SECTION 7.616. Term and Universal Life Insurance Reserve Financing

(a) Definitions. The following words and terms have the following meanings when used in this section unless the context clearly indicates otherwise.

(1) Actuarial method--the methodology used to determine the required level of primary security under subsection (d) of this section.

(2) Covered policy--subject to the exemptions described in subsection (c) of this section, a covered policy, other than a grandfathered policy, that is one of the following policy types:

(A) a life insurance policy with guaranteed nonlevel gross premiums or guaranteed nonlevel benefits, or both, but not a flexible premium universal life insurance policy except as provided by subparagraph (B) of this paragraph; or

(B) a flexible premium universal life insurance policy with provisions allowing a policyholder to keep the policy in force over a secondary guarantee period.

(3) Grandfathered policy--a policy described by paragraph (2)(A) and (B) of this subsection that is:

(A) issued before January 1, 2015; and

(B) ceded, as of December 31, 2014, as part of a reinsurance agreement that would not have been exempt under subsection (c) of this section had that subsection been in effect for the reinsurance agreement.

(4) Non-covered policy--a policy that does not meet the definition of covered policy, including grandfathered policy.

(5) Other security--any security, other than primary security, acceptable to the Commissioner.

(6) Primary security--

(A) cash as described by Insurance Code §493.104;

(B) securities listed by the Securities Valuation Office as described by Insurance Code §493.104, excluding:

(i) any synthetic letters of credit, contingent notes, credit-linked notes, or other similar securities that operate in a manner similar to a letter of credit; and

(ii) any securities issued by the ceding insurer or any of its affiliates; and

(C) for security held in connection with funds-withheld and modified coinsurance reinsurance agreements:

(i) commercial loans in good standing with a risk-based capital risk category of CM3 or higher category;

(ii) policy loans; and

(iii) derivatives acquired in the normal course and used to support and hedge liabilities related to the actual risks in the policies ceded under the reinsurance agreement.

(7) Required level of primary security--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.

(8) Valuation manual--the valuation manual defined by Insurance Code §425.052 and described by §3.9901 of this title (relating to Valuation Manual) in effect for the financial statement date on which credit for reinsurance is claimed.

(9) VM-20--"Requirements for Principle-Based Reserves for Life Products," including all relevant definitions, from the valuation manual.

(b) Applicability. This section applies only to reinsurance agreements that cede liabilities related to covered policies issued by a life insurance company domiciled in this state. In the event of a direct conflict between this section and another provision in Chapter 7, Subchapter F, of this title, this section applies to the extent of the conflict.

(c) Exemptions and public disclosure. This section does not apply to:

(1) reinsurance of:

(A) policies that satisfy the criteria for exemption in §3.4506 of this title (relating to Calculation of Minimum Valuation Standard for Policies with Guaranteed Nonlevel Gross Premiums or Guaranteed Nonlevel Benefits (Other than Universal Life Policies)), subsections (f) or (g) of this section; and that are issued before the later of:

(i) the effective date of this section; or

(ii) the date on which the ceding insurer begins to apply VM-20 to establish the ceded policies' statutory reserves, but not later than January 1, 2020;

(B) portions of policies that satisfy the criteria for exemption in §3.4506(e) of this title and that are issued before the later of:

(i) the effective date of this section; and

(ii) the date on which the ceding insurer begins to apply VM-20 to establish the ceded policies' statutory reserves, but not later than January 1, 2020;

(C) any universal life policy that meets all of the following requirements:

(i) secondary guarantee period, if any, is five years or less;

(ii) 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

(iii) the initial surrender charge is not less than 100% of the first-year annualized specified premium for the secondary guarantee period;

(D) credit life insurance;

(E) 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

(F) any group life insurance certificate unless the certificate provides for a stated or implied schedule of maximum gross premiums required to continue coverage in force for more than one year;

(2) reinsurance ceded to an assuming insurer that meets the applicable requirements of Insurance Code Chapter 493, Subchapter D;

(3) reinsurance ceded to an assuming insurer that meets the applicable requirements of Insurance Code §493.102, concerning Credit for Reinsurance Generally, and §493.103, concerning Accredited Reinsurer, and that:

(A) prepares statutory financial statements that comply with the NAIC Accounting Practices and Procedures Manual, without any departures from NAIC statutory accounting practices and procedures related to the admissibility or valuation of assets or liabilities that:

(i) increase the assuming insurer's reported surplus; and

(ii) are material enough that they must be disclosed in the financial statement of the assuming insurer under Statement of Statutory Accounting Principles No. 1; and

(B) is not in a company action level event, regulatory action level event, authorized control level event, or mandatory control level event as described in §7.402 of this title (relating to Risk-Based Capital and Surplus Requirements for Insurers and HMOs) when the assuming insurer's Risk-Based Capital is calculated in accordance with the life risk-based capital report including overview and instructions for companies, under §7.402 of this title;

(4) reinsurance ceded to an assuming insurer that meets the applicable requirements of Insurance Code §493.102 and §493.103, and that:

(A) is not an affiliate, as defined in Insurance Code §823.003, concerning Classification as Affiliate or Subsidiary, of:

(i) the insurer ceding the business to the assuming insurer; or

(ii) any insurer that directly or indirectly ceded the business to that ceding insurer;

(B) prepares statutory financial statements in compliance with the NAIC Accounting Practices and Procedures Manual;

(C) is both:

(i) licensed or accredited in at least 10 states, including the assuming insurer's state of domicile; and

(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

(D) is not or would not be below 500% of the authorized control level risk-based capital as that term is described in §7.402 of this title when its risk-based capital is calculated in accordance with the life risk-based capital report, including overview and instructions for companies under §7.402 of this title, and without recognition of any departures from NAIC statutory accounting practices and procedures related to the admission or valuation of assets or liabilities that increase the assuming insurer's reported surplus;

(5) reinsurance ceded to an assuming insurer that:

(A) meets the conditions of Insurance Code §493.108;

(B) is certified under Insurance Code Chapter 493, Subchapter C; or

(C) maintains at least $250 million in capital and surplus when determined in accordance with the NAIC Accounting Practices and Procedures Manual, including all amendments adopted by the NAIC, excluding the impact of any permitted or prescribed practices; and is

(i) licensed in at least 26 states; or

(ii) licensed in at least 10 states, and licensed or accredited in a total of at least 35 states; or

(6) reinsurance not otherwise exempt under paragraphs (1) - (5) of this subsection 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:

(A) the risks are clearly outside the intent and purpose of this section;

(B) the risks are included within the scope of this section only as a technicality; and

(C) the application of this section to those risks is not necessary to provide appropriate protection to policyholders.

(7) The Commissioner will publicly disclose any decision made under this subsection to exempt a reinsurance agreement from this section. The disclosure will include the general basis for the decision and a summary description of the reinsurance agreement.

(d) The actuarial method.

(1) Requirements generally. The actuarial method to establish the required level of primary security for each reinsurance agreement subject to this section is VM-20, applied on a reinsurance agreement-by-reinsurance agreement basis, including all relevant definitions, from the valuation manual as then in effect, applied as follows:

(A) For covered policies described in subsection (a)(2)(A) of this section, the actuarial method is the greater of the deterministic reserve or the net premium reserve regardless of whether the criteria for exemption testing can be met, except:

(i) 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 net premium reserve; and

(ii) if the covered policies are reinsured in a reinsurance agreement that contains covered policies described in subsection (a)(2)(B) of this section, in addition to those described in subsection (a)(2)(A) of this section, the ceding insurer may elect to use the method set out in subparagraph (B) of this paragraph as the actuarial method for the entire reinsurance agreement. Whether the method set out in subparagraph (A) or (B) of this paragraph 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.

(B) For covered policies described in subsection (a)(2)(B) of this section, the actuarial method is the greatest of the deterministic reserve, the stochastic reserve, or the net premium reserve, regardless of whether the criteria for exemption testing can be met.

(C) Except as provided in subparagraph (D) of this paragraph, the actuarial method must be applied on a gross basis to all risks related to the covered policies as originally issued or assumed by the ceding insurer.

(D) If the reinsurance agreement cedes less than 100% of the risk related to the covered policies, the required level of primary security may be reduced as follows:

(i) if a reinsurance agreement cedes only a quota share of some or all of the risks related to the covered policies, the required level of primary security and any adjustment under clause (iii) of this subparagraph may be reduced to a pro rata portion in accordance with the percentage of the risk ceded;

(ii) if the reinsurance agreement in a nonexempt arrangement cedes only the risks related 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 reflect any reduction under the cession of mortality risk on a yearly renewable term basis in an exempt arrangement;

(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 determined 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 before January 1, 2017, this adjustment may not 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

(iv) for any other reinsurance agreement ceding a portion of risk to a different reinsurer, including stop loss, excess of loss, and other nonproportional reinsurance agreements, the required level of primary security may not be reduced.

(v) if any combination of clauses (i), (ii), (iii), and (iv) of this subparagraph applies, the adjustments to the required level of primary security must be made in the sequence that accurately reflects the portion of the risk ceded under the reinsurance agreement. 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% of the risk.

(vi) the adjustments for other reinsurance may be made with respect only to reinsurance agreements that the ceding insurer directly entered into. The ceding insurer may make no adjustment as a result of a retrocession treaty that the assuming insurers enter into.

(E) The required level of primary security resulting from application of the actuarial method may never exceed the amount of statutory reserves ceded.

(F) If the ceding insurer cedes risks with respect to covered policies, including any riders, in more than one reinsurance agreement subject to this section, the aggregate required level of primary security for those reinsurance agreements may not be less than the required level of primary security calculated using the actuarial method as if all risks ceded in those reinsurance agreements were ceded in a single agreement subject to this section.

(G) If a reinsurance agreement subject to this section cedes risks on both covered and non-covered policies, credit for the ceded reserves will be determined as follows:

(i) the actuarial method must be used to determine the required level of primary security for the covered policies, and subsection (e) of this section must be used to determine the reinsurance credit for the covered policy reserves; and

(ii) credit for the non-covered policy reserves will be granted only to the extent that security, in addition to the security held to satisfy the requirements of clause (i) of this subparagraph, is held by or on behalf of the ceding insurer in accordance with Insurance Code §§493.102, 493.104, and 493.108, as well as §493.1033, concerning Credit Allowed for Certain Certified Reinsurers; §493.1034, concerning, concerning Certain Associations May Be Certified Reinsurers; §493.1035, concerning Qualified Jurisdictions, §493.1036, concerning Requirements for Certified Reinsurer; §493.1037, concerning Certification by National Association of Insurance Commissioners; and §493.1038, concerning Suspension or Revocation of Accreditation or Certification; Inactive Status. Any primary security used to meet the requirements of this clause may not be used to satisfy the required level of primary security for the covered policies.

(2) Valuation used for purposes of calculations. For calculating the required level of primary security under 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 valuations apply:

(A) for assets, including assets held in trust, that would be admitted under the NAIC Accounting Practices and Procedures Manual if the ceding insurer held the assets, the valuations are to be determined according to statutory accounting procedures as if the assets were held in the ceding insurer's general account and without taking into consideration the effect of any prescribed or permitted practices; and

(B) for all other assets, the valuations are those assigned to the assets for determining the amount of reserve credit taken. In addition, the asset spread tables and asset default cost tables required by VM-20 must be included in the actuarial method if the tables are adopted by the NAIC's Life Actuarial (A) Task Force not later than the December 31st 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 must be incorporated into the actuarial method in accordance with VM-20.

(e) Requirements applicable to covered policies to obtain credit for reinsurance; opportunity for remediation.

(1) General requirements. Subject to subsection (c) of this section and paragraph (2) of this subsection, credit for reinsurance will be allowed with respect to ceded liabilities related to covered policies under Insurance Code §§493.102, 493.1033 - 493.1038, 493.104, and 493.108, only if, in addition to all other requirements imposed by law or rule, the following requirements are met on a reinsurance agreement-by-reinsurance agreement basis:

(A) the ceding insurer's statutory policy reserves with respect to the covered policies are established in full and in accordance with Insurance Code Chapter 425, Subchapter B, and related rules and actuarial guidelines. Credit claimed for any reinsurance agreement subject to this section may not exceed the proportionate share of those reserves ceded under the reinsurance agreement;

(B) the ceding insurer determines the required level of primary security with respect to each reinsurance agreement subject to this section and provides support for its calculation that the Commissioner finds acceptable;

(C) 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 agreement within the meaning of Insurance Code §493.104 on a funds withheld, trust, or modified coinsurance basis;

(D) 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 under subparagraph (C) of this paragraph, are held by or on behalf of the ceding insurer as security under the reinsurance agreement within the meaning of Insurance Code §493.104;

(E) any trust used to satisfy the requirements of this subsection must comply with all of the conditions and qualifications of §7.609 of this title, except that:

(i) funds consisting of primary security or other security held in trust, must be valued for subsection (d)(2) of this section according to the valuation rules in subsection (d)(2) of this section, as applicable;

(ii) there are no affiliate investment limitations for any security held in the trust if the security is not needed to satisfy the requirements of paragraph (1)(C) of this subsection;

(iii) the reinsurance agreement must prohibit withdrawals or substitutions of trust assets that would leave the fair market value of the primary security in the trust when aggregated with primary security outside the trust that is held by or on behalf of the ceding insurer in the manner paragraph (1)(C) of this subsection requires at less than 102% of the level that paragraph (1)(C) of this subsection requires at the time of the withdrawal or substitution; and

(iv) the determination of reserve credit under §7.609 of this title will be determined according to the valuation rules in subsection (d)(2) of this section, as applicable; and

(F) the Commissioner has approved the reinsurance agreement.

(2) Requirements at inception date and on an ongoing basis; remediation.

(A) The requirements of paragraph (1) of this subsection must be satisfied as of the date that risks under covered policies are ceded if that date is on or after the effective date of this section and on an ongoing basis after that date. A ceding insurer may never take or consent to any action or series of actions that would result in a deficiency under paragraph (1)(C) or (D) of this subsection with respect to any reinsurance agreement under which covered policies have been ceded. In the event a ceding insurer becomes aware at any time that such a deficiency exists, it must use its best efforts to arrange to eliminate the deficiency as expeditiously as possible.

(B) Before the due date of each quarterly or annual statement, each life insurance company that has ceded reinsurance within the scope of subsection (b) of this section must perform an analysis, on a reinsurance agreement-by-reinsurance agreement basis, to determine, as to each reinsurance agreement under which covered policies have been ceded, whether as of the end of the immediately preceding calendar quarter (the valuation date) the requirements of paragraph (1)(C) and (D) of this subsection were satisfied. The ceding insurer must establish a liability equal to the excess of the credit for reinsurance taken over the amount of primary security actually held under paragraph (1)(C) of this subsection, unless:

(i) the requirements of paragraph (1)(C) and (D) of this subsection were fully satisfied as of the valuation date as to the reinsurance agreement; or

(ii) 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, or both, in the amount and in the form that would have caused the requirements of paragraph (1)(C) and (D) of this subsection to be fully satisfied as of the valuation date.

(C) Nothing in paragraph (2)(B) of this subsection may be construed to allow a ceding company to maintain any deficiency under paragraph (1)(C) and (D) of this subsection longer than is reasonably necessary to eliminate the deficiency.

Source Note: The provisions of this §7.616 adopted to be effective January 1, 2022, 46 TexReg 8069