NAC681A.160. Prohibited acts regarding financial statement required of insurer.

     1. An insurer shall not, in any financial statement required to be filed with the Division, reduce any liability or establish any asset for reinsurance ceded if, by the terms of the reinsurance agreement, 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. For the purposes of this subsection, renewal 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.

     2. An insurer shall not, in any financial statement required to be filed with the Division, reduce any liability or establish any asset for reinsurance ceded if, by the terms of the reinsurance agreement, the ceding insurer can be deprived of surplus or assets at the reinsurer’s option or automatically upon the occurrence of some event, including the insolvency of the ceding insurer. For the purposes of this subsection, deprivation of surplus or assets does not include the termination of the reinsurance agreement by the reinsurer for nonpayment of reinsurance premiums or other amounts due, including modified coinsurance reserve adjustments, interest and adjustments on money withheld, and tax reimbursements.

     3. An insurer shall not, in any financial statement required to be filed with the Division, reduce any liability or establish any asset for reinsurance ceded if, by the terms of the reinsurance agreement, the ceding insurer is required to reimburse the reinsurer for negative experience under the reinsurance agreement. For the purposes of this subsection:

     (a) Reimbursement for negative experience does not include:

          (1) Offsetting experience refunds against current and prior years’ losses under the agreement; or

          (2) Payment by the ceding insurer of an amount equal to the current and prior years’ losses under the agreement upon voluntary termination of reinsurance in force by the ceding insurer.

     (b) Voluntary termination does not include termination because of unreasonable provisions which allow the reinsurer to reduce its risk under the agreement, including a provision which authorizes the reinsurer to increase reinsurance premiums or risk and expense charges to excessive levels and thereby force the ceding company to terminate prematurely the reinsurance agreement.

     4. An insurer shall not, in any financial statement required to be filed with the Division, reduce any liability or establish any asset for reinsurance ceded if, by the terms of the reinsurance agreement, the ceding insurer must, at specific times scheduled in the agreement, terminate or automatically recapture all or part of the reinsurance ceded.

     5. An insurer shall not, in any financial statement required to be filed with the Division, reduce any liability or establish any asset for reinsurance ceded if, by the terms of the reinsurance agreement, the ceding insurer must pay money to the reinsurer other than from income realized from the reinsured policies, such as a provision which requires the ceding insurer to pay reinsurance premiums, or other fees or charges which are greater than the direct premium collected by the ceding company.

     6. An insurer shall not, in any financial statement required to be filed with the Division, reduce any liability or establish any asset for reinsurance ceded if the reinsurance agreement does not transfer all of the significant risks inherent in the business being reinsured. The following categories of risk are considered to be significant:

     (a) Morbidity.

     (b) Mortality.

     (c) Lapse, which is the risk that a policy will voluntarily terminate before the recoupment of any unearned premium reserve required pursuant to NRS 692A.160.

     (d) Credit quality, which is the risk that invested assets supporting the reinsured business will decrease in value, including the default of assets or a decrease in earning power, but excluding market value declines caused by changes in interest rates.

     (e) Reinvestment, which is the risk that interest rates will fall and therefore money which has been reinvested, including coupon payments or money received upon asset maturity or call, will earn less than expected.

     (f) Disintermediation, which is the risk that interest rates will rise and policy loans and surrenders will increase, or that maturing contracts will not renew at anticipated rates of renewal. Disintermediation includes the risk that policyholders will move their assets into new products offering higher rates and the company may have to sell assets at a loss to provide for these withdrawals.

     7. The categories of significant risk identified in subsection 6 apply in accordance with the following table to a business being reinsured:

Business Being Reinsured	Significant Risk
Health Insurance:
Long-Term Care Insurance or
Long-Term Disability Insurance	a, c, d, e
All other types of Health Insurance	a, c
Annuities:
Immediate Annuities	b, d, e
Single Premium Deferred Annuities	c, d, e, f
Flexible Premium Deferred Annuities	c, d, e, f
Guaranteed Interest Contracts	d, e, f
Other Annuity Deposit Business	c, d, e, f
Life Insurance:
Single Premium Whole Life	b, c, d, e, f
Traditional Non-Par Permanent	b, c, d, e, f
Traditional Non-Par Term	b, c
Traditional Par Permanent	b, c, d, e, f
Traditional Par Term	b, c
Adjustable Premium Permanent	b, c, d, e, f
Indeterminate Premium Permanent	b, c, d, e, f
Universal Life Flexible Premium	b, c, d, e, f
Universal Life Fixed Premium, in which dump-in premiums are allowed	b, c, d, e, f

If a product or type of business is not specifically included in the table, the risks determined to be significant for that product or type of business must be consistent with the table in a manner satisfactory to the Commissioner.

     8. Except as otherwise provided in this subsection, an insurer shall not, in any financial statement required to be filed with the Division, reduce any liability or establish any asset for reinsurance ceded if, by the terms of the reinsurance agreement, the credit quality, reinvestment, or disintermediation risk is significant for the business reinsured and the ceding company does not either transfer the underlying assets to the reinsurer or legally segregate the assets in a trust account or escrow account, or otherwise establish a mechanism satisfactory to the Commissioner which legally segregates the underlying assets by contract or contract provision. 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 the underlying assets:

     (a) Long-Term Care Insurance and Long-Term Disability Insurance.

     (b) Traditional Non-Par Permanent Life Insurance.

     (c) Traditional Par Permanent Life Insurance.

     (d) Adjustable Premium Permanent Life Insurance.

     (e) Indeterminate Premium Permanent Life Insurance.

     (f) Universal Life Fixed Premium Life Insurance, in which dump-in premiums are not allowed.

Ê 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 financial statement.

     9. An insurer shall not, in any financial statement required to be filed with the Division, reduce any liability or establish any asset for reinsurance ceded if, by the terms of the reinsurance agreement, settlements are made more than quarterly or payments due from the reinsurer are not made in cash within 90 days after the settlement date.

     10. An insurer shall not, in any financial statement required to be filed with the Division, reduce any liability or establish any asset for reinsurance ceded if, by the terms of the reinsurance agreement, the ceding insurer is required to make representations or warranties which:

     (a) Are not reasonably related to the business being reinsured; or

     (b) Concern the future performance of the business being reinsured.

     11. An insurer shall not, in any financial statement required to be filed with the Division, reduce any liability or establish any asset for reinsurance ceded if the reinsurance agreement is entered into for the principal purpose of producing significant surplus revenue for the ceding insurer, typically on a temporary basis, while not transferring all of the significant risks inherent in the business reinsured and the expected potential liability to the ceding insurer remains unchanged.

     (Added to NAC by Comm’r of Insurance, eff. 5-13-96)