Titles of Regulations: 14VAC5-280. Rules Establishing Standards for Life, Annuity, and Accident and Sickness Reinsurance Agreements (amending 14VAC5-280-10, 14VAC5-280-30, 14VAC5-280-40, 14VAC5-280-70).

14VAC5-290. Rules Establishing Standards for Companies Deemed to Be in Hazardous Financial Condition  (amending 14VAC5-290-30).

Statutory Authority: §§ 12.1-13 and 38.2-223 of the Code of Virginia.

Effective Date: September 16, 2013.

Agency Contact: Raquel Pino-Moreno, Principal Insurance Analyst, Bureau of Insurance, State Corporation Commission, P.O. Box 1157, Richmond, VA 23218, telephone (804) 371-9499, FAX (804) 371-9511, or email raquel.pino-moreno@scc.virginia.gov.

Summary:

Chapter 539 of the 2012 Acts of Assembly incorporated revisions made to the National Association of Insurance Commissioners' Credit for Reinsurance Model Law that reformed the treatment of reinsurance transactions, including allowing for the certification of reinsurers. The amendments conform the regulations to those changes by (i) adding health maintenance organizations to the definition of "life and health business" and (ii) deleting references to and provisions based on § 38.2-1316.3 or 38.2-1316.6 of the Code of Virginia, which were repealed by Chapter 539.

The changes to the regulation since the proposed stage make the severability section consistent with severability provisions in other Bureau of Insurance regulations.

AT RICHMOND, AUGUST 21, 2013

COMMONWEALTH OF VIRGINIA, ex rel.

STATE CORPORATION COMMISSION

CASE NO. INS-2013-00095

Ex Parte: In the matter of
Amending the Rules Establishing Standards
For Life, Annuity, and Accident and Sickness
Reinsurance Agreements and the Rules Establishing
Standards for Companies Deemed to be in
Hazardous Financial Condition

ORDER ADOPTING RULES

By Order to Take Notice ("Order") entered June 7, 2013, all interested persons were ordered to take notice that subsequent to August 6, 2013, the State Corporation Commission ("Commission") would consider the entry of an order to adopt amendments to Chapters 280 and 290 of Title 14 of the Virginia Administrative Code, entitled Rules Establishing Standards for Life, Annuity, and Accident and Sickness Reinsurance Agreements, 14VAC5-280-10 et seq., and Rules Establishing Standards for Companies Deemed to be in Hazardous Financial Condition, 14VAC5-290-10 et seq. (collectively, "Rules"), respectively, which amend the Rules at 14VAC5-280-10, 14VAC 5-280-30, 14VAC5-280-40, 14VAC5-280-70, and 14VAC5-290-30. These amendments were proposed by the Bureau of Insurance ("Bureau"). The Order required that on or before August 6, 2013, any person objecting to the amendments to the Rules shall have filed a request for hearing with the Clerk of the Commission ("Clerk").

No request for a hearing was filed with the Clerk.

The Order also required all interested persons to file their comments in support of or in opposition to the amendments to the Rules on or before August 6, 2013.

No comments were filed with the Clerk.

The amendments to Chapters 280 and 290 are necessary to implement the provisions of House Bill 1139 passed by the 2012 General Assembly. This legislation incorporates revisions made to the National Association of Insurance Commissioners' Credit for Reinsurance Model Law, which reforms the treatment of reinsurance transactions, including allowing for the certification of reinsurers. The revisions to Chapters 280 and 290 include: (i) the addition of a reference to HMOs under the definition of "life and health business" in 14VAC5-280-10, (ii) the deletion of the reference in 14VAC5-280-30 to § 38.2-1316.6 of the Code of Virginia ("Code"), which was repealed by House Bill 1139, and the addition of a reference to § 38.2-1316.1 of the Code et seq., (iii) the deletion of 14VAC5-280-40 A 2 because this provision pertains to provisions that were in § 38.2-1316.6 of the Code, (iv) the revision of 14VAC5-280-70 to provide consistency with other severability sections, and (v) the deletion of the reference in 14VAC5-290-30 to § 38.2-1316.3 of the Code, which was also repealed by House Bill 1139.

The Bureau recommends that these Rules be adopted as revised.

NOW THE COMMISSION, having considered this matter and the Bureau's recommendation to amend and revise the Rules, is of the opinion that the Rules should be adopted as amended and revised.

Accordingly, IT IS ORDERED THAT:

(1) The amendments and revisions to Chapters 280 and 290 of Title 14 of the Virginia Administrative Code, entitled Rules Establishing Standards for Life, Annuity, and Accident and Sickness Reinsurance Agreements, 14VAC5-280-10 et seq., and Rules Establishing Standards for Companies Deemed to be in Hazardous Financial Condition, 14VAC5-290-10 et seq., respectively, which amend the Rules at 14VAC5-280-10, 14 VAC5-280-30, 14VAC5-280-40, 14VAC 5-280-70, and 14VAC5-290-30, and which are attached hereto and made a part hereof, are hereby ADOPTED and made effective as of September 16, 2013.

(2) AN ATTESTED COPY hereof, together with a copy of the adopted amended and revised Rules shall be sent by the Clerk of the Commission to Douglas C. Stolte, Deputy Commissioner, Bureau of Insurance, State Corporation Commission, who forthwith shall give further notice of the adopted amended and revised Rules by mailing a copy of this Order, including a clean copy of the Rules, to every entity that is licensed, approved, registered, or accredited in Virginia under the provisions of Title 38.2 of the Code and also subject to solvency regulation in this Commonwealth pursuant to the provisions of Title 38.2 of the Code, as well as to all interested parties.

(3) The Commission's Division of Information Resources shall cause a copy of this Order, together with the adopted amended and revised Rules at 14VAC5-280-10 et seq. and 14VAC5-290-10 et seq., to be forwarded to the Virginia Registrar of Regulations for appropriate publication in the Virginia Register of Regulations.

(4) The Commission's Division of Information Resources shall make available this Order and the attached adopted amended and revised Rules at 14VAC5-280-10 et seq. and 14VAC5-290-10 et seq., on the Commission's website: http://www.scc.virginia.gov/case.

(5) The Bureau of Insurance shall file with the Clerk of the Commission an affidavit of compliance with the notice requirements of Ordering Paragraph (2) above.

(6) This matter is dismissed.

14VAC5-280-10. Definitions.

The following words and terms, when used in this chapter, shall have the following meaning unless the context clearly indicates otherwise:

"Commission" means State Corporation Commission.

"Insurer" means a cooperative nonprofit life benefit company, a mutual assessment life, accident and sickness insurer, a fraternal benefit society, a health services plan, a dental services plan, or an optometric services plan licensed under Title 38.2 of the Code of Virginia; and also any insurance company, whether known as a life and health insurer, a property and casualty insurer, or a reciprocal, which is licensed in Virginia and authorized to write any class of life insurance, annuities, or accident and sickness insurance.

"Life and health business" means (i) a class of insurance defined by §§ 38.2-102 through 38.2-109 of the Code of Virginia or (ii) any product or service sold or offered by a person organized and licensed in Virginia under Chapter 38 (§ 38.2-3800 et seq., cooperative nonprofit life benefit companies), Chapter 39 (§ 38.2-3900 et seq., mutual assessment life, accident and sickness insurers), Chapter 41 (§ 38.2-4100 et seq., fraternal benefit societies), Chapter 42 (§ 38.2-4200 et seq., health services plans), Chapter 43 (§ 38.2-4300 et seq., health maintenance organizations), or Chapter 45 (§ 38.2-4500 et seq., dental or optometric services plans) of Title 38.2 of the Code of Virginia.

14VAC5-280-30. Scope.

This regulation chapter shall apply to the life and health business of all domestic insurers and to the life and health business of all other licensed insurers who are not subject to substantially similar provisions in their states of domicile or entry.

This regulation chapter shall not apply to assumption reinsurance, yearly renewable term reinsurance or certain nonproportional reinsurance such as stop loss or catastrophe reinsurance; however, nothing herein shall in any way limit or prevent the application of § 38.2-1316.6 Article 3.1 (§ 38.2-1316.1 et seq.) of Chapter 13 or any other provision in Title 38.2 of the Code of Virginia to any type of insurer, business or reinsurance regardless of whether such application entails a standard or principle set forth in this regulation chapter.

14VAC5-280-40. Accounting and actuarial requirements.

A. No insurer subject to this regulation chapter shall, for reinsurance ceded, reduce any liability or establish any asset in any financial statement filed with the commission if, by the terms of the reinsurance agreement, in substance or effect, any of the following conditions exist:

1. The reserve credit taken by the ceding insurer is not in compliance with the laws of this Commonwealth, particularly the provisions of Title 38.2 of the Code of Virginia and related rules, regulations and administrative pronouncements, including actuarial interpretations or standards adopted by the commission.

2. The reserve credit taken by the ceding insurer is greater than the amount which the ceding insurer would have reserved on the reinsured portion of the risk if there had been no reinsurance.

3. 2. 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 that ceding insurer, 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.

4. 3. The ceding insurer can be deprived of surplus or assets (i) at the reinsurer's option; or (ii) automatically upon the occurrence of some event, such as the insolvency of the ceding insurer or the appointment of a receiver; or (iii) upon the unilateral termination or reduction of reinsurance coverage by the reinsurer or by the terms of the reinsurance contract. 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.

5. 4. The ceding insurer must, at specific points in time scheduled in the agreement, terminate or automatically recapture all or part of the reinsurance ceded.

6. 5. The reinsurance agreement involves the possible payment by the ceding insurer to the reinsurer of amounts other than from income realized from the reinsured policies. For example, it is improper for a ceding company to pay reinsurance premiums, or other fees or charges to a reinsurer which are greater than the direct premiums collected by the ceding company.

7. 6. 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.

8. 7. The terms or operating effect of the reinsurance agreement are such that it does not transfer all of the significant risk inherent in the business being reinsured. The table at Exhibit 1 identifies for a representative sampling of products or types of business, the risks which are considered to be significant. For products not specifically included, the risks determined to be significant shall be consistent with this table.

9. 8. a. The credit quality, reinvestment, or disintermediation risk is significant for the business reinsured and the ceding company does not (other than for the classes of business excepted in subdivision 9 b) 8 b of this subsection) 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 commission which legally segregates, by contract or contract provision, the underlying assets.

b. Notwithstanding the requirements of subdivision 9 8 a of this subsection, the assets supporting the reserves for the following classes of business and any classes of business which do not have a significant credit quality, reinvestment or disintermediation risk may be held by the ceding company without segregation of such assets:

- (1) Health Insurance - Long Term Care/Long Term Disability

- (2) Traditional Nonparticipating Permanent

- (3) Traditional Participating Permanent

- (4) Adjustable Premium Permanent

- (5) Indeterminate Premium Permanent

- (6) Universal Life Fixed Premium (no dump-in premiums allowed)

The associated formula for determining the reserve interest rate adjustment must use a formula which reflects the ceding company's investment earnings and incorporates all realized and unrealized gains and losses reflected in the statutory statement. An acceptable formula appears at Exhibit 2.

10. 9. 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.

11. 10. The ceding insurer is required to make representations or warranties not reasonably related to the business being reinsured.

12. 11. The ceding insurer is required to make representations or warranties about future performance of the business being reinsured.

13. 12. 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.

B. Compliance with the conditions of subsection A of this section is not to be interpreted to diminish the requirement of Article 3.1 (§ 38.2-1316.1 et seq.) of Chapter 13 of Title 38.2 of the Code of Virginia that the reserve credits taken must be based upon the actual liability assumed by the reinsurer to reimburse the ceding company for benefits that the ceding company is obligated to pay under its direct policies and which gave rise to the requirement of statutory reserves.

C. The ceding insurer's actuary responsible for the valuation of the reinsured business shall consider this regulation chapter and any applicable actuarial standards of practice when determining the proper reinsurance credit in financial statements filed with the commission. The actuary should maintain adequate documentation and be prepared upon request to describe the actuarial work that substantiates the reserves, reserve credits or any other reserve adjustments reported in the financial statement and to demonstrate to the satisfaction of the commission that such work conforms to the provisions of this regulation chapter.

D. Notwithstanding subsection A of this section, an insurer subject to this regulation may, with the prior approval of the commission, take such reserve credit or establish such asset as the commission may deem consistent with the laws of this Commonwealth, particularly the provisions of Title 38.2 of the Code of Virginia and related rules, regulations and administrative pronouncements, including actuarial interpretations or standards adopted by the commission. All of the insurer's financial statements filed with the commission pursuant to § 38.2-1300 or § 38.2-1301 of the Code of Virginia shall thereafter disclose the reduction in liability or the establishment of an asset.

E. 1. Each agreement entered into after March 31, 1995, which involves the reinsurance of business issued prior to the effective date of the agreement, along with any subsequent amendments thereto, shall be filed by the ceding insurer with the commission within 30 days from its date of execution. Each filing shall include data detailing the financial impact of the transaction. The ceding insurer's actuary who signs the financial statement actuarial opinion with respect to valuation of reserves shall be subject to the standards set forth in subsection C of this section.

2. Any increase in surplus net of federal income tax resulting from arrangements described in subdivision E 1 of this subsection shall be identified separately on the insurer's statutory financial statement as a surplus item (e.g., as part of the aggregate write-ins for gains and losses in surplus in the Capital and Surplus Account reported at page 4 of the Annual Statement) and recognition of the surplus increase as income shall be reflected on a net of tax basis in the "Reinsurance ceded" portions of the Annual Statement (e.g., Exhibit 1 and Summary of Operations for the life insurer's blue blank and the Underwriting Exhibit and Statement of Income for the property and casualty insurer's yellow blank) as earnings emerge from the business reinsured.

Example: On the last day of calendar year N, company XYZ pays a $20 million initial commission and expense allowance to company ABC for reinsuring an existing block of business. Assuming a 34% tax rate, the net increase in surplus at inception is $13.2 million ($20 million - $6.8 million) which is reported on the "Aggregate write-ins for gains and losses in surplus" line in the Capital and Surplus Account. $6.8 million (34% of $20 million) is reported as income (on the "Commissions and expense allowances on reinsurance ceded" line of the life insurer's Summary of Operations or as "Other underwriting expenses incurred" on the property and casualty insurer's Statement of Income).

At the end of year N+1 the business has earned $4 million. ABC has paid $0.5 million in profit and risk charges in arrears for the year and has received a $1 million experience refund. Company ABC's annual statement (blue blank) would report $1.65 million (66% of ($4 million - $1 million - $0.5 million) up to a maximum of $13.2 million) on the "Commissions and expense allowance on reinsurance ceded" line of the Summary of Operations, and -$1.65 million on the "Aggregate write-ins for gains and losses in surplus" line of the Capital and Surplus Account. In addition, the experience refund would be reported separately as a miscellaneous income item in a life insurer's Summary of Operations and the "Other Income" segment of the property and casualty insurer's Underwriting and Investment Exhibit, Statement of Income.

14VAC5-280-70. Severability.

If any provision in this regulation chapter or [ the its ] application [ thereof ] to any person or circumstance is held for any reason held to be invalid [ by a court ], the remainder of [ the ] provisions in this regulation [ this ] chapter and the application of the [ provision provisions ] to other persons or circumstances shall not be affected [ thereby ].

14VAC5-290-30. Standards.

The following factors and standards, either singly or a combination of two or more, may be considered in determining whether an insurer's financial condition, method of operation, or manner of doing business in this Commonwealth might be deemed to be hazardous to its policyholders, creditors, or the general public:

1. Adverse findings resulting from any financial condition or market conduct examination conducted pursuant to Article 4 (§ 38.2-1317 et seq.) of Chapter 13 of Title 38.2 of the Code of Virginia or any inspection authorized by the general provisions of § 38.2-200, including inspections of financial statements filed pursuant to §§ 38.2-1300, 38.2-1301, 38.2-1316.2, 38.2-1316.3, 38.2-4811, or 38.2-5103 of the Code of Virginia, or reported in any examination or other information submitted pursuant to § 38.2-5103 of the Code of Virginia, or reported in any audit report, and actuarial opinions, reports, or summaries submitted pursuant to §§ 38.2-1315.1 and 38.2-3127.1 of the Code of Virginia;

2. The National Association of Insurance Commissioners' ("NAIC") Insurance Regulatory Information System ("IRIS") and its other financial analysis solvency tools and reports;

3. The ratio of the annual premium volume to surplus or of liabilities to surplus in relation to loss experience and/or the kinds of risks insured;

4. Whether the insurer's asset portfolio when viewed in light of current economic conditions and indications of financial or operation leverage is of sufficient value, liquidity, or diversity to assure the company's ability to meet its outstanding obligations as they mature;

5. Whether the insurer has established reserves and related actuarial items that make adequate provision, according to presently accepted actuarial standards of practice, for the anticipated cash flows required by the contractual obligations and related expenses of the insurer, when considered in light of the assets held by the insurer with respect to such reserves and related actuarial items including, but not limited to, the investment earnings on such assets, and the considerations anticipated to be received and retained under such policies and contracts;

6. The ability of an assuming reinsurer to perform and whether the insurer's reinsurance program provides sufficient protection for the insurer's remaining surplus after taking into account the insurer's cash flow and the classes of business written as well as the financial condition of the assuming reinsurer;

7. Whether the insurer's operating loss in the last 12-month period or any shorter period of time, including but not limited to net capital gain or loss, change in nonadmitted assets, and cash dividends paid to shareholders, is greater than 50% of the insurer's remaining surplus as regards policyholders in excess of the minimum required;

8. Whether the insurer's operating loss in the last 12-month period or any shorter period of time, excluding net capital gains, is greater than 20% of the insurer's remaining surplus as regards policyholders in excess of the minimum required;

9. Whether the excess of surplus to policyholders over and above an insurer's statutorily required surplus to policyholders has decreased by more than 50% in the preceding 12-month period or any shorter period of time;

10. The age and collectibility of receivables;

11. Whether a reinsurer, obligor, or any entity within the insurer's insurance holding company system is insolvent, threatened with insolvency, or delinquent in payment of its monetary or other obligations, and which may affect the solvency of the insurer;

12. Contingent liabilities, pledges or guaranties that either individually or collectively involve a total amount that may affect the solvency of the insurer;

13. Whether any affiliate of an insurer is delinquent in the transmitting to, or payment of, net premiums or other amounts due to such insurer;

14. Whether the management of an insurer, including officers, directors, or any other person who directly or indirectly controls the operation of such insurer, fails to possess and demonstrate the competence, fitness and reputation deemed necessary to serve the insurer in such position;

15. Whether the management of an insurer has failed to respond to inquiries relative to the condition of the insurer or has furnished false and misleading information concerning an inquiry;

16. Whether the insurer has failed to meet financial and holding company filing requirements in the absence of a reason satisfactory to the commission;

17. Whether the management of an insurer either has filed any false or misleading sworn financial statement, or has released any false or misleading financial statement to lending institutions or to the general public, or has made a false or misleading entry, or has omitted an entry of material amount in the books of the insurer;

18. Whether the insurer has grown so rapidly and to such an extent that it lacks adequate financial and administrative capacity to meet its obligations in a timely manner;

19. Whether the insurer has experienced or will experience in the foreseeable future cash flow and/or liquidity problems;

20. Whether management has established reserves and related actuarial values that do not comply with the requirements of Title 38.2 of the Code of Virginia, related rules, regulations, administrative promulgations, and statutory accounting standards, or that are not computed in accordance with presently accepted actuarial standards consistently applied and in accordance with sound actuarial principles and standards of practice;

21. Whether management persistently engages in material under reserving that results in adverse development;

22. Whether transactions among affiliates, subsidiaries, or controlling persons for which the insurer receives assets or capital gains, or both, do not provide sufficient value, liquidity, or diversity to assure the insurer's ability to meet its outstanding obligations as they mature; or

23. Any other finding determined by the commission to be hazardous to the insurer's policyholders, creditors, or the general public.