CurrentIdaho Department of InsurancePolicy N/A

Life and Health Reinsurance Agreements

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Establishes accounting and agreement standards for life, annuity, and accident and health reinsurance so insurers’ financial statements properly reflect reinsured business.

Policy Summary

PayerIdaho Department of Insurance

PolicyLife and Health Reinsurance Agreements

Policy CodePolicy N/A

Change TypeNo material change

Effective DateN/A

Next Review DateN/A

Key ActionFile qualifying retroactive reinsurance agreements and amendments with the Director within 30 days of execution.

SourceLink

POLICY UPDATE CHANGES

No material clinical or coverage changes in this revision.

6Statutory authorities cited

6Significant risk categories

6Credit-preventing conditions

30 daysAgreement filing deadline

90 daysAgreement completion after letter of intent

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CurrentIdaho Department of InsurancePolicy N/A

Life and Health Reinsurance Agreements

Customize your policy alerts

Sign up for all Idaho Department of Insurance policy alerts

Know when Idaho Department of Insurance releases new policies or updates existing guidance.

Monitor payer policy activity

Receive email alerts as soon as relevant payer policies are published or updated.

Establishes accounting and agreement standards for life, annuity, and accident and health reinsurance so insurers’ financial statements properly reflect reinsured business.

Policy Summary

PayerIdaho Department of Insurance

PolicyLife and Health Reinsurance Agreements

Policy CodePolicy N/A

Change TypeNo material change

Effective DateN/A

Next Review DateN/A

Key ActionFile qualifying retroactive reinsurance agreements and amendments with the Director within 30 days of execution.

SourceLink

POLICY UPDATE CHANGES

No material clinical or coverage changes in this revision.

6Statutory authorities cited

6Significant risk categories

6Credit-preventing conditions

30 daysAgreement filing deadline

90 daysAgreement completion after letter of intent

Both partiesRequired signatories

Financial Statement Credit and Risk-Transfer Requirements

Conditions Preventing Financial Statement Credit

No insurer may reduce a liability or establish an asset for ceded reinsurance in a financial statement filed with the Department if, by the terms of the agreement, any of the following conditions exists:

NO FINANCIAL STATEMENT CREDIT WHEN ANY OF THE FOLLOWING APPLIES

Renewal expense allowances provided or to be provided by the reinsurer in any accounting period are insufficient to cover the ceding insurer's anticipated allocable renewal expenses for the reinsured business, unless a liability is established for the present value of the shortfall using assumptions equal to the applicable statutory reserve basis. Expenses include commissions, premium taxes, billing, valuation, claims, maintenance, and other direct expenses expected when the business is reinsured.
The ceding insurer can be deprived of surplus or assets at the reinsurer's option or automatically upon an event such as the ceding insurer's insolvency. Termination by the reinsurer for nonpayment of reinsurance premiums or other amounts due—including modified coinsurance reserve adjustments, interest and funds-withheld adjustments, and tax reimbursements—is not such a deprivation.
The ceding insurer must reimburse the reinsurer for negative experience, except that offsetting experience refunds against current and prior years' losses, or payment of an amount equal to current and prior years' losses upon the ceding insurer's voluntary termination of in-force reinsurance, is not such reimbursement. Voluntary termination excludes termination caused by unreasonable provisions allowing the reinsurer to reduce its risk, such as a right to increase premiums or risk and expense charges to excessive levels that force premature termination.
The ceding insurer must terminate or automatically recapture all or part of the ceded reinsurance at specific points in time scheduled in the agreement.
The agreement involves possible payment by the ceding insurer to the reinsurer of amounts other than income realized from insured policies. For example, reinsurance premiums or other fees or charges may not exceed the direct premiums collected by the ceding insurer.
The treaty does not transfer all significant risk inherent in the reinsured business.

Product-Specific Significant-Risk Transfer Analysis

The treaty must transfer all significant risk inherent in the business reinsured. For products not specifically listed, significant risks must be determined consistently with the representative product classifications below. A plus sign (+) means significant; zero (0) means insignificant.

PRODUCT-SPECIFIC SIGNIFICANT-RISK TRANSFER ANALYSIS

Health Insurance—other than LTC/LTD: morbidity +; mortality 0; lapse +; credit quality 0; reinvestment 0; disintermediation 0.
Health Insurance—LTC/LTD: morbidity +; mortality 0; lapse +; credit quality +; reinvestment +; disintermediation 0.
Immediate Annuities: morbidity 0; mortality +; lapse 0; credit quality +; reinvestment +; disintermediation 0.
Single Premium Deferred Annuities: morbidity 0; mortality 0; lapse +; credit quality +; reinvestment +; disintermediation +.

Risk-Transfer and Asset-Segregation Requirements

The agreement must satisfy the following risk-transfer, asset-segregation, settlement, representation, and surplus-aid requirements:

REQUIRED RISK-TRANSFER AND ASSET CONDITIONS

If credit quality, reinvestment, or disintermediation risk is significant for the reinsured business, the ceding company must transfer the underlying assets to the reinsurer, legally segregate them in a trust or escrow account, or establish another mechanism satisfactory to the Director that legally segregates the assets by contract or contract provision, unless an exception applies.
Assets supporting reserves may be held by the ceding company without segregation for Health Insurance—LTC/LTD; Traditional Non-Par Permanent; Traditional Par Permanent; Adjustable Premium Permanent; Indeterminate Premium Permanent; Universal Life Fixed Premium with no dump-in premiums allowed; and any class of business without significant credit quality, reinvestment, or disintermediation risk.
For an applicable reserve interest-rate adjustment, the formula must reflect the ceding company's investment earnings and incorporate all realized and unrealized gains and losses reflected in the statutory statement. An acceptable formula uses I, CG, X, and Y, where I is net investment income; CG is capital gains less capital losses; X is current-year cash and invested assets plus investment income due and accrued less borrowed money; and Y is the same measure for the prior year.

Filing, Execution, and Agreement Provisions

Reinsurance agreements and amendments must be filed and executed in accordance with the following requirements before financial statement recognition is taken:

FILING, EXECUTION, AND AGREEMENT PROVISIONS

An agreement entered into after the rule's effective date that reinsures business issued before the agreement's effective date, and any subsequent amendment, must be filed by the ceding company with the Director within thirty (30) days after execution. The filing must include data detailing the transaction's financial impact.
The ceding insurer's actuary who signs the financial statement actuarial opinion on reserve valuation must consider this rule and applicable actuarial standards when determining the proper financial statement credit. The actuary must maintain adequate documentation and be prepared, on request, to describe the actuarial work included in the financial statements and demonstrate conformity with this rule.
Any increase in surplus, net of federal income tax, resulting from an arrangement described above must be separately identified on the statutory financial statement as a surplus item, using aggregate write-ins for gains and losses in surplus in the Capital and Surplus Account line of the Annual Statement. Recognition of the surplus increase as income must be reflected net of tax in the Reinsurance ceded line as earnings emerge from the reinsured business.

Existing Agreement Recognition

For agreements entered into before the effective date of the rule:

TRANSITIONAL RECOGNITION LIMIT

An insurer may not recognize reserve credits or assets established under a pre-effective-date reinsurance agreement if the agreement would not be entitled to recognition under this rule. This limitation applies provided that the agreement was in compliance with the laws or rules in effect immediately before the rule's effective date.

Risk Categories, Product Matrix, and Timing Rules

Risk categories used to evaluate significant risk transfermixed

i	Morbidity
ii	Mortality
iii	Lapse
iv	Credit Quality (C1)
v	Reinvestment (C3)
vi	Disintermediation (C3)

Product-specific significant-risk matrixmixed

Health Insurance - other than LTC/LTD	Morbidity = +; Mortality = 0; Lapse = +; Credit Quality (C1) = 0; Reinvestment (C3) = 0; Disintermediation (C3) = 0
Health Insurance - LTC/LTD	Morbidity = +; Mortality = 0; Lapse = +; Credit Quality (C1) = +; Reinvestment (C3) = +; Disintermediation (C3) = 0
Immediate Annuities	Morbidity = 0; Mortality = +; Lapse = 0; Credit Quality (C1) = +; Reinvestment (C3) = +; Disintermediation (C3) = 0
Single Premium Deferred Annuities	Morbidity = 0; Mortality = 0; Lapse = +; Credit Quality (C1) = +; Reinvestment (C3) = +; Disintermediation (C3) = +
Flexible Premium Deferred Annuities	Morbidity = 0; Mortality = 0; Lapse = +; Credit Quality (C1) = +; Reinvestment (C3) = +; Disintermediation (C3) = +
Guaranteed Interest Contracts	Morbidity = 0; Mortality = 0; Lapse = 0; Credit Quality (C1) = +; Reinvestment (C3) = +; Disintermediation (C3) = +
Other Annuity Deposit Business	Morbidity = 0; Mortality = 0; Lapse = +; Credit Quality (C1) = +; Reinvestment (C3) = +; Disintermediation (C3) = +
Single Premium Whole Life	Morbidity = 0; Mortality = +; Lapse = +; Credit Quality (C1) = +; Reinvestment (C3) = +; Disintermediation (C3) = +
Traditional Non-Par Permanent	Morbidity = 0; Mortality = +; Lapse = +; Credit Quality (C1) = +; Reinvestment (C3) = +; Disintermediation (C3) = +
Traditional Non-Par Term	Morbidity = 0; Mortality = +; Lapse = +; Credit Quality (C1) = 0; Reinvestment (C3) = 0; Disintermediation (C3) = 0

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Renewal expense allowance

Renewal expense allowanceMust be sufficient to cover anticipated allocable renewal expenses.

Shortfall treatmentIf insufficient, the present value of the shortfall must be recorded as a liability.

Reserve-basis assumptionThe liability uses assumptions equal to the applicable statutory reserve basis for the reinsured business.

Significant risk transfer

Required transferThe treaty must transfer all significant risks inherent in the business being reinsured.

Risk assessmentSignificant risk is evaluated using the applicable product-specific risk categories.

Operational Compliance Actions

Billing Rule

Account for renewal expense shortfalls

Do not reduce a liability or establish an asset for ceded reinsurance when renewal expense allowances are insufficient to cover anticipated allocable renewal expenses. Financial statement credit is available only if a liability is established for the present value of the shortfall using assumptions equal to the applicable statutory reserve basis.

Denial Risk

Avoid prohibited reinsurance agreement terms

Do not take financial statement credit for ceded reinsurance if the agreement permits the ceding insurer to be deprived of surplus or assets, requires reimbursement for negative experience, requires scheduled termination or automatic recapture, or requires payments from sources other than income realized from insured policies.

Reinsurance Risk and Product Terms

Lapse

Risk categoryLapse is a significant-risk category used in evaluating reinsurance business.

DefinitionIt is the risk that a policy voluntarily terminates before the statutory surplus strain experienced at issue of the policy has been recouped.

TriggerThe risk concerns voluntary termination before recovery of the statutory surplus strain.

Credit Quality (C1)

Risk categoryCredit Quality is designated C1.

DefinitionIt is the risk that invested assets supporting the reinsured business decrease in value.

Main hazards and exclusion

Policy Summary

PayerIdaho Department of Insurance

PolicyLife and Health Reinsurance Agreements

Policy CodePolicy N/A

Change TypeNo material change

Effective DateN/A

Next Review DateN/A

Key ActionFile qualifying retroactive reinsurance agreements and amendments with the Director within 30 days of execution.

SourceLink

On This Page

Flexible Premium Deferred Annuities: morbidity 0; mortality 0; lapse +; credit quality +; reinvestment +; disintermediation +.

Guaranteed Interest Contracts: morbidity 0; mortality 0; lapse 0; credit quality +; reinvestment +; disintermediation +.

Other Annuity Deposit Business: morbidity 0; mortality 0; lapse +; credit quality +; reinvestment +; disintermediation +.

Single Premium Whole Life: morbidity 0; mortality +; lapse +; credit quality +; reinvestment +; disintermediation +.

Traditional Non-Par Permanent: morbidity 0; mortality +; lapse +; credit quality +; reinvestment +; disintermediation +.

Traditional Non-Par Term: morbidity 0; mortality +; lapse +; credit quality 0; reinvestment 0; disintermediation 0.

Traditional Par Permanent: morbidity 0; mortality +; lapse +; credit quality +; reinvestment +; disintermediation +.

Traditional Par Term: morbidity 0; mortality +; lapse +; credit quality 0; reinvestment 0; disintermediation 0.

Adjustable Premium Permanent: morbidity 0; mortality +; lapse +; credit quality +; reinvestment +; disintermediation +.

Indeterminate Premium Permanent: morbidity 0; mortality +; lapse +; credit quality +; reinvestment +; disintermediation +.

Universal Life Flexible Premium: morbidity 0; mortality +; lapse +; credit quality +; reinvestment +; disintermediation +.

Universal Life Fixed Premium: morbidity 0; mortality +; lapse +; credit quality +; reinvestment +; disintermediation +.

Universal Life Fixed Premium—dump-in premiums allowed: morbidity 0; mortality +; lapse +; credit quality +; reinvestment +; disintermediation +.

Risk categories: morbidity; mortality; lapse; credit quality (C1); reinvestment (C3); and disintermediation (C3). LTD means Long Term Disability Insurance.

Lapse is the risk that a policy voluntarily terminates before recoupment of the statutory surplus strain experienced at issue.

Credit quality (C1) is the risk that invested assets supporting the reinsured business decrease in value, principally through asset default or decreased earning power; it excludes market-value declines caused by interest-rate changes.

Reinvestment (C3) is the risk that falling interest rates cause reinvested funds, including coupon payments and amounts received at asset maturity or call, to earn less than expected. A duration mismatch with asset durations shorter than liability durations increases the risk.

Disintermediation (C3) is the risk that rising interest rates increase policy loans and surrenders, or prevent maturing contracts from renewing at anticipated rates. Policyholders may move funds to higher-rate products, requiring asset sales at a loss; the risk increases when asset durations exceed liability durations.

Settlements may not be made less frequently than quarterly, and payments due from the reinsurer must be made in cash within ninety (90) days of the settlement date.

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

The ceding insurer may not be required to make representations or warranties about future performance of the business being reinsured.

An agreement may not be entered into principally to produce significant surplus aid for the ceding insurer, typically temporarily, while failing to transfer all significant risks and leaving the expected potential liability of the ceding insurer basically unchanged.

No reinsurance agreement or amendment may be used to reduce a liability or establish an asset in a financial statement filed with the Department unless the agreement, amendment, or binding letter of intent was duly executed by both parties no later than the financial statement's as-of date.

When a letter of intent is used, the reinsurance agreement or amendment must be executed within a reasonable period, not exceeding ninety (90) days after execution of the letter of intent, for credit to be granted for ceded reinsurance.

The agreement must state that it is the entire agreement between the parties concerning the reinsured business and that no understandings exist other than those expressed in the agreement.

The agreement must state that any change or modification is null and void unless made by amendment and signed by both parties.

With prior Director approval, an insurer may take reserve credit or establish an asset as the Director deems consistent with Insurance law, including actuarial interpretations or standards adopted by the Department.

Recognition consequenceFinancial statement credit is unavailable when the treaty does not transfer all significant inherent risks.

Premium and fee funding

Funding sourcePayments to the reinsurer must come from income realized from the insured policies.

Payment limitReinsurance premiums, fees, and other charges must not exceed the direct premiums collected by the ceding company.

Prohibited arrangementThe agreement must not require payments from sources other than income realized from the insured policies.

Filing deadline

Filing deadlineWithin thirty (30) days from the date of execution.

Covered filingsApplies to qualifying agreements involving business issued before the agreement date and to subsequent amendments.

Filing contentEach filing must include data detailing the financial impact of the transaction.

Letter-of-intent execution deadline

Completion deadlineA definitive reinsurance agreement or amendment must be executed within a reasonable period not exceeding ninety (90) days from the letter-of-intent execution date.

PurposeThe deadline applies when credit is to be granted for the ceded reinsurance.

Required instrumentThe follow-on document is a reinsurance agreement or an amendment to one.

Execution timing for financial statement recognition

Execution cutoffThe agreement, amendment, or binding letter of intent must be duly executed no later than the as-of date of the financial statement.

Required signaturesExecution must be completed by both parties.

Recognition effectWithout timely execution, the instrument may not be used to reduce a liability or establish an asset in the financial statement.

Settlement frequency

Settlement frequencySettlements must be made at least quarterly.

Noncompliance conditionSettlements made less frequently than quarterly prevent recognition under the stated accounting requirements.

Related payment rulePayments due from the reinsurer must also be made in cash within ninety (90) days of the settlement date.

Cash payment timing

Cash payment deadlinePayments due from the reinsurer must be made in cash within ninety (90) days of the settlement date.

Payment formThe payment must be made in cash.

Recognition consequenceCash payments outside the ninety-day period are a condition preventing financial statement credit.

Documentation Required

Document transfer of significant risk

Document that the reinsurance treaty transfers all significant risks inherent in the reinsured business. Use the applicable product-specific analysis of morbidity, mortality, lapse, credit quality, reinvestment, and disintermediation risks.

Prior Authorization

Obtain Director approval when required

Obtain prior Director approval before taking reserve credit or establishing an asset in a manner requiring the Director to determine that it is consistent with insurance law, including applicable actuarial interpretations or standards adopted by the Department.

Documentation Required

File qualifying reinsurance agreements

File agreements entered into after the rule’s effective date that reinsure business issued before the agreement date, along with subsequent amendments, with the Director within thirty (30) days from the date of execution.

Documentation Required

Document financial and actuarial impact

Include data detailing the financial impact of each qualifying transaction in the filing. The insurer’s actuary must consider the rule and applicable actuarial standards when determining financial statement credit and maintain adequate documentation supporting the actuarial work and compliance.

Documentation Required

Execute agreement by financial statement date

Before using an agreement, amendment, or binding letter of intent to reduce a liability or establish an asset, ensure it has been duly executed by both parties no later than the “as of date” of the financial statement.

Documentation Required

Complete agreement after letter of intent

When reserve credit is sought after execution of a letter of intent, execute the reinsurance agreement or amendment within a reasonable period not exceeding ninety (90) days from the letter-of-intent execution date.

Denial Risk

Avoid arrangements that fail risk-transfer requirements

Avoid arrangements that settle less frequently than quarterly, delay cash payments beyond ninety (90) days after settlement, require representations or warranties unrelated to the reinsured business or concerning future performance, or primarily provide temporary surplus aid without transferring all significant risks.

The main hazards are asset default or decreased earning power; market-value declines due to changes in interest rates are excluded.

Reinvestment (C3)

Risk categoryReinvestment is designated C3.

DefinitionIt is the risk that falling interest rates cause reinvested funds to earn less than expected.

Reinvested funds and mismatchReinvested funds include coupon payments and monies received at asset maturity or call; mismatch risk increases when asset durations are less than liability durations.

Disintermediation (C3)

Risk categoryDisintermediation is designated C3.

DefinitionIt is the risk that rising interest rates increase policy loans and surrenders or cause maturing contracts not to renew at anticipated rates.

Potential asset impactThe company may have to sell assets at a loss to fund withdrawals.

LTD

AbbreviationLTD.

Full termLong Term Disability Insurance.

Table usageThe abbreviation appears in the product designation Health Insurance - LTC/LTD.

Lapse risk

Risk categoryLapse risk concerns voluntary policy termination.

DefinitionIt is the risk that a policy voluntarily terminates before the statutory surplus strain experienced at policy issue has been recouped.

Recovery pointThe relevant recovery point is recoupment of the statutory surplus strain experienced at policy issue.

Credit quality risk (C1)

Risk categoryCredit quality risk is designated C1.

DefinitionIt is the risk that invested assets supporting reinsured business decrease in value because of asset default or reduced earning power.

Excluded declineMarket-value declines caused solely by changes in interest rates are excluded.

Reinvestment risk (C3)

Risk categoryReinvestment risk is designated C3.

DefinitionIt is the risk that falling interest rates cause reinvested funds to earn less than expected.

Duration mismatchThe risk increases when asset durations are shorter than liability durations.

Disintermediation risk (C3)

Risk categoryDisintermediation risk is designated C3.

DefinitionIt is the risk that rising interest rates increase policy loans and surrenders or prevent contract renewals at anticipated rates.

Potential consequenceThe insurer may need to sell assets at a loss to provide for withdrawals.