31.05.07.01

.01 Regulatory Considerations.

A. The Insurance Commissioner recognizes that licensed insurers routinely enter into reinsurance agreements that yield legitimate relief to the ceding insurer from strain to the ceding insurer's surplus.

B. It is improper, however, for a licensed insurer, in the capacity of ceding insurer, to enter into a reinsurance agreement for the principal purpose of producing significant surplus aid for the ceding insurer, typically on a temporary basis, while not transferring all of the significant risks inherent in the business being reinsured.

C. Under this type of agreement, in substance or effect, the expected potential liability to the ceding insurer remains basically unchanged by the reinsurance transaction, notwithstanding certain risk elements in the reinsurance agreement, such as catastrophic mortality or extraordinary survival.

D. The terms of an agreement described in §§B and C of this regulation and Regulation .05 of this chapter violate:

(1) Insurance Article, §4-116, Annotated Code of Maryland, relating to financial statements, resulting in statements that do not properly reflect the financial condition of the ceding insurer;

(2) Insurance Article, §5-904(a), Annotated Code of Maryland, relating to reinsurance reserve credits, resulting in a ceding insurer improperly reducing liabilities or establishing assets for reinsurance ceded; and

(3) Insurance Article, §4-113(b)(3), Annotated Code of Maryland, relating to creating a situation that would be contrary to the interests of the policyholders or stockholders of the ceding insurer.