3 Colo. Code Regs. § 702-3-3-5-5

Current through Register Vol. 47, No. 24, December 25, 2024

Section 3 CCR 702-3-3-5-5 - Accounting Requirements

All ceding insurers are responsible for establishing appropriate statutory gross reserves and reflecting appropriate credit, if any, for reinsurance ceded. A reinsurance agreement that does not comply with this regulation will be considered as a valid contract, unless terminated or voided by the parties to the contract, where all terms and obligations are in effect, but no credit for reinsurance is permitted to be taken by the ceding insurer. The ceding insurer shall comply with the applicable provisions of law and this regulation before taking any credit for reinsurance in any statutory financial statement for any particular reinsurance agreement.

A. The essential element of a reinsurance agreement is the transfer of risk. Unless the agreement contains this essential element of risk transfer, no credit shall be recorded. Therefore, no insurer subject to this regulation shall, for reinsurance ceded, establish any credit for reinsurance in any financial statement filed with the Division if, by the terms of the reinsurance agreement, in substance or effect, any of the following conditions exist:

1. Single or multi year agreements in which the premium charged is, or can be reasonably assumed to be, equal to the present value of the maximum insured loss;

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

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

4. The reinsurance agreement is entered into for the principal purpose of producing significant financial statement enhancement for the ceding insurer, typically on a temporary basis, while not transferring significant insurance risk under the reinsured portion of the underlying insurance agreement and, in substance or effect, the expected potential liability to the ceding insurer remains basically unchanged; or

5. Provisions exist whereby the obligation of the assuming insurer to pay claims is conditioned upon some event or situation unrelated to the performance of the underlying business and were not taken into account in the risk transfer analysis. These provisions include such situations as the payment of reinsurance considerations, or performance under a separate contract or agreement being a condition precedent to the payment of claims. This does not preclude the reinsurer's ability to terminate the agreement for breach or default of contract terms.

B. The following situations require the establishment of additional liabilities or limitations to the credit for reinsurance taken by the ceding insurer:

1. The ceding insurer shall not take any credit for reinsurance in excess of the gross reserve it has established for the portion of the business or risks being reinsured;

2. If commissions or other similar allowances received or credited to the ceding insurer are required to be repaid to the reinsurer, other than from emerging profits of the portion of the business reinsured, based on contract provisions or on future experience of the reinsured business, a liability shall be established or the credit for reinsurance reduced by the maximum amount of such future tentative repayment; and

3. For multi-year agreements in which the renewal ceding commission percentage is less than the first year ceding commission percentage, and the agreement requires the ceding insurer to perform administrative, claim or maintenance services on the ceded business: if the renewal commission provided or to be provided to the ceding insurer by the reinsurer is materially less than the cost to the ceding insurer to perform the duties required in connection with the portion of the business reinsured, a liability is to be established for the present value of the shortfall.

C. Notwithstanding Subsection 5.A., an insurer subject to this regulation may, with the prior written approval of the commissioner, take such credit for reinsurance as the commissioner may deem consistent with § 10-3-702, C.R.S., Colorado Insurance Regulation 3-3-3, or other actuarial interpretations or standards adopted by the Division.

3 CCR 702-3-3-5-5

37 CR 20, October 25,2014, effective 11/15/2014

37 CR 20, October 25,2014, effective 1/1/2015

37 CR 23, December 10, 2014, effective 1/1/2015

38 CR 17, September 10, 2015, effective 10/1/2015

39 CR 05, March 10, 2016, effective 4/1/2016

39 CR 14, July 25, 2016, effective 8/15/2016

39 CR 23, December 10, 2016, effective 1/1/2017

40 CR 03, February 10, 2017, effective 3/15/2017

40 CR 05, March 10, 2017, effective 4/1/2017

40 CR 13, July 10, 2017, effective 8/1/2017

40 CR 17, September 10, 2017, effective 11/1/2017

43 CR 06, March 25, 2020, effective 4/15/2020

44 CR 03, February 10, 2021, effective 3/15/2021

44 CR 23, December 10, 2021, effective 1/1/2022

46 CR 03, February 10, 2023, effective 3/2/2023