HF 4799

as introduced - 92nd Legislature (2021 - 2022) Posted on 04/21/2022 10:09am

A bill for an act
relating to insurance; providing for term and universal life insurance reserve
financing; proposing coding for new law in Minnesota Statutes, chapter 61A.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA:

Section 1.

new text begin [61A.259] TERM AND UNIVERSAL LIFE INSURANCE RESERVE
FINANCING.
new text end

new text begin Subdivision 1. new text end

new text begin Definitions. new text end

new text begin (a) For purposes of this section, the following terms have
the meanings given.
new text end

new text begin (b) "Actuarial method" means the methodology used to determine the required level of
primary security, as described in subdivision 4.
new text end

new text begin (c) "Covered policies" means, subject to the exemptions described in subdivision 3,
those policies, other than grandfathered policies, of the following types:
new text end

new text begin (1) life insurance policies with guaranteed nonlevel gross premiums or guaranteed
nonlevel benefits, except for flexible premium universal life insurance policies; or
new text end

new text begin (2) flexible premium universal life insurance policies with provisions resulting in the
ability of a policyholder to keep a policy in force over a secondary guarantee period.
new text end

new text begin (d) "Grandfathered policies" means policies of the types described in paragraph (c) that
were:
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new text begin (1) issued prior to January 1, 2015; and
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new text begin (2) ceded, as of December 31, 2014, as part of a reinsurance treaty that would not have
met one of the exemptions set forth in subdivision 3 had subdivision 3 then been in effect.
new text end

new text begin (e) "NAIC" means the National Association of Insurance Commissioners.
new text end

new text begin (f) "Noncovered policies" means any policy that does not meet the definition of covered
policies, including grandfathered policies.
new text end

new text begin (g) "Required level of primary security" means the dollar amount determined by applying
the actuarial method to the risks ceded with respect to covered policies, but not more than
the total reserve ceded.
new text end

new text begin (h) "Primary security" means the following forms of security:
new text end

new text begin (1) cash meeting the requirements of section 60A.093, subdivision 1;
new text end

new text begin (2) securities listed by the Securities Valuation Office meeting the requirements of
section 60A.093, subdivision 1, but excluding any synthetic letter of credit, contingent note,
credit-linked note or other similar security that operates in a manner similar to a letter of
credit, and excluding any securities issued by the ceding insurer or any of its affiliates; and
new text end

new text begin (3) for security held in connection with funds-withheld and modified coinsurance
reinsurance treaties:
new text end

new text begin (i) commercial loans in good standing of CM3 quality and higher;
new text end

new text begin (ii) policy loans; and
new text end

new text begin (iii) derivatives acquired in the normal course and used to support and hedge liabilities
pertaining to the actual risks in the policies ceded pursuant to the reinsurance treaty.
new text end

new text begin (i) "Other security" means any security acceptable to the commissioner other than security
meeting the definition of primary security.
new text end

new text begin (j) "Valuation manual" means the valuation manual adopted by the NAIC as described
in section 61A.25, subdivision 10, with all amendments adopted by the NAIC that are
effective for the financial statement date on which credit for reinsurance is claimed.
new text end

new text begin (k) "VM-20" has the meaning given to "Requirements for Principle-Based Reserves for
Life Products," including all relevant definitions, in the valuation manual.
new text end

new text begin Subd. 2. new text end

new text begin Applicability. new text end

new text begin This section applies to reinsurance treaties that cede liabilities
pertaining to covered policies, as that term is defined in subdivision 1, paragraph (c), issued
by any life insurance company domiciled in this state. This section and sections 60A.091
to 60A.094 shall both apply to such reinsurance treaties; provided, that in the event of a
direct conflict between the provisions of this section and sections 60A.091 to 60A.094, the
provisions of this section shall apply, but only to the extent of the conflict.
new text end

new text begin Subd. 3. new text end

new text begin Exemptions. new text end

new text begin (a) This section does not apply to reinsurance of:
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new text begin (1) policies that satisfy the criteria for exemption under section 60A.125, subdivision
6, which are issued before the later of:
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new text begin (i) the effective date of this section; and
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new text begin (ii) the date on which the ceding insurer begins to apply the provisions of VM-20 to
establish the ceded policies' statutory reserves, but in no event later than January 1, 2020;
new text end

new text begin (2) portions of policies that satisfy the criteria for exemption set forth in section 61A.25,
subdivision 6, and which are issued before the later of:
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new text begin (i) the effective date of this section; and
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new text begin (ii) the date on which the ceding insurer begins to apply the provisions of VM-20 to
establish the ceded policies' statutory reserves, but in no event later than January 1, 2020;
new text end

new text begin (3) a universal life policy that meets all of the following requirements:
new text end

new text begin (i) the secondary guarantee period, if any, is five years or less;
new text end

new text begin (ii) the specified premium for the secondary guarantee period is not less than the net
level reserve premium for the secondary guarantee period based on the Commissioners
Standard Ordinary valuation tables and valuation interest rate applicable to the issue year
of the policy; and
new text end

new text begin (iii) the initial surrender charge is not less than 100 percent of the first year annualized
specified premium for the secondary guarantee period;
new text end

new text begin (4) credit life insurance;
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new text begin (5) any variable life insurance policy that provides for life insurance, the amount or
duration of which varies according to the investment experience of any separate account or
accounts; or
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new text begin (6) any group life insurance certificate unless the certificate provides for a stated or
implied schedule of maximum gross premiums required in order to continue coverage in
force for a period in excess of one year.
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new text begin (b) This section does not apply to reinsurance ceded to an assuming insurer that meets
the applicable requirements of section 60A.092, subdivision 5.
new text end

new text begin (c) This section does not apply to reinsurance ceded to an assuming insurer that meets
the applicable requirements of section 60A.091 and:
new text end

new text begin (1) prepares statutory financial statements in compliance with the NAIC Accounting
Practices and Procedures Manual, without any departures from NAIC statutory accounting
practices and procedures pertaining to the admissibility or valuation of assets or liabilities
that increase the assuming insurer's reported surplus and are material enough that they need
to be disclosed in the financial statement of the assuming insurer pursuant to Statement of
Statutory Accounting Principles No. 1 ("SSAP 1"); and
new text end

new text begin (2) is not in a company action level event, regulatory action level event, authorized
control level event, or mandatory control level event, as those terms are defined in section
60A.60, when its risk-based capital is calculated in accordance with the life risk-based
capital report including overview and instructions for companies, as the same may be
amended by the NAIC from time to time, without deviation.
new text end

new text begin (d) This section does not apply to reinsurance ceded to an assuming insurer that meets
the applicable requirements of section 60A.091 and that, in addition:
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new text begin (1) is not an affiliate, as that term is defined in section 60D.15, of:
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new text begin (i) the insurer ceding the business to the assuming insurer; or
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new text begin (ii) any insurer that directly or indirectly ceded the business to that ceding insurer;
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new text begin (2) prepares statutory financial statements in compliance with the NAIC Accounting
Practices and Procedures Manual;
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new text begin (3) is both:
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new text begin (i) licensed or accredited in at least ten states, including its state of domicile; and
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new text begin (ii) not licensed in any state as a captive, special purpose vehicle, special purpose financial
captive, special purpose life reinsurance company, limited purpose subsidiary, or any other
similar licensing regime; and
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new text begin (4) is not, or would not be, below 500 percent of the authorized control level risk-based
capital, as that term is defined in section 60A.60, when its risk-based capital is calculated
in accordance with the life risk-based capital report including overview and instructions for
companies, as the same may be amended by the NAIC from time to time, without deviation,
and without recognition of any departures from NAIC statutory accounting practices and
procedures pertaining to the admission or valuation of assets or liabilities that increase the
assuming insurer's reported surplus.
new text end

new text begin (e) This section does not apply to reinsurance ceded to an assuming insurer that meets
the requirements of section 60A.091.
new text end

new text begin (f) This section does not apply to reinsurance not otherwise exempt under paragraphs
(a) to (e) if the commissioner, after consulting with the NAIC Financial Analysis Working
Group or other group of regulators designated by the NAIC, as applicable, determines under
all the facts and circumstances that all of the following apply:
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new text begin (1) the risks are clearly outside of the intent and purpose of this section;
new text end

new text begin (2) the risks are included within the scope of this statute only as a technicality; and
new text end

new text begin (3) the application of this section to those risks is not necessary to provide appropriate
protection to policyholders.
new text end

new text begin (g) new text end new text begin The commissioner shall publicly disclose any decision made pursuant to paragraph
(f) to exempt a reinsurance treaty from this section, as well as the general basis therefor,
and including a summary description of the treaty.
new text end

new text begin Subd. 4. new text end

new text begin Actuarial method; calculation valuation. new text end

new text begin (a) The actuarial method to establish
the required level of primary security for each reinsurance treaty subject to this section shall
be VM-20, applied on a treaty-by-treaty basis, including all relevant definitions, from the
valuation manual as then in effect, applied as follows:
new text end

new text begin (1) for covered policies described in subdivision 1, paragraph (c), clause (1), the actuarial
method is the greater of the deterministic reserve or the net premium reserve (NPR) regardless
of whether the criteria for exemption testing can be met. However, if the covered policies
do not meet the requirements of the stochastic reserve exclusion test in the valuation manual,
then the actuarial method is the greatest of the deterministic reserve, the stochastic reserve,
or the NPR. In addition, if such covered policies are reinsured in a reinsurance treaty that
also contains covered policies described in subdivision 1, paragraph (c), clause (2), the
ceding insurer may elect to instead use clause (2) as the actuarial method for the entire
reinsurance agreement. Whether clause (1) or (2) is used, the actuarial method must comply
with any requirements or restrictions that the valuation manual imposes when aggregating
these policy types for purposes of principle-based reserve calculations;
new text end

new text begin (2) for covered policies described in subdivision 1, paragraph (c), clause (2), the actuarial
method is the greatest of the deterministic reserve, the stochastic reserve, or the NPR
regardless of whether the criteria for exemption testing can be met;
new text end

new text begin (3) except as provided in clause (4), the actuarial method is to be applied on a gross
basis to all risks with respect to the covered policies as originally issued or assumed by the
ceding insurer;
new text end

new text begin (4) if the reinsurance treaty cedes less than 100 percent of the risk with respect to the
covered policies, then the required level of primary security may be reduced as follows:
new text end

new text begin (i) if a reinsurance treaty cedes only a quota share of some or all of the risks pertaining
to the covered policies, the required level of primary security, as well as any adjustment
under item (iii), may be reduced to a pro rata portion in accordance with the percentage of
the risk ceded;
new text end

new text begin (ii) if the reinsurance treaty in a nonexempt arrangement cedes only the risks pertaining
to a secondary guarantee, the required level of primary security may be reduced by an
amount determined by applying the actuarial method on a gross basis to all risks, other than
risks related to the secondary guarantee, pertaining to the covered policies, except that for
covered policies for which the ceding insurer did not elect to apply the provisions of VM-20
to establish statutory reserves, the required level of primary security may be reduced by the
statutory reserve retained by the ceding insurer on those covered policies, where the retained
reserve of those covered policies should be reflective of any reduction pursuant to the cession
of mortality risk on a yearly renewable term basis in an exempt arrangement;
new text end

new text begin (iii) if a portion of the covered policy risk is ceded to another reinsurer on a yearly
renewable term basis in an exempt arrangement, the required level of primary security may
be reduced by the amount resulting by applying the actuarial method including the
reinsurance section of VM-20 to the portion of the covered policy risks ceded in the exempt
arrangement, except that for covered policies issued prior to January 1, 2017, this adjustment
is not to exceed [cx/ (2 * number of reinsurance premiums per year)], where cx is calculated
using the same mortality table used in calculating the net premium reserve; and
new text end

new text begin (iv) for any other treaty ceding a portion of risk to a different reinsurer, including but
not limited to stop loss, excess of loss and other nonproportional reinsurance treaties, there
will be no reduction in the required level of primary security;
new text end

new text begin (5) in no event will the required level of primary security resulting from application of
the actuarial method exceed the amount of statutory reserves ceded;
new text end

new text begin (6) if the ceding insurer cedes risks with respect to covered policies, including any riders,
in more than one reinsurance treaty subject to this section, in no event will the aggregate
required level of primary security for those reinsurance treaties be less than the required
level of primary security calculated using the actuarial method as if all risks ceded in those
treaties were ceded in a single treaty subject to this section; and
new text end

new text begin (7) if a reinsurance treaty subject to this section cedes risk on both covered and
noncovered policies, credit for the ceded reserves shall be determined as follows:
new text end

new text begin (i) the actuarial method shall be used to determine the required level of primary security
for the covered policies, and subdivision 5 shall be used to determine the reinsurance credit
for the covered policy reserves; and
new text end

new text begin (ii) credit for the noncovered policy reserves shall be granted only to the extent that
security, in addition to the security held to satisfy the requirements of item (i), is held by
or on behalf of the ceding insurer in accordance with sections 60A.092 and 60A.093. Any
primary security used to meet the requirements of this item may not be used to satisfy the
required level of primary security for the covered policies.
new text end

new text begin (b) It is possible for any combination of paragraph (a), clause (4), items (i), (ii), (iii),
and (iv), to apply. Such adjustments to the required level of primary security will be done
in the sequence that accurately reflects the portion of the risk ceded via the treaty. The
ceding insurer should document the rationale and steps taken to accomplish the adjustments
to the required level of primary security due to the cession of less than 100 percent of the
risk. The adjustments for other reinsurance will be made only with respect to reinsurance
treaties entered into directly by the ceding insurer. The ceding insurer will make no
adjustment as a result of a retrocession treaty entered into by the assuming insurers.
new text end

new text begin (c) For the purposes of both calculating the required level of primary security pursuant
to the actuarial method and determining the amount of primary security and other security,
as applicable, held by or on behalf of the ceding insurer, the following apply:
new text end

new text begin (1) for assets, including any such assets held in trust, that would be admitted under the
NAIC Accounting Practices and Procedures Manual if they were held by the ceding insurer,
the valuations are to be determined according to statutory accounting procedures as if such
assets were held in the ceding insurer's general account and without taking into consideration
the effect of any prescribed or permitted practices; and
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new text begin (2) for all other assets, the valuations are to be those that were assigned to the assets for
the purpose of determining the amount of reserve credit taken. In addition, the asset spread
tables and asset default cost tables required by VM-20 shall be included in the actuarial
method if adopted by the NAIC's Life Actuarial (A) Task Force no later than December 31
on or immediately preceding the valuation date for which the required level of primary
security is being calculated. The tables of asset spreads and asset default costs shall be
incorporated into the actuarial method in the manner specified in VM-20.
new text end

new text begin Subd. 5. new text end

new text begin Credit for reinsurance; requirements; opportunity for remediation. new text end

new text begin (a)
Subject to the exemptions described in subdivision 3 and the provisions of paragraphs (b)
to (d), credit for reinsurance shall be allowed with respect to ceded liabilities pertaining to
covered policies pursuant to sections 60A.092 and 60A.093 if, and only if, in addition to
all other requirements imposed by law or statute, the following requirements are met on a
treaty-by-treaty basis:
new text end

new text begin (1) the ceding insurer's statutory policy reserves with respect to the covered policies are
established in full and in accordance with the applicable requirements of section 61A.25
and related statutes and actuarial guidelines, and credit claimed for any reinsurance treaty
subject to this statute does not exceed the proportionate share of those reserves ceded under
the contract; and
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new text begin (2) the ceding insurer determines the required level of primary security with respect to
each reinsurance treaty subject to this statute and provides support for its calculation as
determined to be acceptable to the commissioner; and
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new text begin (3) funds consisting of primary security, in an amount at least equal to the required level
of primary security, are held by or on behalf of the ceding insurer, as security under the
reinsurance treaty within the meaning of section 60A.093, on a funds withheld, trust, or
modified coinsurance basis; and
new text end

new text begin (4) funds consisting of other security, in an amount at least equal to any portion of the
statutory reserves as to which primary security is not held pursuant to clause (3), are held
by or on behalf of the ceding insurer as security under the reinsurance treaty within the
meaning of section 60A.093; and
new text end

new text begin (5) any trust used to satisfy the requirements of this subdivision shall comply with all
of the conditions and qualifications of section 60A.0921, except that:
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new text begin (i) funds consisting of primary security or other security held in trust, shall for the
purposes identified in subdivision 4, paragraph (c), be valued according to the valuation
rules set forth in subdivision 4, paragraph (c), as applicable;
new text end

new text begin (ii) there are no affiliate investment limitations with respect to any security held in such
trust if such security is not needed to satisfy the requirements of clause (3); and
new text end

new text begin (iii) the reinsurance treaty must prohibit withdrawals or substitutions of trust assets that
would leave the fair market value of the primary security within the trust, when aggregated
with primary security outside the trust that is held by or on behalf of the ceding insurer in
the manner required by clause (3), below 102 percent of the level required by clause (3) at
the time of the withdrawal or substitution; and
new text end

new text begin (iv) the determination of reserve credit under section 61A.25 shall be determined
according to the valuation rules set forth in subdivision 4, paragraph (c), as applicable; and
new text end

new text begin (6) the reinsurance treaty has been approved by the commissioner.
new text end

new text begin (b) The requirements of paragraph (a) must be satisfied as of the date that risks under
covered policies are ceded, if such date is on or after the effective date of this section, and
on an ongoing basis thereafter. Under no circumstances shall a ceding insurer take or consent
to any action or series of actions that would result in a deficiency under paragraph (a), clause
(3) or (4), with respect to any reinsurance treaty under which covered policies have been
ceded, and in the event that a ceding insurer becomes aware at any time that such a deficiency
exists, it shall use its best efforts to arrange for the deficiency to be eliminated as
expeditiously as possible.
new text end

new text begin (c) Prior to the due date of each quarterly or annual statement, each life insurance
company that has ceded reinsurance within the scope of subdivision 1 shall perform an
analysis, on a treaty-by-treaty basis, to determine, as to each reinsurance treaty under which
covered policies have been ceded, whether as of the valuation date at the end of the
immediately preceding calendar quarter the requirements of paragraph (a), clauses (3) and
(4), were satisfied. The ceding insurer shall establish a liability equal to the excess of the
credit for reinsurance taken over the amount of primary security actually held pursuant to
paragraph (a), clause (3), unless:
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new text begin (1) the requirements of paragraph (a), clauses (3) and (4), were fully satisfied as of the
valuation date as to such reinsurance treaty; or
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new text begin (2) any deficiency has been eliminated before the due date of the quarterly or annual
statement to which the valuation date relates through the addition of primary security or
other security, as the case may be, in such amount and in such form as would have caused
the requirements of paragraph (a), clauses (3) and (4), to be fully satisfied as of the valuation
date.
new text end

new text begin (d) Nothing in paragraph (c) shall be construed to allow a ceding company to maintain
any deficiency under paragraph (a), clause (3) or (4), for any period of time longer than is
reasonably necessary to eliminate it.
new text end

new text begin Subd. 6. new text end

new text begin Severability. new text end

new text begin If any provision of this section is held invalid, the remainder is
not affected.
new text end

new text begin Subd. 7. new text end

new text begin Prohibition against avoidance. new text end

new text begin No insurer that has covered policies as to
which this section applies, as set forth in subdivision 1, shall take any action or series of
actions, or enter into any transaction or arrangement or series of transactions or arrangements
if the purpose of such action, transaction or arrangement or series thereof is to avoid the
requirements of this statute, or to circumvent its purpose and intent.
new text end

new text begin EFFECTIVE DATE. new text end

new text begin This section is effective January 1, 2023, and applies to all covered
policies in effect on and after that date.
new text end