31.05.07.03

.03 Definitions.

A. In this chapter, the following terms have the meanings indicated.

B. Terms Defined.

(1) Credit Quality Risk.

(a) "Credit quality risk" means the risk that invested assets supporting the reinsured business will decrease in value creating the hazard that assets will default or that there will be a decrease in earning power.

(b) "Credit quality risk" does not include market value declines due to changes in interest rates.

(2) "Disintermediation risk" means the risk that interest rates will rise and policy loans and surrenders will increase or maturing contracts will not renew at anticipated rates of renewal, with the mismatch increasing if asset durations are greater than liability durations, resulting in the hazards that:

(a) Policyholders will move their funds into new products offering higher rates; and

(b) The company may have to sell assets at a loss to provide for these withdrawals.

(3) "Expenses" includes:

(a) Commissions;

(b) Premium taxes; and

(c) Direct expenses, including billing, valuation, claims, and maintenance expected by the company at the time the business is reinsured.

(4) "Lapse risk" means the risk that a policy will voluntarily terminate before the recoupment of a statutory surplus strain experienced at issue of the policy.

(5) "Negative experience" means that the evolving claims under an initial insurance policy or contract or a reinsurance contract exceed those anticipated at the time of entering into the policy or contract.

(6) "Reinsurer" means an insurer that, in consideration of the payment by a ceding insurer of a risk charge, enters into a reinsurance contract with the ceding insurer, under which the reinsurer bears all or a portion of the risk of the ceding insurer.

(7) "Reinvestment risk" means the risk that interest rates will fall and funds reinvested, such as coupon payments or money received on asset maturity or call, will earn less than expected, with the mismatch increasing if asset durations are less than liability durations.