Common use of Accounting Requirements Clause in Contracts

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 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 Par Permanent 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 (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.

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 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 Par Permanent 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 (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.

Accounting Requirements. A. No insurer subject to this section regulation shall, for reinsurance ceded, reduce any liability or establish any asset in any financial statement filed with the commissioner Department if, by the terms of the reinsurance agreement, in substance or effect, any of the following conditions in paragraphs (a) to (k) exist: (a1) The renewal 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, shortfall (using assumptions equal to the applicable statutory reserve basis on the business reinsured). Those expenses include commissions, premium taxes, taxes and direct expenses including, but not limited to, billing, valuation, claims, claims and maintenance expected by the company at the time the business is reinsured.; (b2) 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.; (c3) 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 shall be 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.; (d4) The ceding insurer must, at specific points in time scheduled in the agreement, terminate or automatically recapture all or part of the reinsurance ceded.; (e5) 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 For example, it is improper for a ceding company to pay reinsurance premiums, or other fees or charges to a reinsurer, reinsurer which are greater than the direct premiums collected by the ceding company.; (f6) The reinsurance agreement treaty does not transfer all of the significant risk inherent in the business being reinsured. The following table identifies, identifies for a representative sampling of products or type of business, the risks that which are considered to be significant. For products not specifically included, the risks determined to be significant must shall be consistent with this table. Risk categories: (1a) morbidity;Morbidity (2b) mortality;Mortality (3c) lapse, which Lapse This is the risk that a policy will voluntarily terminate prior to the recoupment of a statutory surplus strain experienced at issue of the policy;. (4d) credit quality Credit Quality (C1), which ) This 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;. (5e) reinvestment Reinvestment (C3), which ) This is the risk that interest rates will fall and funds reinvested (coupon payments or money monies 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. (6f) disintermediation Disintermediation (C3), which ) This 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 Health Insurance 0 - 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 Par Permanent 0 + + + + + Adjustable Premium Permanent 0 + + + + + Indeterminate Premium Permanent 0 + + + + + Universal Life Flexible Premium 0 + + + + + Insignificant Universal Life Fixed Premium 0 + + + + + Universal Life Fixed Premium (dump-in premiums allowed) 0 + + + + + allowed *LTC = Long-Long Term Care Insurance LTD = Long-Long Term Disability Insurance (17) (a) The credit quality, reinvestment, or disintermediation risk is significant for the business reinsured and the ceding company does not, not (other than for the classes of business excepted in clause Paragraph (27)(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 that which 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.

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 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 Par Permanent 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-Long Term Care Insurance LTD = Long-Long Term Disability Insurance (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.

Accounting Requirements. No (a) An insurer subject to this section shallchapter may not, for reinsurance ceded, reduce any liability or establish any an asset in any financial statement statements filed with the commissioner Department if, by the terms of the reinsurance agreement, in substance or effect, any one or more of the following conditions in paragraphs (a) to (k) exist: (a1) The renewal reserve credit taken by the ceding insurer is greater than the under- lying reserve of the ceding insurer supporting the policy obligations transferred under the reinsurance agreement. (2) 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, shortfall using assumptions equal to the applicable statutory reserve basis on the business reinsured. Those Renewal expenses include commissions, premium taxes, taxes and direct expenses including, but not limited to, including billing, valuation, claims, claims and maintenance expected by the company ceding insurer at the time the business is reinsured. (b3) The ceding insurer can be deprived of surplus or assets at the reinsurer's reinsur- er’s option or automatically upon the occurrence of some event, such as the insolvency of the ceding insurer. However, 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 will not be considered to be a deprivation of surplus or assetsassets for purposes of this subsection. (c4) The ceding insurer is required to reimburse the reinsurer for negative experience under the reinsurance agreement, except that neither . Neither offsetting experience refunds against current and prior years' ’ losses under the agreement nor payment pay- ment 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 will be considered such a reimbursement to the reinsurer for negative experienceexperience for purposes of this subsection. Voluntary termination In addition, voluntary ter- mination does not include situations where termination occurs because as a result of unreasonable provisions which allow the reinsurer to reduce its risk under the agreement. An example of such a an unreasonable provision is the right of the reinsurer to increase reinsurance premiums or risk and expense charges to excessive levels thereby forcing the ceding company insurer to prematurely terminate the reinsurance treaty. (d5) The ceding insurer mustshall, at specific points in time scheduled in the agreement, terminate or automatically recapture all or part of the reinsurance ceded. (e6) The reinsurance agreement involves the possible payment by the ceding ced- ing insurer to the reinsurer of amounts other than from income realized from the reinsured policies. It For example, it is improper for a ceding company insurer to pay reinsurance premiums, or other fees or charges charges, to a reinsurer, the reinsurer which are greater than the direct premiums collected by the ceding companyinsurer. (f7) The reinsurance agreement treaty does not transfer all of the significant risk inherent in the business being reinsured. The following table identifies, identifies for a representative sampling of products or type of business, the risks that which are considered to be significant. For products not specifically included, the risks determined to be significant must shall be consistent with this the following table. Risk categories: (1A) morbidity;Morbidity. (2B) mortality;Mortality. (3C) lapse, which is the Lapse—The risk that a policy will voluntarily terminate prior to the recoupment of a statutory surplus strain experienced at issue of the policy;. (4D) credit quality (C1), which is the Credit Quality—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 This risk category excludes market mar- ket value declines due to changes in interest rate;. (5E) reinvestment (C3), which is the Reinvestment—The risk that interest rates will fall and funds reinvested (coupon payments or money monies 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. (6F) disintermediation (C3), which is the Disintermediation—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 insurer may have to sell assets at a loss to provide for these withdrawals. RISK CATEGORY + = Significant Risk Category A B C D E F Health Insurance - LTCOther than Long Term Care/LTD* Long Health Insurance—Long Term Care/Long Term Disability + 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 Non-Par Permanent 0 + + + + + Traditional Par Permanent 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+ (1) 8) The credit quality, reinvestment, reinvestment or disintermediation risk is significant for the business reinsured and the ceding company insurer does not, other than for the classes of business excepted in clause subparagraph (2i), either transfer the underlying assets to the reinsurer or legally segregate such the assets in a trust or escrow account or otherwise establish a mechanism satisfactory to the commissioner that Commissioner which legally segregates, by contract or contract provision, the underlying assets. (2i) Notwithstanding the requirements provisions of clause (1)this paragraph, the assets supporting support- ing the reserves for the following classes of business and any classes of business that which do not have a significant credit quality, reinvestment or disintermediation risk, dis- intermediation risk may be held by the ceding company insurer without segregation of the assets: (i) : Health Insurance—Long Term Care/Long Term Disability Insurance - LTC/LTD; (ii) Traditional Nonpar Permanent; (iii) Non-Par Permanent Traditional Par Permanent; (iv) Permanent Adjustable Premium Permanent; (v) Permanent Indeterminate Premium Permanent; and/or (vi) Permanent Universal Life Fixed Premium (no dump-in premiums allowed). The associated formula (ii) If the ceding insurer elects to hold the assets supporting the reserves for determining the classes of business stated in subparagraph (i) or for classes of busi- ness which do not represent a significant risk as noted in subparagraph (i), the determination of the modified coinsurance reserve interest rate adjustment must reflect adjust- ment shall conform to a formula which reflects the ceding company's investment insurer’s invest- ment earnings and incorporate incorporates all realized and unrealized gains and losses reflected in the statutory statement. The following is an acceptable formula: Rate = 2(I+CG) / 2 (X + Y - I - +CG) X +Y — I — CG Where: I is =the net investment income CG is =realized and unrealized capital gains less realized and unrealized 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 (h9) 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. (i10) The ceding insurer is required to make representations or warranties not reasonably related to the business being reinsured. (j11) 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.

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 pre- maturely terminate the reinsurance treaty. (d) The ceding insurer must, at specific points in time scheduled in the agreement, terminate or automatically auto- matically 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 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 Par Permanent 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 (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.

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 pre- maturely terminate the reinsurance treaty. (d) The ceding insurer must, at specific points in time scheduled in the agreement, terminate or automatically auto- matically 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 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 Par Permanent 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 (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.