It is enacted by the General Assembly as follows:
SECTION 1. Chapter 4.2 of the General Laws entitled "Life Reinsurance Agreements" is hereby repealed in its entirety.
SECTION 2. Title 27 of the General Laws entitled "Insurance" is hereby amended by adding thereto the following chapter:
{ADD CHAPTER 4.2 ADD}
{ADD LIFE AND HEALTH REINSURANCE ADD} {ADD AGREEMENTS ACT ADD}
{ADD 27-4.2-1. Preamble. -- ADD} {ADD (A) The Rhode Island Insurance Department recognizes that licensed insurers routinely enter into reinsurance agreements that yield legitimate relief to the ceding insurer from strain to surplus. ADD}
{ADD (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 agreements referred to herein and described in section 27-4.2-3 would violate: ADD}
{ADD (1) Applicable sections of the general laws relating to financial statements of insurers, thus resulting in distorted financial statements which do not properly reflect the financial condition of the ceding insurer; ADD}
{ADD (2) Applicable sections of the general laws relating to reinsurance reserve credits, thus resulting in a ceding insurer improperly reducing liabilities or establishing assets for reinsurance ceded; and ADD}
{ADD (3) Applicable sections of the general laws relating to creating a situation that may be hazardous to policyholders and the people of this state. ADD}
{ADD 27-4.2-2. Applicability. -- ADD} {ADD This chapter shall apply to all domestic life and accident and health insurers and to all other licensed life and accident and health insurers which are not subject to a substantially similar regulation in their domiciliary state. This chapter shall also similarly apply to licensed property and casualty insurers with respect to their accident and health business. This chapter shall not apply to assumption reinsurance, yearly renewable term reinsurance or certain nonproportional reinsurance such as stop loss or catastrophe reinsurance. ADD}
{ADD 27-4.2-3. Accounting requirements. -- ADD} {ADD (A) No insurer subject to this chapter shall, for reinsurance ceded, reduce any liability or establish any asset in any financial statement filed with the department, if, by the terms of the reinsurance agreement, in substance or effect, any of the following conditions exist: ADD}
{ADD (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 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; ADD}
{ADD (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 coninsurance reserve adjustments, interest and adjustments on funds withheld, and tax reimbursements, shall not be considered to be a deprivation of surplus or assets; ADD}
{ADD (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 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; ADD}
{ADD (4) The ceding insurer must, at specific points in time scheduled in the agreement, terminate or automatically recapture all or part of the reinsurance ceded; ADD}
{ADD (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; ADD}
{ADD (6) The treaty does not transfer all of the significant risk inherent in the business being reinsured. The risk categories considered shall be morbidity, mortality, lapse, credit quality, reinvestment, and disintermediation. Such categories are further defined in the regulation promulgated pursuant to this chapter; ADD}
{ADD (7)(a) 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 27-4.2-3 (A)(7)(b) either transfer the underlying assets to the reinsurer or legally segregate such assets in a trust or escrow account or otherwise establish a mechanism satisfactory to the commissioner which legally segregates, by contract or contract provision, the underlying assets; ADD}
{ADD (b) Notwithstanding the requirements of 27-4.2-3 (A)(7)(a), 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: ADD}
{ADD Health Insurance--long term care insurance/long term disability insurance ADD}
{ADD Traditional Non-Par Permanent ADD}
{ADD Traditional Par Permanent ADD}
{ADD Adjustable Premium Permanent ADD}
{ADD Indeterminate Premium Permanent ADD}
{ADD Universal Life Fixed Premium (no dump-in premiums allowed) ADD}
{ADD 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. An acceptable formula shall be set forth in regulations promulgated pursuant to this chapter; ADD}
{ADD (8) Settlements are made less frequently that quarterly or payments due form the reinsurer are not made in cash within ninety (90) days of the settlement date; ADD}
{ADD (9) The ceding insurer is required to make representations or warranties not reasonably related to the business being reinsured; ADD}
{ADD (10) The ceding insurer is required to make representations or warranties about future performance of the business being reinsured; ADD}
{ADD (11) 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. ADD}
{ADD (B) Notwithstanding subsection (A), an insurer subject to this chapter may, with the prior approval of the commissioner, take such reserve credit or establish such asset as the commissioner may deem consistent with chapter 1.1 of title 27 and regulations promulgated thereunder, including actuarial interpretations or standards adopted by the Insurance Division of the Department of Business Regulation. ADD}
{ADD (C)(1) Agreements entered into after the effective date of this chapter which involve the reinsurance of business issued prior to the effective date of the agreements, along with any subsequent amendments thereto, shall be filed by the ceding company with the commissioner within (30) days from its date of execution. Each filing shall include data detailing the financial impact of the transaction. The ceding insurer's actuary who signs the financial statement actuarial opinion with respect to valuation of reserves shall consider this chapter and any applicable acturial standards of practice when determining the proper credit in financial statements filed with the Insurance Division of the Department of Business Regulation. The actuary should maintain adequate documentation and be prepared upon request to describe the acturial work performed for inclusion in the financial statements and to demonstrate that such work conforms to this regulation. ADD}
{ADD (2) Any increase in surplus net of federal income tax resulting from arrangements described in subsection (C)(1) shall be identified separately on the insurer's statutory financial statement as a surplus item (aggregate write-ins from gains and losses in surplus in the capital and surplus account, of the annual statement) and recognition of the surplus increase as income shall be reflected on a net of tax basis in the annual statement as earnings emerge from the business reinsured. ADD}
{ADD 27-4.2-4. Written agreements. -- ADD} {ADD (A) No reinsurance agreement or amendment to any agreement may be used to reduce any liability or to establish any asset in any financial statement filed with the Insurance Division of the Department of Business Regulation, 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. ADD}
{ADD (B) 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. ADD}
{ADD (C) The reinsurance agreement shall contain provisions which provide that: ADD}
{ADD (1) The agreement shall constitute the entire agreement between the parties with respect to the business being reinsured thereunder and that there are no understandings between the parties other than as expressed in the agreement; and ADD}
{ADD (2) Any change or modification to the agreement shall be null and void unless made by amendment to the agreement and signed by both parties. ADD}
{ADD 27-4.2-5. Existing agreements. -- ADD} {ADD Insurers subject to this chapter shall reduce to zero by December 31, 1997 any reserve credits or assets established with respect to reinsurance agreements entered into prior to the effective date of this law which, under the provisions of this law would not be entitled to recognition of the reserve credits or assets; provided, however, that the reinsurance agreements shall have been in compliance with laws or regulations in existence immediately preceding the effective date of this regulation. ADD}
{ADD 27-4.2-6. Rules and regulations. -- ADD} {ADD The insurance commissioner shall have the authority to promulgate rules and regulations necessary to carry out the purposes of this chapter. ADD}
SECTION 3. This act shall take effect on January 1, 1996.