N.J. Admin. Code § 11:2-40.4

Current through Register Vol. 56, No. 24, December 18, 2024

Section 11:2-40.4 - Agreements or conditions precluding reduction of liability or inclusion as an asset

(a) Except as N.J.A.C. 11:2-40.5 applies, no insurer shall reduce any liability or establish any asset in any financial statement filed with the Department for any reinsurance ceded if by the terms of the reinsurance agreement, any of the following conditions exist, in substance or effect:

1. Renewal expense allowances provided or to be provided to the ceding insurer by the reinsurer in any accounting period are not sufficient to cover anticipated allocable renewal expenses of the ceding insurer on the portion of the business reinsured unless an adequate liability is established by the ceding insurer for the present value of the shortfall by taking into consideration 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 ceding insurer at the time the business is reinsured;

2. The ceding insurer can be deprived of surplus or assets at the reinsurer's option or automatically upon the occurrence of some event, such as the insolvency of the ceding insurer, except that termination of the reinsurance agreement by the reinsurer for nonpayment of reinsurance premiums or other amounts due, such as modified coinsurance reserve adjustments, interest and adjustments on funds withheld, and tax reimbursements, shall not be considered to be such a deprivation of surplus or assets;

3. The ceding insurer is required to reimburse the reinsurer for negative experience under the reinsurance agreement, except that neither offsetting experience refunds against current and prior years' losses under the agreement nor payment by the ceding insurer of an amount equal to the current and prior years' losses under the agreement upon voluntary termination of in force reinsurance by the ceding insurer shall be considered such a reimbursement to the reinsurer for negatives experience. Voluntary termination does not include situations where termination occurs because of unreasonable provisions which allow the reinsurer to reduce its risk under the agreement. An example of such a provision is the right of the reinsurer to increase reinsurance premiums or risk and expense charges to excessive levels forcing the ceding company to prematurely terminate the reinsurance treaty;

4. The ceding insurer is required, at specific points in time scheduled in the agreement, to terminate or automatically recapture all or part of the reinsurance ceded;

5. The reinsurance agreement involves the possible payment by the ceding insurer to the reinsurer of amounts other than from income realized from the reinsured policies. 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;

6. The treaty does not transfer all of the significant risk inherent in the business being reinsured. Exhibit 1 entitled "Significant Risks" appearing in the Appendix to this subchapter identifies the risks considered to be significant for the various products or types of business set forth in the table. For products not specifically included, the risks determined to be significant shall be consistent with this table;

7. The credit quality, reinvestment, or disintermediation risk is significant for the business reinsured and the ceding company does not (other than for the classes of business excepted in (a)8 below) either transfer the underlying assets to the reinsurer, maintain such assets in a separate trust or escrow account, or otherwise establish a mechanism by contractual arrangement satisfactory to the Commissioner whereby the underlying assets are legally segregated;

8. Notwithstanding the requirements of (a)7 above, the assets supporting the reserves for the following classes of business and any classes of business which do not have a significant credit quality, reinvestment, or disintermediation risk may be held by the ceding company without segregation of such assets: Health Insurance--LTC/LTD; Traditional Non-Par Permanent; Traditional Par Permanent; Adjustable Premium Permanent; Indeterminate Premium Permanent; and Universal Life Fixed Premium (no dump-in premiums allowed). The formula for determining the reserve interest rate adjustment should reflect the ceding company's investment earnings and incorporate all realized and unrealized gains and losses reflected in the financial statement. The formula set forth as Exhibit 2 in the Appendix to this subchapter is an example of an acceptable formula;

9. Settlements are made less frequently than quarterly or payments due from the reinsurer are not made in cash within 90 days of the settlement date;

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

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

12. 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) Notwithstanding (a) above, in financial statements filed with the Department a ceding insurer subject to this subchapter may, with the prior approval of the Commissioner, take such reinsurance credit as the Commissioner may deem consistent with the fair presentation of the insurer's financial condition under statutory accounting principles (as permitted or prescribed by Title 17B of the New Jersey revised statutes and rules and regulations promulgated thereunder), including actuarial interpretations and standards adopted by the Department.

N.J. Admin. Code § 11:2-40.4