to pay any claims. The reserve credit taken shall only reflect these reasonable expectations. This treatment of non-proportional reinsurance is similar to the way property and casualty (P&C) reinsurance is considered. This is because these modes of reinsurance more closely follow P&C indemnification principles than life insurance formula basis, and because these coverages are very similar to excess insurance on P&C products. In determining the appropriate reserve credit, the probability of a loss penetrating to the reinsurer's level of coverage (using reasonable assumptions) must be multiplied by the expected amount of recovery. This is the same as reserve credits on coinsurance where the probability of a claim (i.e., mortality) is multiplied by the expected return (i.e., death benefit). In that the coverage is for aggregate experience, the mortality assumptions underlying any one policy risk are inappropriate to analyze the appropriate credits for non-proportional coverage.

Relevant Literature

78. This statement adopts with modification FASB Statement No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts. The statutory accounting principles established by this statement differ substantially from GAAP, reflecting much more detailed guidance, as follows:

a. Reserve credits taken by ceding companies as a result of reinsurance contracts are netted against the ceding entity's policy and claim reserves and unpaid claims;

b. First year and renewal ceding commissions on indemnity reinsurance of new business are recognized as income. Ceding commissions on ceded in-force business are included in the calculation of initial gain or loss;

c. As discussed in SSAP No. 50, statutory accounting defines deposit-type contracts as those contracts which do not include any mortality or morbidity risk. GAAP defines investment contracts as those that do not subject the insurance enterprise to significant policyholder mortality or morbidity risk. (The distinction is any mortality or morbidity risk for statutory purposes vs. significant mortality or morbidity risk for GAAP purposes.) Therefore, a contract may be considered an investment contract for GAAP purposes, and that same contract may be considered other than deposit-type for statutory purposes. A reinsurance treaty covering contracts that have insignificant mortality or morbidity risk (i.e., contracts classified as other than deposit-type contracts for statutory purposes, but investment contracts for GAAP purposes) that does not transfer that mortality or morbidity risk, but does transfer all of the significant risk inherent in the business being reinsured (e.g., lapse, credit quality, reinvestment or disintermediation risk) qualifies for reinsurance accounting for statutory reporting purposes, but would not qualify for reinsurance accounting treatment for GAAP purposes;



Excerpts of Authoritative Literatured. Initial gains on indemnity reinsurance of in-force blocks of business have unique

accounting treatment. A portion of the initial gains (equal to the tax effect of the initial gain in surplus) is reported as commissions and expense allowances on reinsurance ceded in the statement of operations. The remainder of the initial gains is reported on a net-of-tax basis as a write-in for gain or loss in surplus in the Capital and Surplus Account. In subsequent years, the ceding entity recognizes income on the reinsurance ceded line for the net-of-tax profits that emerged on the reinsured block of business with a corresponding decrease in the write-in for gain or loss in surplus;

e. This statement prohibits recognition of a gain or loss in connection with the sale, transfer or reinsurance of an in-force block of business between affiliated entities in a non-economic transaction. Any difference between the assets transferred by the ceding entity and the liabilities, including unamortized IMR, shall be deferred and amortized under the interest method;

f. This statement requires that a liability be established through a provision reducing surplus for unsecured reinsurance recoverables from unauthorized reinsurers;

g. This statement prescribes offsetting certain reinsurance premiums.

79. This statement incorporates Appendices A-785 and A-791.

SSAP No. 62R—Property and Casualty Reinsurance provides the following:

Reinsurance Contracts Must Include Transfer of Risk

10. The essential ingredient of a reinsurance contract is the transfer of risk. The essential element of every true reinsurance agreement is the undertaking by the reinsurer to indemnify the ceding entity, i.e., reinsured entity, not only in form but in fact, against loss or liability by reason of the original insurance. Unless the agreement contains this essential element of risk transfer, no credit shall be recorded. (INT 02-22)

11. Insurance risk involves uncertainties about both (a) the ultimate amount of net cash flows from premiums, commissions, claims, and claims settlement expenses (underwriting risk) and (b) the timing of the receipt and payment of those cash flows (timing risk). Actual or imputed investment returns are not an element of insurance risk. Insurance risk is fortuitous–the possibility of adverse events occurring is outside the control of the insured.

12. Determining whether an agreement with a reinsurer provides indemnification against loss or liability (transfer of risk) relating to insurance risk requires a complete understanding of that contract and other contracts or agreements between the ceding entity and related reinsurers. A complete understanding includes an evaluation of all contractual features that (a) limit the amount of insurance risk to which the reinsurer is subject (e.g., experience refunds, cancellation provisions, adjustable features, or additions of profitable lines of business to the reinsurance contract) or (b) delay the timely reimbursement of claims by the reinsurer (e.g., payment schedules or accumulating retentions from multiple years).

13. Indemnification of the ceding entity against loss or liability relating to insurance risk in reinsurance requires both of the following:

a. The reinsurer assumes significant insurance risk under the reinsured portions of the underlying insurance agreements; and

b. It is reasonably possible that the reinsurer may realize a significant loss from the transaction.

14. A reinsurer shall not have assumed significant insurance risk under the reinsured contracts if the probability of a significant variation in either the amount or timing of payments by the reinsurer is remote. Implicit in this condition is the requirement that both the amount and timing of the reinsurer's payments depend on and



Excerpts of Authoritative Literaturedirectly vary with the amount and timing of claims settled by the ceding entity. Contractual provisions that delay timely reimbursement to the ceding entity prevent this condition from being met.

15. The ceding entity's evaluation of whether it is reasonably possible for a reinsurer to realize a significant loss from the transaction shall be based on the present value of all cash flows between the ceding and assuming companies under reasonably possible outcomes, without regard to how the individual cash flows are described or characterized. An outcome is reasonably possible if its probability is more than remote. The same interest rate shall be used to compute the present value of cash flows for each reasonably possible outcome tested. A constant interest rate shall be used in determining those present values because the possibility of investment income varying from expectations is not an element of insurance risk. Judgment is required to identify a reasonable and appropriate interest rate.

16. Significance of loss shall be evaluated by comparing the present value of all cash flows, determined as described in paragraph 15, with the present value of the amounts paid or deemed to have been paid to the reinsurer. If, based on this comparison, the reinsurer is not exposed to the reasonable possibility of significant loss, the ceding entity shall be considered indemnified against loss or liability relating to insurance risk only if substantially all of the insurance risk relating to the reinsured portions of the underlying insurance agreements has been assumed by the reinsurer. In this narrow circumstance, the reinsurer's economic position is virtually equivalent to having written the insurance contract directly. This condition is met only if insignificant insurance risk is retained by the ceding entity on the retained portions of the underlying insurance contracts, so that the reinsurer's exposure to loss is essentially the same as the reporting entity's.

17. Payment schedules and accumulating retentions from multiple years are contractual features inherently designed to delay the timing of reimbursement to the ceding entity. Regardless of what a particular feature might be called, any feature that can delay timely reimbursement violates the conditions for reinsurance accounting. Transfer of insurance risk requires that the reinsurer's payment to the ceding entity depend on and directly vary with the amount and timing of claims settled under the reinsured contracts. Contractual features that can delay timely reimbursement prevent this condition from being met. Therefore, any feature that may affect the timing of the reinsurer's reimbursement to the ceding entity shall be closely scrutinized.

92. Disclosures for paragraphs 93-98 represent annual statement interrogatories, which are required to be included with the annual audit report beginning with audit reports on financial statements as of and for the period ended December 31, 2006. The disclosures required within paragraphs 93-98 shall be included in accompanying supplemental schedules of the annual audit report beginning in year-end 2006. These disclosures shall be limited to reinsurance contracts entered into, renewed or amended on or after January 1, 1994. This limitation applies to the annual audit report only and does not apply to the statutory annual statement interrogatories and the reinsurance summary supplemental filing.

93. Disclose if any risks are reinsured under a quota share reinsurance contract with any other entity that includes a provision that would limit the reinsurer’s losses below the stated quota share percentage (e.g. a deductible, a loss ratio corridor, a loss cap, an aggregate limit or any similar provisions)? If yes, indicate the number of reinsurance contracts containing such provisions and if the amount of reinsurance credit taken reflects the reduction in quota share coverage caused by any applicable limiting provision(s).

94. Disclose if the reporting entity ceded any risk under any reinsurance contract (or under multiple contracts with the same reinsurer or its affiliates) for which during the period covered by the statement: (i) it recorded a positive or negative underwriting result greater than 5% of prior year-end surplus as regards policyholders or it reported calendar year written premium ceded or year-end loss and loss expense reserves ceded greater than 5% of prior year-end surplus as regards policyholders; (ii) it accounted for that contract as reinsurance and not as a deposit; and (iii) the contract(s) contain one or more of the following features or other features that would have similar results:

a. A contract term longer than two years and the contract is noncancellable by the reporting entity during the contract term;



Excerpts of Authoritative Literatureb. A limited or conditional cancellation provision under which cancellation triggers an obligation by the reporting entity, or an affiliate of the reporting entity, to enter into a new reinsurance contract with the reinsurer, or an affiliate of the reinsurer;

c. Aggregate stop loss reinsurance coverage;

d. A unilateral right by either party (or both parties) to commute the reinsurance contract, whether conditional or not, except for such provisions which are only triggered by a decline in the credit status of the other party;

e. A provision permitting reporting of losses, or payment of losses, less frequently than on a quarterly basis (unless there is no activity during the period); or

f. Payment schedule, accumulating retentions from multiple years or any features inherently designed to delay timing of the reimbursement to the ceding entity.

95. Disclose if the reporting entity during the period covered by the statement ceded any risk under any reinsurance contract (or under multiple contracts with the same reinsurer or its affiliates) for which during the period covered by the statement it recorded a positive or negative underwriting result greater than 5% of prior year-end surplus as regards policyholders or it reported calendar year written premium ceded or year-end loss and loss expense reserves ceded greater than 5% of prior year-end surplus as regards policyholders, excluding cessions to approved pooling arrangements or to captive insurance companies that are directly or indirectly controlling, controlled by, or under common control with (i) one or more unaffiliated policyholders of the reporting entity, or (ii) an association of which one or more unaffiliated policyholders of the reporting entity is a member, where:

a. The written premium ceded to the reinsurer by the reporting entity or its affiliates represents fifty percent (50%) or more of the entire direct and assumed premium written by the reinsurer based on its most recently available financial statement; or

b. Twenty–five percent (25%) or more of the written premium ceded to the reinsurer has been retroceded back to the reporting entity or its affiliates in a separate reinsurance contract.

96. If affirmative disclosure is required for paragraph 94 or 95, provide the following information:

a. A summary of the reinsurance contract terms and indicate whether it applies to the contracts meeting paragraph 94 or 95;

b. A brief discussion of management's principal objectives in entering into the reinsurance contract including the economic purpose to be achieved; and

c. The aggregate financial statement impact gross of all such ceded reinsurance contracts on the balance sheet and statement of income.

97. Except for transactions meeting the requirements of paragraph 31, disclose if the reporting entity ceded any risk under any reinsurance contract (or multiple contracts with the same reinsurer or its affiliates) during the period covered by the financial statement, and either:

a. Accounted for that contract as reinsurance (either prospective or retroactive) under statutory accounting principles (“SAP”) and as a deposit under generally accepted accounting principles (“GAAP”); or

b. Accounted for that contract as reinsurance under GAAP and as a deposit under SAP.

98. If affirmative disclosure is required for paragraph 97, explain in a supplemental filing why the contract(s) is treated differently for GAAP and SAP.



Excerpts of Authoritative Literature FASB Statement No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration

Contracts (FAS 113) excerpts

Indemnification against Loss or Liability Relating to Insurance Risk

8. Determining whether a contract with a reinsurer provides indemnification against loss or liability relating to insurance risk requires a complete understanding of that contract and other contracts or agreements between the ceding enterprise and related reinsurers. A complete understanding includes an evaluation of all contractual features that (a) limit the amount of insurance risk to which the reinsurer is subject (such as through experience refunds, cancellation provisions, adjustable features, or additions of profitable lines of business to the reinsurance contract) or (b) delay the timely reimbursement of claims by the reinsurer (such as through payment schedules or accumulating retentions from multiple years).

Reinsurance of Short-Duration Contracts9. Indemnification of the ceding enterprise against loss or liability relating to insurance risk in reinsurance of short-duration contracts requires both of the following, unless the condition in paragraph 11 is met:

a. The reinsurer assumes significant insurance risk under the reinsured portions of the underlying insurance contracts.

b. It is reasonably possible that the reinsurer may realize a significant loss from the transaction.

A reinsurer shall not be considered to have assumed significant insurance risk under the reinsured contracts if the probability of a significant variation in either the amount or timing of payments by the reinsurer is remote. Contractual provisions that delay timely reimbursement to the ceding enterprise would prevent this condition from being met.

10. The ceding enterprise’s evaluation of whether it is reasonably possible for a reinsurer to realize a significant loss from the transaction shall be based on the present value of all cash flows between the ceding and assuming enterprises under reasonably possible outcomes, without regard to how the individual cash flows are characterized. The same interest rate shall be used to compute the present value of cash flows for each reasonably possible outcome tested.

11. Significance of loss shall be evaluated by comparing the present value of all cash flows, determined as described in paragraph 10, with the present value of the amounts paid or deemed to have been paid3 to the reinsurer. If, based on this comparison, the reinsurer is not exposed to the reasonable possibility of significant loss, the ceding enterprise shall be considered indemnified against loss or liability relating to insurance risk only if substantially all of the insurance risk relating to the reinsured portions of the underlying insurance contracts has been assumed by the reinsurer.4

Reinsurance of Long-Duration Contracts10. Indemnification of the ceding enterprise against loss or liability relating to insurance risk in reinsurance of long-duration contracts requires the reasonable possibility that the reinsurer may realize significant loss from assuming insurance risk as that concept is contemplated in Statement 60 and FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments. Statement 97 defines long-duration contracts that do not subject the insurer to mortality or morbidity risks as investment contracts. Consistent with that definition, a contract that does not subject the reinsurer to the reasonable possibility of significant loss from the events insured by the underlying insurance contracts does not indemnify the ceding enterprise against insurance risk.

11. The evaluation of mortality or morbidity risk in contracts that reinsure policies subject to Statement 97 shall be consistent with the criteria in paragraphs 7 and 8 of that Statement. Evaluation of the presence of insurance risk in contracts that reinsure other long-duration contracts (such as those that reinsure ordinary life contracts or contracts that provide benefits related only to illness, physical injury, or disability) also shall be consistent with those criteria.



Excerpts of Authoritative Literature

3Payments and receipts under a reinsurance contract may be settled net. The ceding enterprise may withhold funds as collateral or may be entitled to compensation other than recovery of claims. Determining the amounts paid or deemed to have been paid (hereafter referred to as “amounts paid”) for reinsurance requires an understanding of all contract provisions.4This condition is met only if insignificant insurance risk is retained by the ceding enterprise on the reinsured portions of the underlying insurance contracts. The term insignificant is defined in paragraph 8 of FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized gains and Losses from the Sale of Investments, to mean “having little or no importance; trivial” and is used in the same sense in this Statement.

A-791– Life And Health Reinsurance Agreements

Accounting Requirements

1. This Appendix shall not apply to assumption reinsurance, yearly renewable term reinsurance or certain nonproportional reinsurance such as stop loss or catastrophe reinsurance.

Q – Aside from assumption reinsurance, what other types of reinsurance are exempt from the accounting requirements?

A – Yearly renewable term (YRT) and certain nonproportional reinsurance arrangements, such as stop loss and catastrophe reinsurance are exempt because these do not normally provide significant surplus relief and therefore are outside the scope of this Appendix. If a catastrophe arrangement takes a reserve credit for actual losses beyond the attachment point or the unearned premium reserve (UPR) of the current year's premium, there will most likely be no regulatory concern.

Similarly, if a YRT treaty provides incidental reserve credits for the ceding insurer's net amount at risk for the year with no other allowance to enhance surplus, there will most likely be no regulatory concern. For purposes of this exemption, a treaty labeled as YRT does not meet the intended definition of YRT if the surplus relief in the first year is greater than that provided by a YRT treaty with zero first year reinsurance premium and no additional allowance from the reinsurer.

Additional pertinent information applicable to all YRT treaties and to non-proportional reinsurance arrangements is contained in paragraphs 19 and 20 of SSAP No. 61R.

2. No insurer shall, for reinsurance ceded, reduce any liability or establish any asset in any statutory financial statement if, by the terms of the reinsurance agreement, in substance or effect, any of the following conditions exist:

a. 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, but not limited to, billing, valuation, claims and maintenance expected by the company at the time the business is reinsured;

Q – What should be included in the renewal expense allowances with regard to direct expenses? An allocation of salaries? Computer usage? Or just marginal expenses directly related to the business reinsured such as claim payment expenses, postage, etc.?

A – The primary purpose of the accounting requirements is to prohibit credit for reinsurance under financial arrangements where the ceding company enters into an agreement for the principal purpose of producing significant surplus aid for the ceding insurer on a temporary basis, while not transferring all of the significant risks inherent in the business being reinsured.

Paragraph 2. a. implements that purpose by prohibiting credit for reinsurance in certain instances where the ceding insurer is afforded a large ceding commission at the inception of the agreement resulting in a significant increase in surplus only to have such surplus increase be drained away in subsequent periods because renewal expense allowances provided under the agreement are insufficient to cover the direct allocable costs estimated at



Excerpts of Authoritative Literaturethe time the business is reinsured, which are anticipated to be incurred by the ceding insurer in maintaining the business reinsured.

An exception to complete disallowance of credit for reinsurance is allowed in situations where the ceding insurer reflects a liability for the present value of the shortage between renewal expense allowances provided under the agreement and the direct allocable costs expected in the future by the insurer in maintaining the business reinsured. This liability must be calculated using actuarial assumptions that are consistent with those utilized in the statutory reserve calculation. The expenses to be accounted for in establishing this liability should represent all costs of the ceding insurer in servicing the business that is subject to the agreement.

In determining what the ceding insurer should include in the renewal expenses with regard to direct expenses, there should be an allocation of all renewal expenses anticipated at the time the business is reinsured including salaries, computer usage, postage, etc. This comprehensive calculation should recognize that the anticipated expense levels may be estimated; a comparison with pricing assumptions may be considered in determining the reasonableness of such assumptions.

When an agreement does not comply with paragraph 2.a., this area of non-compliance should be addressed by the posting of a reserve for the present value of the deficiency rather than denial for credit for reinsurance, assuming that no other area of non-compliance is encountered with the agreement and that the assets received corresponding to the ceding commission are in compliance with the Codification, including Appendix A-785. For example, the assets received corresponding to the ceding commission must be admissible and not subject to repayment to the reinsurer.

b. 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;

Q – With regard to existing business, should the coinsurance reserve percentage or the coinsurance reserve amount not be allowed to increase in a combination coinsurance/modified coinsurance treaty? How would the rule be applicable to the difference between the total reserve and the amount of funds withheld in a coinsurance with funds withheld treaty?

A – Under a combination coinsurance/modified coinsurance (co/modco) arrangement the ceding company and the reinsurer both establish reserves for future claim payments. Treaty provisions which adjust the reserves each party holds in lieu of transferring funds owed to the reinsurer are acceptable. However, adjustment of reserves in lieu of payment when funds are due to the ceding company is a violation of the accounting requirements since it is a depletion of the ceding company's assets. In other words, statutory gains can be used to increase the modified coinsurance reserve but statutory losses cannot be used to reduce the modified coinsurance reserve. This is the case even if the agreement provides for this adjustment at inception and never requires a payment to be owed by the reinsurer.

Under a coinsurance with funds withheld treaty the reinsurer establishes the entire amount of reserve liability on its share of reinsured policies, but the ceding company withholds a portion of the reinsurer's assets typically in an amount less than the reserves, to offset future obligations. Provided the withheld assets are not withheld for any purpose other than the payment of future claims, it is not a violation of the accounting requirements for the reinsurer to require full use of such withheld assets for the payment of claims prior to using any other assets owned by the reinsurer.

Paragraph 2.b. disallows reinsurance credit if the ceding company can be deprived of assets at the reinsurer's option or automatically upon the occurrence of some event. Thus, a provision in a coinsurance with funds withheld or modified coinsurance treaty which unilaterally or automatically allows the reinsurer to convert the treaty to coinsurance at some later date would be of concern. Although the parties could have entered a coinsurance agreement at inception, regulators are concerned that the reinsurer would take invested assets from the ceding



Excerpts of Authoritative Literaturecompany at a time which would be to the detriment of the ceding company's policyholders. Therefore, a conversion provision will not violate paragraph 2.b. only if all of the following are met:

i) the triggers for conversion are limited to ceding company violations of treaty provisions, including complying representations and warranties; the occurrence of a violation has been determined; and the ceding company has been given an opportunity and refuses to promptly remedy the violation;

ii) the conversion is structured so that the surplus of the ceding company will remain unchanged immediately following the conversion;

iii) the invested assets to be transferred upon conversion are less than or equal to the modco reserve, in the case of modco or co/modco, or to the Funds Withheld, in the case of coinsurance funds withheld, and have been maintained in a Trust or Escrow Account since inception of the agreement; and

iv) the reinsurance complies with Credit for Reinsurance requirements (see Appendix A-785) immediately upon conversion.

c. 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;

d. The ceding insurer must, at specific points in time scheduled in the agreement, terminate or automatically recapture all or part of the reinsurance ceded;

e. 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. For example, it is improper for a ceding company to pay reinsurance premiums, or other fees or charges to a reinsurer which are greater than the direct premiums collected by the ceding company;Q – Should a reinsurer have a unilateral right to establish underlying cost of insurance rates or credited interest rates for policies which are wholly or partially reinsured?

A – No, only the ceding company has the right to set the cost of insurance rates charged policyholders and to set the rates of interest credited to them. However, a representation (but not a warranty) that the ceding company shall vary nonguaranteed elements reinsured in a manner consistent with the ceding company's documented procedures, in effect at the time the agreement was entered into, does not violate the accounting requirements.

Q – May a reinsurance contract allow the reinsurer to change the cost of insurance that the ceding company must pay under the treaty?

A – So long as the aggregate amounts payable by the ceding company in any settlement period do not exceed the income of the reinsured policies during that period, the treaty's structure would not be in violation of paragraph 2.e. There is not compliance if any changes could cause payments made by the ceding company to exceed income from the reinsured business, unless the change is necessary to conform to the documented procedures represented to the reinsurer at the time the treaty was entered into and as long as the ceding company has the ability to change the insurance rates it charges policyholders by at least as much as was included in the original representation.

Q – If a reinsured policy allows the ceding company to guarantee rates of interest to be credited to the policyholder which are greater than those guaranteed by the policy, may a reinsurance contract allow the



Excerpts of Authoritative Literaturereinsurer to limit its participation in such credited rate as long as it at least provides for the amount based on the rate guaranteed in the contract?

A – So long as the aggregate amounts payable by the ceding company in any settlement period do not exceed the income of the reinsured policies during that period, the treaty's structure would not be in violation of paragraph 2.e. There is not compliance if any changes could cause payments made by the ceding company to exceed income from the reinsured business, unless the limited participation reflects a change in declared interest rates which is necessary to conform to the documented procedures represented to the reinsurer at the time the treaty was entered into and as long as the ceding company has the ability to change the declared interest rates to be credited to policyholders by at least as much as was included in the original representation.

f. The treaty does not transfer all of the significant risk inherent in the business being reinsured. The following table identifies for a representative sampling of products or type 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.

Risk categories:i. Morbidityii. Mortalityiii. Lapse

This 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. Credit Quality This 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. It excludes market value declines due to changes in interest rate.

v. Reinvestment This 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. Disintermediation This 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. 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.+ - Significant 0 - Insignificant

RISK CATEGORYi. ii. iii. iv. v. vi.

Health Insurance – other than LTC/LTD*+ 0 + 0 0 0Health Insurance – LTC/LTD* + 0 + + + 0Immediate Annuities 0 + 0 + + 0Single 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 0Traditional Par Permanent 0 + + + + +Traditional Par Term 0 + + 0 0 0



Excerpts of Authoritative LiteratureAdjustable Premium Permanent 0 + + + + +Indeterminate Premium Permanent 0 + + + + +Universal Life Flexible Premium 0 + + + + +Universal Life Fixed Premium 0 + + + + +Universal Life Fixed Premium dump-in premiums allowed 0 + + + + +*LTC = Long Term Care Insurance* LTD = Long Term Disability Insurance

g. i. 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 paragraph g.ii.) either transfer the underlying assets to the reinsurer or legally segregate such assets in a trust or escrow account or otherwise establish a satisfactory mechanism which legally segregates, by contract or contract provision, the underlying assets.

Q – Is asset segmentation an acceptable mechanism for legal segregation of assets?

A – Generally no. Segmentation involves the allocation of a company's general account investment earnings over several lines of business, or various groups of policies within those lines, such that the performance of one corporate bond, for example, may affect the earnings of several segments within a company. The accounting for the segmentation is largely internal, and the detail of the record keeping varies from company to company.

The fundamental purpose of the requirement for a reinsurance treaty to employ the use of a segregated asset portfolio ("SAP") is that all payments (interest, benefits, allowances, etc.) must be made from the SAP, so as to eliminate any problems that could arise in determining what asset or assets should be sold, and to avoid disputes in the event of insolvency. Any sale of assets that could affect policies not subject to reinsurance, or policies subject to reinsurance with other reinsurers is problematic.

In addition, auditing the performance of a treaty using traditional segmentation methods would be extremely difficult and prone to disagreement, which could provide a reinsurer with broad leverage to contest amounts due that reinsurer, especially in the event of insolvency or rehabilitation of the ceding company.

It is important to determine that the arrangement in place does in fact transfer all of the risks of the underlying assets supporting the reinsured business to the reinsurer.

Q – If a percentage of all policies in a block of business is reinsured, must the company segregate that percentage of the assets supporting the business, or can it segregate all the assets?

A – The company may segregate only assets supporting the reinsured portion or the segregated asset portfolio may represent the entire block of business if the reinsured portion is the same for all policies. In the latter case, the reinsurer would take its proportionate share of the SAP performance.

Q – If the ceding company cedes a portion of each policy in a block of business to one reinsurer and a portion to another, while retaining some itself, does it have to segregate assets separately for each reinsurer, or is it acceptable to have all the assets segregated together with each reinsurer responsible for its portion of the investment risk?

A – The ceding company does not need to segregate assets separately for each reinsurer if the treaties are virtually identical.

Q – At the time assets are legally segregated under a coinsurance with funds withheld treaty, should they be valued at market value, statutory value, or some combination?

A – The assets should be valued at their statutory admitted value.

Q – When the assets are legally segregated, how are the funds withheld payables and receivables reported?



Excerpts of Authoritative LiteratureA – The payables and receivables are recorded in the same manner as in a funds withheld treaty where the assets are not legally segregated and will usually mirror the value of the funds withheld account. However, the funds withheld account, which reflects the statutory admitted value of the assets in the SAP, will fluctuate, and thus may differ from the reserves on the reinsured business.

ii. Notwithstanding the requirements of paragraph g.i., 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:

(a) Health Insurance - LTC/LTD(b) Traditional Non-Par Permanent(c) Traditional Par Permanent(d) Adjustable Premium Permanent(e) Indeterminate Premium Permanent(f) Universal Life Fixed Premium(no dump-in premiums allowed)

The associated formula for determining the reserve interest rate adjustment must use a formula which reflects the ceding company's investment earnings and incorporates all realized and unrealized gains and losses reflected in the statutory statement. The following is an acceptable formula:Rate = 2 (I + CG) X + Y - I - CGWhere:I is the net investment incomeCG is capital gains less capital lossesX is the current year cash and invested assets plus investment income due and accrued less

borrowed moneyY is the same as X but for the prior year

h. 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.

i. The ceding insurer is required to make representations or warranties not reasonably related to the business being reinsured.

j. The ceding insurer is required to make representations or warranties about future performance of the business being reinsured.

k. 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.

3. Any increase in surplus net of federal income tax resulting from reinsurance agreements entered into or amended after the effective date of the Codification which involve the reinsurance of business issued prior to the effective date of the agreements shall be identified separately on the insurer's statutory financial statement as a surplus item and recognition of the surplus increase as income shall be reflected on a net of tax basis as earnings emerge from the business reinsured.

{For example, on the last day of calendar year N, company XYZ pays a $20 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 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 million) is reported as income on the "Commissions and expense allowances on reinsurance ceded" line of the Summary of Operations.



Excerpts of Authoritative LiteratureAt 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.}

Written Agreements

4. No reinsurance agreement or amendment to any agreement may be used to reduce any liability or to establish any asset in any financial statement, 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.

5. 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.

Note that Model 791 is almost identical to Appendix A-791, except that Model 791 includes the following preamble in section 2.

A. The [name of state] Insurance Department recognizes that licensed insurers routinely enter into reinsurance agreements that yield legitimate relief to the ceding insurer from strain to surplus.

B. However, it is improper for a licensed insurer, in the capacity of ceding insurer, to enter into reinsurance agreements 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 being reinsured. In substance or effect, the expected potential liability to the ceding insurer remains basically unchanged by the reinsurance transaction, notwithstanding certain risk elements in the reinsurance agreement, such as catastrophic mortality or extraordinary survival. The terms of such agreements referred to herein and described in Section 4 violate:

(1) Section [insert applicable section] relating to financial statements which do not properly reflect the financial condition of the ceding insurer;

(2) Section [insert applicable section] relating to reinsurance reserve credits, thus resulting in a ceding insurer improperly reducing liabilities or establishing assets for reinsurance ceded; and

(3) Section [insert applicable section] relating to creating a situation that may be hazardous to policyholders and the people of this State.




Current GAAP topic 944 -20 on Short-Duration and Long-Duration contracts

Distinguishing Short-Duration Contracts from Long-Duration Contracts

944-20-15-2 Insurance contracts, for purposes of this Subtopic, shall be classified as short-duration contracts (see paragraph 944-20-15-7) or long-duration contracts (see paragraph 944-20-15-10) depending on whether the contracts are expected to remain in force for an extended period.

> > Certain Long-Duration Participating Life Insurance Contracts

944-20-15-3 Certain guidance in the Long-Duration Subsections in this Subtopic (and other Subtopics within the Financial Services—Insurance Topic) applies only to certain long-duration participating life insurance contracts of mutual life insurance entities and certain stock life insurance entities. For purposes of that guidance:

a. Mutual life insurance entities include assessment entities, fraternal benefit societies, and stock life insurance subsidiaries of mutual life insurance entities.

b. Participating life insurance contracts denote those that have both of the following characteristics:

1. They are long-duration participating contracts that are expected to pay dividends to policyholders based on actual experience of the insurance entity.

2. Annual policyholder dividends are paid in a manner that both:

a. Identifies divisible surplus

b. Distributes that surplus in approximately the same proportion as the contracts are considered to have contributed to divisible surplus (commonly referred to in actuarial literature as the contribution principle).

944-20-15-4 Paragraph 944-20-15-11 states that stock life insurance entities with participating life insurance contracts that meet certain conditions are permitted to account for those contracts in accordance with the Long-Duration Contracts Subsections of this Subtopic. That paragraph explains that the same accounting policy shall be applied consistently to all those participating life insurance contracts.

Short-Duration Contracts

> Overall Guidance

944-20-15-5 The Short-Duration Contracts Subsections follow the same Scope and Scope Exceptions as outlined in the General Subsection of this Section, with specific instrument qualifications and exceptions noted below.

> Instruments

944-20-15-6 The guidance in the Short-Duration Contracts Subsections of this Subtopic applies only to short-duration contracts.

944-20-15-7 Paragraph 944-20-15-2 states that insurance contracts, for purposes of this Subtopic, shall be classified as short-duration contracts or long-duration contracts depending on whether the contracts are expected to remain in force for an extended period. The factors that shall be considered in determining whether a particular contract can be expected to remain in force for an extended period are as follows for a short-duration contract:




a. The contract provides insurance protection for a fixed period of short duration.

b. The contract enables the insurer to cancel the contract or to adjust the provisions of the contract at the end of any contract period, such as adjusting the amount of premiums charged or coverage provided.

Long-Duration Contracts

> Overall Guidance

944-20-15-8 The Long-Duration Contracts Subsections follow the same Scope and Scope Exceptions as outlined in the General Subsection of this Section, with specific instrument qualifications and exceptions and other considerations noted below.

> Instruments

944-20-15-9 The guidance in the Long-Duration Contracts Subsections of this Subtopic applies only to long-duration contracts.

944-20-15-10 Paragraph 944-20-15-2 states that insurance contracts, for purposes of this Subtopic, shall be classified as short-duration contracts or long-duration contracts depending on whether the contracts are expected to remain in force for an extended period. The factors that shall be considered in determining whether a particular contract can be expected to remain in force for an extended period are as follows for a long-duration contract:

a. The contract generally is not subject to unilateral changes in its provisions, such as a noncancelable or guaranteed renewable contract.

b. The contract requires the performance of various functions and services (including insurance protection) for an extended period.

944-20-15-11 The guidance in the Long-Duration Contracts Subsections of this Subtopic applies, in part, to all of the following classes of long-duration contracts issued:

a. Universal life-type contracts, that is, long-duration insurance contracts with terms that are not fixed and guaranteed

b. Limited-payment contracts, including limited-payment participating and limited-payment nonguaranteed-premium contracts that are not, in substance, universal life-type contracts

c. Except as noted in paragraph 944-20-15-3, participating life insurance contracts

d. Whole-life contract, that is, insurance that may be kept in force for a person’s entire life by paying one or more premiums

e. Term life insurance, that is, insurance that provides a benefit if the insured dies within the period specified in the contract.

Stock life insurance entities with participating life insurance contracts described in (c) are permitted to account for those contracts in accordance with the Long-Duration Contracts Subsections of this Subtopic. The same accounting policy shall be applied consistently to all those participating life insurance contracts.

944-20-15-12 If insurance contracts have characteristics significant to the contracts cited in (a) or (b) of the preceding paragraph those contracts are within the scope of the Long-Duration Contracts Subsections of this Subtopic. For example, universal disability contracts that have many of the same characteristics as universal life-



Excerpts of Authoritative Literaturetype contracts, with the exception of providing disability benefits instead of life insurance benefits, shall be accounted for in a manner consistent with universal life-type contracts.

944-20-15-13 The Long-Duration Subsections of this Subtopic also apply to certain contract features not covered elsewhere in the Codification, including asset, liability, revenue, and expense recognition. Examples of such contract features include the following:

a. Contracts offered through an insurance entity's separate accounts

b. Variable annuities with a minimum guaranteed death benefit

c. Variable annuities with a guaranteed minimum income benefit

d. Contracts providing multiple account balances

e. Contracts with sales inducements.

944-20-15-14 The guidance in the Long-Duration Subsections of this Subtopic does not apply to investment contracts issued by an insurance entity that do not incorporate significant insurance risk and shall not be accounted for as insurance contracts. See paragraph 944-825-25-2 for investment c

Glossary Insurance Risk The risk arising from uncertainties about both underwriting risk and timing risk. Actual or imputed investment returns are not an element of insurance risk. Insurance risk is fortuitous; the possibility of adverse events occurring is outside the control of the insured.

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National Association of Insurance Commissioners - …€¦ · Web viewin agenda item 2017-28 - Attachment Q2. The Informal Life and Health Drafting Group is not recommending adoption