Model Regulation Service—1
st
Quarter 2017
© 2017 National Association of Insurance Commissioners 787-5
(1) For Covered Policies described in Section 5B(1) above, the Actuarial Method is the greater of the
Deterministic Reserve or the Net Premium Reserve (NPR) regardless of whether the criteria for
exemption testing can be met. However, 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 NPR. In addition, if such Covered
Policies are reinsured in a reinsurance treaty that also contains Covered Policies described in Section
5B(2) above, the ceding insurer may elect to instead use paragraph 2 below as the Actuarial Method
for the entire reinsurance agreement. Whether Paragraph 1 or 2 are 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.
(2) For Covered Policies described in Section 5B(2) above, the Actuarial Method is the greatest of the
Deterministic Reserve, the Stochastic Reserve, or the NPR regardless of whether the criteria for
exemption testing can be met.
(3) Except as provided in Paragraph (4) below, the Actuarial Method is to be applied on a gross basis
to all risks with respect to the Covered Policies as originally issued or assumed by the ceding insurer.
(4) If the reinsurance treaty cedes less than one hundred percent (100%) of the risk with respect to the
Covered Policies then the Required Level of Primary Security may be reduced as follows:
(a) If a reinsurance treaty cedes only a quota share of some or all of the risks pertaining to the
Covered Policies, the Required Level of Primary Security, as well as any adjustment under
Subparagraph (c) below, may be reduced to a pro rata portion in accordance with the
percentage of the risk ceded;
(b) If the reinsurance treaty in a non-exempt arrangement cedes only the risks pertaining 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 be reflective of any reduction
pursuant to the cession of mortality risk on a yearly renewable term basis in an exempt
arrangement;
(c) 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 resulting 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 prior to Jan 1, 2017, this
adjustment is not to exceed [c
x
/ (2 * number of reinsurance premiums per year)] where c
x
is calculated using the same mortality table used in calculating the Net Premium Reserve;
and
(d) For any other treaty ceding a portion of risk to a different reinsurer, including but not
limited to stop loss, excess of loss and other non-proportional reinsurance treaties, there
will be no reduction in the Required Level of Primary Security.
It is possible for any combination of Subparagraphs (a), (b), (c), and (d) above to apply. Such
adjustments to the Required Level of Primary Security will be done in the sequence that accurately
reflects the portion of the risk ceded via the treaty. 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 one hundred percent (100%) of the risk.
The Adjustments for other reinsurance will be made only with respect to reinsurance treaties entered
into directly by the ceding insurer. The ceding insurer will make no adjustment as a result of a
retrocession treaty entered into by the assuming insurers.