Sec. 31.05.07.07. Filing Agreements with Commissioner

A. Filing Required. A ceding insurer shall file with the Commissioner:

(1) Each agreement entered into after the effective date of this chapter that involves the reinsurance of business issued before the effective date of the agreement; and

(2) Any amendment to an agreement required to be filed under §A(1) of this regulation.

B. Time for Filing. A ceding insurer shall file an agreement or amendment within 30 days after the execution of the agreement or amendment.

C. Contents of Filing. Each filing shall include data detailing the financial impact of the transaction.

D. Duties of Actuary.

(1) The ceding insurer's actuary, who signs the financial statement actuarial opinion with respect to valuation of reserves, shall consider this chapter and any applicable actuarial standards of practice when determining the proper credit in financial statements filed with the Commissioner.

(2) The actuary shall maintain adequate documentation and be prepared, on request, to:

(a) Describe the actuarial work performed for inclusion in the financial statements; and

(b) Demonstrate that the work conforms to this chapter.

E. Increase in Surplus Net of Federal Income Tax.

(1) If there is an increase in surplus net of federal income tax resulting from arrangements described in this regulation, the surplus increase shall be:

(a) Identified separately on the insurer's statutory financial statement as a surplus item on the "aggregate write-ins for gains and losses in surplus" line in the capital and surplus account in the annual statement; and

(b) Recognized as income by being reflected on a net of tax basis in the "reinsurance ceded" line of the annual statement as earnings emerge from the business reinsured.

(2) The following is an example of how an increase in surplus should be identified on the insurer's statutory financial statement:

(a) 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;

(b) Assuming a 34 percent 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;

(c) $6.8 million (34 percent of $20 million) is reported as income on the "commissions and expense allowances or reinsurance ceded" line of the summary of operations;

(d) At the end of N+1 the business has earned $4 million;

(e) Company ABC has paid $0.5 million in profit and risk charges in arrears for the year and has received a $1 million experience refund;

(f) Company ABC's annual statement would report $1.65 million (66 percent 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; and

(g) The experience refund would be reported separately as a miscellaneous income item in the summary of operations.