Section R20-6-304. Reserved

C.      Accounting Requirements

1.        Unless authorized by the director, an insurer shall not, for reinsurance ceded, reduce any liability, or establish any asset in any statutory financial statement filed with the Department if, by the terms of the agreement, or in effect, any of the following conditions exist:

a.         Renewal expense allowances provided or to be pro- vided to the ceding insurer by the reinsurer in any accounting period are not sufficient to cover the ced- ing insurer’s allocable renewal expenses anticipated at the time the business is reinsured on the portion of the business reinsured, unless a liability is estab- lished for the present value of the shortfall using assumptions equal to the applicable statutory reserve basis on the business reinsured.

b.        The ceding insurer is required to reimburse the rein- surer for negative experience under the agreement. Neither the offset of the ceding insurer’s experience refunds against current and prior years’ losses, nor payment by the ceding insurer of an amount equal to the reinsurer’s current and prior years’ losses upon voluntary termination of in-force reinsurance by the ceding insurer, shall be considered a reimbursement

R20-6-305.     Expired			to the reinsurer for negative experience.
		c.	The ceding insurer may be deprived of surplus or
	Historical Note		assets at the reinsurer’s option or automatically upon
	Adopted effective September 13, 1978, except that it shall		the occurrence of a specified event, including the
	apply to the accounting treatment for unearned premium		insolvency of the ceding insurer. Termination of the
	reserves and reinsurance premium receivables for credit		agreement by the reinsurer for nonpayment of rein-
	life disability insurance on January 1, 1979, and all annual		surance premiums or other amounts due shall not be
	statements filed for periods on or after that date (Supp. 78-		considered a deprivation of surplus or assets within
	5). R20-6-305 recodified from R4-14-305 (Supp. 95-1).		the meaning of this subsection.
	Section expired under A.R.S. § 41-1056(E) at 8 A.A.R.	d.	The ceding insurer is required, at scheduled times, to
	491, effective September 30, 2001 (Supp. 02-1).		terminate the agreement or recapture automatically
R20-6-306.     Reserved			all or part of the reinsurance ceded.
		e.	The ceding insurer may be required to pay the rein-
R20-6-307.     Life and Disability Reinsurance Agreements			surer amounts other than from income reasonably
A.	Scope. This rule applies to all domestic life and disability		expected from the reinsured policies.
	insurers and reinsurers, and to all other licensed life and dis-	f.	Significant risks inherent in the business reinsured
	ability insurers and accredited resinsurers that are not subject		are not transferred to the reinsurer. Table A identi-
	to a substantially similar rule in their jurisdictions of domicile.		fies the risks deemed significant for representative
	This rule applies to the disability business of licensed property		types of business.
	and casualty insurers. This rule does not apply to assumption	g.	The credit quality, reinvestment, or disintermedia-
	reinsurance, yearly renewable term reinsurance, or nonpropor-		tion risk is significant for the business reinsured and
	tional stop loss or catastrophe reinsurance, or similar forms of		the ceding company does not transfer the underlying
	nonproportional reinsurance.		assets  to  the  reinsurer,   segregate  the  underlying
B.	Definitions		assets in a trust or escrow account, or otherwise seg-
	1.     “Agreement” means a reinsurance agreement and any		regate the underlying assets. The assets that support
	amendment to a reinsurance agreement.		the reserves for classes of business that do not have a
	2.     “Credit Quality” means the risk that invested assets sup-		significant credit quality, reinvestment, or disinter-
	porting the reinsured business will decrease in value but		mediation risk, or for long-term care or long-term
	excludes decreases to changes in interest rate.		disability insurance, traditional non-par permanent,
	3.     “Department” means the Arizona Department of Insur-		traditional par permanent, adjustable premium per-
	ance.		manent, indeterminate premium permanent, or uni-
	4.     “Director” means the Director of the Arizona Department		versal   life   fixed   premium    with   no   dump-in
	of Insurance.		premiums allowed, may be held by the ceding com-
	5.     “Disintermediation” means the risk that interest rates will		pany without segregation. To determine the reserves
	rise  and  policy  loans  and  surrenders   will  increase  or		for  classes  of  business,   the  supporting   assets  of
	maturing contracts will not renew at anticipated rates of		which may be held without being segregated, the
	renewal.		reserve interest rate adjustment formula shall reflect
	6.     “Lapse” means the risk that a policy will voluntarily ter-		the  ceding  company’s  investment   earnings  and
	minate before the recoupment of a statutory surplus strain		incorporate all realized and unrealized gains and
	experienced at issuance of the policy.		losses  reported   in  the  ceding  insurer’s   statutory
	7.     “Reinvestment” means the risk that interest rates will fall		financial statement.
	and  funds  reinvested   will  therefore  earn   less  than
	expected.

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 representa- tions or warranties unrelated to the business rein- sured.

j.         The ceding insurer is required to make representa- tions or warranties related to future performance of the business reinsured.

2.        An agreement entered into after the effective date of this rule to reinsure business issued before the effective date of the agreement shall be filed by the ceding insurer with the Director within 30 days after execution of the agree- ment. Each filing shall be accompanied by a description of the corresponding reduction in liabilities or other credit for reinsurance, and any other financial impact of the agreement, reported in the ceding insurer’s statutory financial statements. When an increase in surplus net of federal income tax results from an agreement falling under this subsection, the ceding insurer shall separately identify the increase as a surplus item in the aggregate write-ins for gains and losses in surplus in the Capital and Surplus account of the ceding insurer’s statutory financial statement. As earnings emerge from the business rein- sured, the ceding insurer shall report in its statutory finan-