Mich. Admin. Code R. 500.126 - Actuarial method

Rule 6.

(1) The actuarial method used to establish the required level of primary security for each reinsurance treaty subject to these rules must be VM-20, applied on a treaty-by-treaty basis, including all relevant definitions, from the valuation manual. The actuarial method must be applied as follows:

(a) For covered policies described in R 500.121(1)(d)(i) the actuarial method is the greater of the deterministic reserve or the net premium reserve 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, the actuarial method is the greatest of the deterministic reserve, the stochastic reserve, or the net premium reserve. In addition, if the covered policies are reinsured in a reinsurance treaty that also contains covered policies described in R 500.121(1)(d)(ii), the ceding insurer may elect to instead apply subdivision (b) of this subrule as the actuarial method for the entire reinsurance agreement. The actuarial method must comply with any requirements or restrictions that the valuation manual imposes when aggregating these policy types as used in principle-based reserve calculations when applying this subdivision or subdivision (b) of this subrule.

(b) For covered policies described in R 500.121(1)(d)(ii), the actuarial method is the greatest of the deterministic reserve, the stochastic reserve, or the net premium reserve regardless of whether the criteria for exemption testing can be met.

(c) Except as provided in subdivision (d) of this subrule, the actuarial method must be applied on a gross basis to all risks with respect to the covered policies as originally issued or assumed by the ceding insurer.

(d) If the reinsurance treaty cedes less than 100% of the risk, with respect to the covered policies, the required level of primary security may be reduced as follows:

(i) 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, and any adjustment under paragraph (iii) of this subdivision, may be reduced to a pro rata portion in accordance with the percentage of the risk ceded.

(ii) 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. However, 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 is reflective of any reduction pursuant to the cession of mortality risk on a yearly renewable term basis in an exempt arrangement.

(iii) 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. However, for covered policies issued before January 1, 2017, the adjustment must not exceed [cx/ (2 * number of reinsurance premiums per year)] where "cx" is calculated using the same mortality table used in calculating the Net Premium Reserve.

(iv) 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 is no reduction in the required level of primary security.

(e) For the purposes of applying subdivision (d) of this subrule, any combination of subdivision (d)(i) to (iv) of this subrule may apply, in which case the adjustments to the required level of primary security must be done in the sequence that accurately reflects the portion of the risk ceded by the treaty. In addition, the ceding insurer shall document the rationale and steps taken to accomplish the adjustments to the required level of primary security due to the cession of less than 100% of the risk. The adjustments for other reinsurance must be made only with respect to reinsurance treaties entered into directly by the ceding insurer. The ceding insurer shall not make an adjustment as a result of a retrocession treaty entered into by the assuming insurers.

(f) Without exception, the required level of primary security resulting from applying the actuarial method must not exceed the amount of statutory reserves ceded.

(g) Without exception, if the ceding insurer cedes risks with respect to covered policies, including any riders, in more than 1 reinsurance treaty subject to these rules, the aggregate required level of primary security for those reinsurance treaties must not be less than the required level of primary security calculated using the actuarial method as if all risks ceded in those treaties were ceded in a single treaty subject to these rules.

(h) If a reinsurance treaty subject to these rules cedes risk on both covered policies and non-covered policies, credit for the ceded reserves must be determined as follows:

(i) The actuarial method must be used to determine the required level of primary security for the covered policies, and R 500.127 must be used to determine the reinsurance credit for the covered policy reserves.

(ii) Credit for the non-covered policy reserves must be granted only to the extent that security, in addition to the security held to satisfy the requirements of paragraph (i) of this subdivision, is held by or on behalf of the ceding insurer in accordance with sections 1103 and 1105 of the act, MCL 500.1103 and 500.1105. Any primary security used to meet the requirements of this paragraph must not be used to satisfy the required level of primary security for the covered policies.

(2) For the purposes of calculating the required level of primary security pursuant to the actuarial method and determining the amount of primary security and other security, as applicable, held by or on behalf of the ceding insurer, the following apply:

(a) For assets, including assets held in trust, that would be admitted under the accounting practices and procedures manual if they were held by the ceding insurer, the valuations must be determined according to statutory accounting procedures as if the assets were held in the ceding insurer's general account and without taking into consideration the effect of any prescribed or allowed practices.

(b) For all other assets, the valuations must be the valuations that were assigned to the assets for the purpose of determining the amount of reserve credit taken. In addition, the asset spread tables and asset default cost tables required by VM-20 must be included in the actuarial method if the director adopts the requirement following its adoption by the NAIC's Life Actuarial (A) Task Force no later than the December 31 that occurs on or immediately preceding the valuation date for which the required level of primary security is calculated. The tables of asset spreads and asset default costs must be incorporated into the actuarial method in the manner specified in VM-20.

Notes

Mich. Admin. Code R. 500.126

2025 MR 9, Eff. 4/29/2025