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60A.803 LIFE AND HEALTH REINSURANCE AGREEMENTS.
    Subdivision 1. Scope. This section applies to:
(1) all domestic life and accident and sickness insurers;
(2) all other licensed life and accident and sickness insurers which are not subject to a
substantially similar regulation in their domiciliary state; and
(3) licensed insurers with respect to their accident and sickness business.
This section does not apply to assumption reinsurance, yearly renewable term reinsurance, or
certain nonproportional reinsurance such as stop loss or catastrophe reinsurance.
    Subd. 2. Accounting requirements. No insurer subject to this section shall, for reinsurance
ceded, reduce any liability or establish any asset in any financial statement filed with the
commissioner if, by the terms of the reinsurance agreement, in substance or effect, any of the
conditions in paragraphs (a) to (k) exist:
(a) The 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.
(b) 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
a deprivation of surplus or assets.
(c) 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 is considered such 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.
(d) The ceding insurer must, at specific points in time scheduled in the agreement, terminate
or automatically recapture all or part of the reinsurance ceded.
(e) 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. 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.
(f) The reinsurance agreement does not transfer all of the significant risk inherent in the
business being reinsured. The following table identifies, for a representative sampling of products
or type of business, the risks that are considered to be significant. For products not specifically
included, the risks determined to be significant must be consistent with this table.
Risk categories:
(1) morbidity;
(2) mortality;
(3) lapse, which is the risk that a policy will voluntarily terminate prior to the recoupment
of a statutory surplus strain experienced at issue of the policy;
(4) credit quality (C1), which is the risk that invested assets supporting the reinsured business
will decrease in value. The main hazards are that assets will default or that there will be a decrease
in earning power. It excludes market value declines due to changes in interest rate;
(5) reinvestment (C3), which is the risk that interest rates will fall and funds reinvested
(coupon payments or money received upon asset maturity or call) will therefore earn less than
expected. If asset durations are less than liability durations, the mismatch will increase; and
(6) disintermediation (C3), which is the risk that interest rates rise and policy loans and
surrenders increase or maturing contracts do not renew at anticipated rates of renewal. If asset
durations are greater than the liability durations, the mismatch will increase. Policyholders will
move their funds into new products offering higher rates. The company may have to sell assets at
a loss to provide for these withdrawals.
RISK CATEGORY
+ = Significant
0 = Insignificant


1
2
3
4
5
6

Health Insurance - other than LTC/LTD*
+
0
+
0
0
0

Health Insurance - LTC/LTD*
+
0
+
+
+
0

Immediate Annuities
0
+
0
+
+
0

Single Premium Deferred Annuities
0
0
+
+
+
+

Flexible Premium Deferred Annuities
0
0
+
+
+
+

Guaranteed Interest Contracts
0
0
0
+
+
+

Other Annuity Deposit Business
0
0
+
+
+
+

Single Premium Whole Life
0
+
+
+
+
+

Traditional Nonpar Permanent
0
+
+
+
+
+

Traditional Nonpar Term
0
+
+
0
0
0

Traditional Par Permanent
0
+
+
+
+
+

Traditional Par Term
0
+
+
0
0
0

Adjustable Premium Permanent
0
+
+
+
+
+

Indeterminate Premium Permanent
0
+
+
+
+
+

Universal Life Flexible Premium
0
+
+
+
+
+

Universal Life Fixed Premium
0
+
+
+
+
+


Universal Life Fixed Premium (dump-in premiums
allowed)
0
+
+
+
+
+
*LTC = Long Term Care Insurance
LTD = Long Term Disability Insurance
(g)(1) 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
clause (2), 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
that legally segregates, by contract or contract provision, the underlying assets.
(2) Notwithstanding the requirements of clause (1), the assets supporting the reserves for
the following classes of business and any classes of business that do not have a significant credit
quality, reinvestment or disintermediation risk, may be held by the ceding company without
segregation of the assets:
(i) Health Insurance - LTC/LTD;
(ii) Traditional Nonpar Permanent;
(iii) Traditional Par Permanent;
(iv) Adjustable Premium Permanent;
(v) Indeterminate Premium Permanent; and/or
(vi) Universal Life Fixed Premium (no dump-in premiums allowed).
The associated formula for determining the reserve interest rate adjustment must reflect the
ceding company's investment earnings and incorporate all realized and unrealized gains and losses
reflected in the statutory statement. The following is an acceptable formula:
Rate = 2(I+CG) / (X + Y - I - CG)

Where:
I is the net investment income

CG is capital gains less capital losses


X is the current year cash and invested assets plus investment income due
and accrued less borrowed money

Y is the same as X but for the prior year
(h) 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.
(i) The ceding insurer is required to make representations or warranties not reasonably
related to the business being reinsured.
(j) The ceding insurer is required to make representations or warranties about future
performance of the business being reinsured.
(k) 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.
    Subd. 3. Commissioner approval. Notwithstanding subdivision 2, an insurer subject to this
section may, with the prior approval of the commissioner, take such reserve credit or establish
such asset as the commissioner deems consistent with state insurance law or rules.
    Subd. 4. Filing. (a) Agreements entered into after August 1, 1994, that 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 their 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 section and any applicable
actuarial standards of practice when determining the proper credit in financial statements filed
with the commissioner. The actuary shall maintain adequate documentation and be prepared upon
request to describe the actuarial work performed for inclusion in the financial statements and to
demonstrate that the work conforms to this section.
(b) Any increase in surplus net of federal income tax resulting from arrangements described
in paragraph (a) must be identified separately on the insurer's statutory financial statement as a
surplus item (aggregate write-ins for gains and losses in surplus in the capital and surplus account
of the annual statement) and recognition of the surplus increase as income must be reflected on a
net of tax basis in the "Reinsurance ceded" line of the annual statement as earnings emerge
from the business reinsured.
    Subd. 5. Written agreements. 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 commissioner, unless the agreement, amendment, or a binding letter or intent has been duly
executed by both parties no later than the "as of date" of the financial statement. 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 90 days from the execution date of
the letter of intent, in order for credit to be granted for the reinsurance ceded. The reinsurance
agreement must provide that:
(1) the agreement constitutes the entire agreement between the parties with respect to the
business being reinsured under it and that there are no understandings between the parties other
than as expressed in the agreement; and
(2) any change or modification to the agreement is null and void unless made by amendment
to the agreement and signed by both parties.
    Subd. 6. Reserve credits. Insurers subject to this section shall reduce to zero by December
31, 1995, any reserve credits or assets established with respect to reinsurance agreements entered
into prior to August 1, 1994, that under the provisions of this section would not be entitled to
recognition of the reserve credits or assets; provided, however, that the reinsurance agreements
have been in compliance with laws or regulations in existence immediately preceding August 1,
1994.
History: 1994 c 426 s 9

Official Publication of the State of Minnesota
Revisor of Statutes