Section 2644.25 - Reinsurance(a) For all lines and sublines except for those listed in the next subparagraph, ratemaking shall be on a direct basis, with no consideration for the cost or benefits of reinsurance.(b) For earthquake and for medical malpractice facultative reinsurance with attachment points above one million dollars, the maximum permitted earned premium is calculated as follows: The sum of
(1) the quotient of(A) the difference of (i) the product of a. the projected losses, as defined in section 2644.4, plus the projected defense and cost containment expense, as defined in section 2644.8, minus the projected reinsurance recoverables, as defined in section 2644.26,b. multiplied by 1 minus the fixed investment income factor, as defined in section 2644.19(a),(ii) minus the projected ancillary income, as defined in section 2644.13,(B) divided by the sum of (ii) minus the efficiency standard, as defined in section 2644.12,(iii) minus the maximum profit factor, as defined in section 2644.15,(iv) plus the variable investment income factor, as defined in section 2644.19(b).(2) plus the quotient of (A) the reinsurance premium, net of ceding and contingent commissions,(B) divided by the difference of(ii) minus the variable expense factor, as defined in section 2644.14. Stated as a formula:
| Max permitted EP= | (losses + DCCE - recoverables) x (1- fixed invest income factor) - ancil inc. | + | reins premium |
| 1 - eff std - profit factor + var invest inc factor | | 1-var exp factor |
(c) For the calculation of fixed investment income factor, the numerator and denominator of the loss reserves ratio shall be adjusted for projected reinsurance recoverables, and for the variable investment income factor, the numerator and denominator of the unearned premium reserve ratio shall be adjusted to reflect the cash flows of the unearned reinsurance premium.(d) Reinsurance costs shall be allowed for ratemaking purposes as set forth in this section only if: (1) the reinsurance agreement was entered into in good faith in an arms-length transaction and at fair market value for the coverage provided, and(2) the reinsurance meets the statement credit requirements of Sections 2303 through 2303.25.(e) There will be no allowance for reinsurance between affiliated entities as set forth in Schedule Y of the Annual Statement.(f) Copies of the reinsurance agreements shall be submitted with the filing.(g) For the purposes of this section and section 2644.26, reinsurance shall include other risk financing mechanisms, such as catastrophe bonds.(h) For the earthquake line, if at least 30% of the requested rate results from the cost of reinsurance, and a consumer or the consumer's representative requests a hearing within 45 days of public notice, the Commissioner shall hold a hearing on the issue of the reasonableness of the reinsurance costs, as defined in section (d), and whether some or all of those costs shall be reflected in the proposed rate change. An insurer's rate application shall indicate whether at least 30% of the requested rate results from the cost of reinsurance.(i) For the medical malpractice line, if at least 30% of the requested rate is attributable to the cost of facultative reinsurance with attachment points above one million dollars, and a consumer or a consumer's representative requests a hearing within 45 days of public notice, the Commissioner shall hold a hearing on the issue of the reasonableness of the reinsurance costs, as defined in section (d), and whether some or all of those costs shall be reflected in the proposed rate change. An insurer's rate application shall indicate whether at least 30% of the requested rate results from the cost of reinsurance.Cal. Code Regs. Tit. 10, § 2644.25
1. New section filed 1-3-2007; operative 4-3-2007. Submitted to OAL for printing only pursuant to Government Code section 11340.9(g) (Register 2007, No. 1).
2. Amendment filed 5-16-2008; operative 5-16-2008. Submitted to OAL for printing only pursuant to Government Code section 11340.9(g) (Register 2008, No. 20).
3. Change without regulatory effect amending subsections (h) and (i) filed 7-14-2021 pursuant to section 100, title 1, California Code of Regulations (Register 2021, No. 29). Filing deadline specified in Government Code section 11349.3(a) extended 60 calendar days pursuant to Executive Order N-40-20. Note: Authority cited: Sections 1861.01 and 1861.05, Insurance Code; and 20th Century v. Garamendi, 8 Cal.4th 216 (1994). Reference: Sections 1861.01 and 1861.05, Insurance Code; and Calfarm Insurance Company v. Deukmejian (1989) 48 Cal.3d 805.
1. New section filed 1-3-2007; operative 4-3-2007. Submitted to OAL for printing only pursuant to Government Code section 11340.9(g) (Register 2007, No. 1).
2. Amendment filed 5-16-2008; operative 5-16-2008. Submitted to OAL for printing only pursuant to Government Code section 11340.9(g)(Register 2008, No. 20).
3. Change without regulatory effect amending subsections (h) and (i) filed 7-14-2021 pursuant to section 100, title 1, California Code of Regulations (Register 2021, No. 29). Filing deadline specified in Government Code section 11349.3(a) extended 60 calendar days pursuant to Executive Order N-40-20.