# Title 45 — Insurance, Commissioner of

## Article 45-03 — Regulation of Insurance Companies

## Chapter 45-03-26 — Term and Universal Life Insurance Reserve Financing Model Regulation

Opportunity for Remediation
### § 45-03-26-01. Authority.

This chapter is adopted pursuant to the authority granted by North Dakota Century Code chapter
26.1-31.2.
History: Effective April 1, 2022.
General Authority: NDCC 26.1-31.2-04
Law Implemented: NDCC 26.1-31.2-04
### § 45-03-26-02. Purpose.

The purpose and intent of this chapter is to establish standards governing reserve financing
arrangements pertaining to life insurance policies containing guaranteed nonlevel gross premiums,
guaranteed nonlevel benefits and universal life insurance policies with secondary guarantees; and to
ensure that, with respect to each such financing arrangement, funds consisting of primary security and
other security, as defined in section 45-03-26-05, are held by or on behalf of ceding insurers in the
forms and amounts required herein. In general, reinsurance ceded for reserve financing purposes has
one or more of the following characteristics: some or all of the assets used to secure the reinsurance
treaty or to capitalize the reinsurer:
1. Are issued by the ceding insurer or its affiliates;
2. Are not unconditionally available to satisfy the general account obligations of the ceding
insurer; or
3. Create a reimbursement, indemnification or other similar obligation on the part of the ceding
insurer or any if its affiliates, other than a payment obligation under a derivative contract
acquired in the normal course and used to support and hedge liabilities pertaining to the
actual risks in the policies ceded pursuant to the reinsurance treaty.
History: Effective April 1, 2022.
General Authority: NDCC 26.1-31.2-04
Law Implemented: NDCC 26.1-31.2
### § 45-03-26-03. Applicability.

This chapter shall apply to reinsurance treaties that cede liabilities pertaining to covered policies, as
that term is defined in subsection 2 of section 45-03-26-05, issued by any life insurance company
domiciled in this state. This chapter and North Dakota Century Code chapter 26.1-31.2 shall both apply
to such reinsurance treaties.
History: Effective April 1, 2022.

General Authority: NDCC 26.1-31.2-04
Law Implemented: NDCC 26.1-31.2
### § 45-03-26-04. Exemptions from this chapter.

This chapter does not apply to the situations described in subsections 1 through 6.
1. Reinsurance of:
a. Policies that satisfy the criteria for exemption set forth in subsection 6 of section
of:
(1) The effective date of this chapter, and
(2) The date on which the ceding insurer begins to apply the provisions of VM-20 to
establish the ceded policies' statutory reserves, but in no event later than January 1,
2020;
b. Portions of policies that satisfy the criteria for exemption set forth in subsection 5 of
section 45-04-12-04 and which are issued before the later of:
(1) The effective date of this chapter, and
(2) The date on which the ceding insurer begins to apply the provisions of VM-20 to
establish the ceded policies' statutory reserves, but in no event later than January 1,
2020;
c. Any universal life policy that meets all of the following requirements:
(1) Secondary guarantee period, if any, is five years or less;
(2) Specified premium for the secondary guarantee period is not less than the net level
reserve premium for the secondary guarantee period based on the commissioners
standard ordinary valuation tables and valuation interest rate applicable to the issue
year of the policy; and
(3) The initial surrender charge is not less than one hundred percent of the first year
annualized specified premium for the secondary guarantee period;
d. Credit life insurance;
e. Any variable life insurance policy that provides for life insurance, the amount or duration
of which varies according to the investment experience of any separate account or
accounts; or
f. Any group life insurance certificate unless the certificate provides for a stated or implied
schedule of maximum gross premiums required in order to continue coverage in force for
a period in excess of one year;
2. Reinsurance ceded to an assuming insurer that meets the applicable requirements of
subsection 5 of North Dakota Century Code section 26.1-31.2-01;
3. Reinsurance ceded to an assuming insurer that meets the applicable requirements of
subsection 2, 3, or 4 of North Dakota Century Code section 26.1-31.2-01 and that, in addition:
a. Prepares statutory financial statements in compliance with the national association of
insurance commissioners' "Accounting Practices and Procedures Manual", without any

departures from national association of insurance commissioners statutory accounting
practices and procedures pertaining to the admissibility or valuation of assets or liabilities
that increase the assuming insurer’s reported surplus and are material enough that they
need to be disclosed in the financial statement of the assuming insurer pursuant to
Statement of Statutory Accounting Principles No. 1; and
b. Is not in a company action level event, regulatory action level event, authorized control
level event, or mandatory control level event as those terms are defined in North Dakota
Century Code chapter 26.1-03.1 when its risk-based capital is calculated in accordance
with the life risk-based capital report, including overview and instructions for companies,
as the same may be amended by the national association of insurance commissioners
from time to time, without deviation;
4. Reinsurance ceded to an assuming insurer that meets the applicable requirements of
subsection 2, 3, or 4 of North Dakota Century Code section 26.1-31.2-01 and that, in addition:
a. Is not an affiliate, as that term is defined in subsection 1 of North Dakota Century Code
section 26.1-10-01 of:
(1) The insurer ceding the business to the assuming insurer; or
(2) Any insurer that directly or indirectly ceded the business to that ceding insurer;
b. Prepares statutory financial statements in compliance with the national association of
insurance commissioners' "Accounting Practices and Procedures Manual";
c. Is both:
(1) Licensed or accredited in at least ten states, including its state of domicile; or
(2) Not licensed in any state as a captive, special purpose vehicle, special purpose
financial captive, special purpose life reinsurance company, limited purpose
subsidiary, or any other similar licensing regime; and
d. Is not, or would not be, below five hundred percent of the authorized control level
risk-based capital as that term is defined in North Dakota Century Code chapter
26.1-03.1 when its risk-based capital is calculated in accordance with the life risk-based
capital report, including overview and instructions for companies, as the same may be
amended by the national association of insurance commissioners from time to time,
without deviation, and without recognition of any departures from national association of
insurance commissioners' statutory accounting practices and procedures pertaining to
the admission or valuation of assets or liabilities that increase the assuming insurer’s
reported surplus;
5. Cessions to an assuming insurer that:
a. Meets the conditions set forth in subsection 7 of North Dakota Century Code section
subsection 7 of North Dakota Century Code section 26.1-31.2-01 in a minimum of five
other states;
b. Is certified in this state as set forth in subsection 6 of North Dakota Century Code section
subsection 6 of North Dakota Century Code section 26.1-31.2-01 in a minimum of five
other states; or

c. Maintains at least two hundred fifty million dollars in capital and surplus when determined
in accordance with national association of insurance commissioners' "Accounting
Practices and Procedures Manual", including all amendments thereto adopted by the
national association of insurance commissioners, excluding the impact of any permitted
or prescribed practices; and is:
(1) Licensed in at least twenty-six states; or
(2) Licensed in at least ten states, and licensed or accredited in a total of at least
thirty-five states; or
6. Reinsurance not otherwise exempt under subsections 1 through 5 if the commissioner, after
consulting with the national association of insurance commissioners' financial analysis working
group or other group of regulators designated by the national association of insurance
commissioners, as applicable, determines under all the facts and circumstances that all of the
following apply:
a. The risks are clearly outside of the intent and purpose of this chapter as described in
section 45-03-26-02;
b. The risks are included within the scope of this chapter only as a technicality; and
c. The application of this chapter to those risks is not necessary to provide appropriate
protection to policyholders. The commissioner shall publicly disclose any decision made
pursuant to this subsection to exempt a reinsurance treaty from this chapter, as well as
the general basis therefor, including a summary description of the treaty.
History: Effective April 1, 2022.
General Authority: NDCC 26.1-31.2-04
Law Implemented: NDCC 26.1-31.2-01
### § 45-03-26-05. Definitions.

1. "Actuarial method" means the methodology used to determine the required level of primary
security, as described in section 45-03-26-06.
2. "Covered policies" means subject to the exemptions described in section 45-03-26-04,
covered policies are those policies, other than grandfathered policies, of the following policy
types:
a. Life insurance policies with guaranteed nonlevel gross premiums or guaranteed nonlevel
benefits, or both, except for flexible premium universal life insurance policies; or
b. Flexible premium universal life insurance policies with provisions resulting in the ability of
a policyholder to keep a policy in force over a secondary guarantee period.
3. "Grandfathered policies" means policies of the types described in subsection 2 that were:
a. Issued prior to January 1, 2015; and
b. Ceded, as of December 31, 2014, as part of a reinsurance treaty that would not have met
one of the exemptions set forth in section 45-03-26-04 had that section then been in
effect.
4. "Noncovered policies" means any policy that does not meet the definition of covered policies,
including grandfathered policies.

5. "Required level of primary security" means the dollar amount determined by applying the
actuarial method to the risks ceded with respect to covered policies, but not more than the
total reserve ceded.
6. "Primary security" means the following forms of security:
a. Cash meeting the requirements of subsection 1 of North Dakota Century Code section
26.1-31.2-02.
b. Securities listed by the securities valuation office of the national association of insurance
commissioners meeting the requirements of subsection 2 North Dakota Century Code
section 26.1-31.2-02 but excluding any synthetic letter of credit, contingent note,
credit-linked note, or other similar security that operates in a manner similar to a letter of
credit, and excluding any securities issued by the ceding insurer or any of its affiliates;
and
c. For security held in connection with funds-withheld and modified coinsurance
reinsurance treaties:
(1) Commercial loans in good standing of CM3 quality and higher;
(2) Policy loans; and
(3) Derivatives acquired in the normal course and used to support and hedge liabilities
pertaining to the actual risks in the policies ceded pursuant to the reinsurance treaty.
7. "Other security" means any security acceptable to the commissioner other than security
meeting the definition of primary security.
8. "Valuation manual" means the valuation manual adopted by the national association of
insurance commissioners as described in subdivision a of subsection 1 of North Dakota
Century Code section 26.1-35-00.2, with all amendments adopted by the national association
of insurance commissioners that are effective for the financial statement date on which credit
for reinsurance is claimed.
9 "VM-20" means requirements for principle-based reserves for life products, including all
relevant definitions, from the Valuation Manual.
History: Effective April 1, 2022.
General Authority: NDCC 26.1-31.2-04
Law Implemented: NDCC 26.1-31.2
### § 45-03-26-06. The actuarial method.

1. The actuarial method to establish the required level of primary security for each reinsurance
treaty subject to this chapter shall be VM-20, applied on a treaty-by-treaty basis, including all
relevant definitions, from the valuation manual as then in effect, applied as follows:
a. For covered policies described in subdivision a of subsection 2 of section 45-03-26-05,
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, then the actuarial method is the greatest of the deterministic
reserve, the stochastic reserve, or the net premium reserve. In addition, if such covered
policies are reinsured in a reinsurance treaty that also contains covered policies
described in subdivision b of subsection 2 of section 45-03-26-05, the ceding insurer may
elect to instead use subdivision b as the actuarial method for the entire reinsurance

agreement. Whether subdivision a or subdivision b 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.
b. For covered policies described in subdivision b of subsection 2 of section 45-03-26-05,
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, 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.
d. If the reinsurance treaty cedes less than one hundred percent of the risk with respect to
the covered policies, then the required level of primary security may be reduced as
follows:
(1) 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 paragraph 3, may be reduced to a pro rata portion in accordance
with the percentage of the risk ceded;
(2) If the reinsurance treaty in a nonexempt 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;
(3) 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
January 1, 2017, this adjustment is not to 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; and
(4) For any other treaty ceding a portion of risk to a different reinsurer, including stop
loss, excess of loss, and other nonproportional reinsurance treaties, there will be no
reduction in the required level of primary security.
(5) It is possible for any combination of paragraphs 1, 2, 3, and 4 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 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.

e. In no event will the required level of primary security resulting from application of the
actuarial method exceed the amount of statutory reserves ceded.
f. If the ceding insurer cedes risks with respect to covered policies, including any riders, in
more than one reinsurance treaty subject to this regulation, in no event will the aggregate
required level of primary security for those reinsurance treaties 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 this chapter.
g. If a reinsurance treaty subject to this chapter cedes risk on both covered and noncovered
policies, credit for the ceded reserves shall be determined as follows:
(1) The actuarial method shall be used to determine the required level of primary
security for the covered policies, and section 45-03-26-07 shall be used to
determine the reinsurance credit for the covered policy reserves; and
(2) Credit for the noncovered policy reserves shall be granted only to the extent that
security, in addition to the security held to satisfy the requirements of paragraph 1, is
held by or on behalf of the ceding insurer in accordance with North Dakota Century
Code sections 26.1-31.2-01 and 26.1-31.2-02. Any primary security used to meet
the requirements of this paragraph may not be used to satisfy the required level of
primary security for the covered policies.
2. For the purposes of both 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 shall apply:
a. For assets, including any such assets held in trust, that would be admitted under the
national association of insurance commissioners' "Accounting Practices and Procedures
Manual" if they were held by the ceding insurer, the valuations are to be determined
according to statutory accounting procedures as if such assets were held in the ceding
insurer's general account and without taking into consideration the effect of any
prescribed or permitted practices; and
b. For all other assets, the valuations are to be those 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 shall be included in the
actuarial method if adopted by the national association of insurance commissioners' life
actuarial task force no later than the December thirty-first on or immediately preceding
the valuation date for which the required level of primary security is being calculated. The
tables of asset spreads and asset default costs shall be incorporated into the actuarial
method in the manner specified in VM-20.
History: Effective April 1, 2022.
General Authority: NDCC 26.1-31.2-04
Law Implemented: NDCC 26.1-31.2-01
### § 45-03-26-07. Requirements applicable to covered policies to obtain credit for reinsurance -

Opportunity for remediation.
1. Subject to the exemptions described in section 45-03-26-04 and the provisions of
subsection 2, credit for reinsurance shall be allowed with respect to ceded liabilities pertaining
to covered policies pursuant to North Dakota Century Code sections 26.1-31.2-01 and
the following requirements are met on a treaty-by-treaty basis:

a. The ceding insurer's statutory policy reserves with respect to the covered policies are
established in full and in accordance with the applicable requirements of North Dakota
Century Code chapter 26.1-35 and related chapters and actuarial guidelines, and credit
claimed for any reinsurance treaty subject to this chapter does not exceed the
proportionate share of those reserves ceded under the contract;
b. The ceding insurer determines the required level of primary security with respect to each
reinsurance treaty subject to this regulation and provides support for its calculation as
determined to be acceptable to the commissioner;
c. Funds consisting of primary security, in an amount at least equal to the required level of
primary security, are held by or on behalf of the ceding insurer, as security under the
reinsurance treaty within the meaning of North Dakota Century Code section
d. Funds consisting of other security, in an amount at least equal to any portion of the
statutory reserves as to which primary security is not held pursuant to subdivision c, are
held by or on behalf of the ceding insurer as security under the reinsurance treaty within
the meaning of North Dakota Century Code section 26.1-31.2-02;
e. Any trust used to satisfy the requirements of this section shall comply with all of the
conditions and qualifications of section 45-03-07.1-08 except that:
(1) Funds consisting of primary security or other security held in trust, shall for the
purposes identified in subsection 2 of section 45-03-07.1-08, be valued according to
the valuation rules set forth in subsection 2 of section 45-03-07.1-08, as applicable;
(2) There are no affiliate investment limitations with respect to any security held in such
trust if such security is not needed to satisfy the requirements of subdivision c;
(3) The reinsurance treaty must prohibit withdrawals or substitutions of trust assets that
would leave the fair market value of the primary security within the trust when
aggregated with primary security outside the trust that is held by or on behalf of the
ceding insurer in the manner required by subdivision c below one hundred two
percent of the level required by subdivision c at the time of the withdrawal or
substitution; and
(4) The determination of reserve credit under subdivision c of subsection 4 of section
subsection 2 of section 45-03-26-06, as applicable; and
f. The reinsurance treaty has been approved by the commissioner.
2. Requirements at inception date and on an ongoing basis; remediation.
a. The requirements of subsection 1 must be satisfied as of the date that risks under
covered policies are ceded, if such date is on or after the effective date of this chapter,
and on an ongoing basis thereafter. Under no circumstances may a ceding insurer take
or consent to any action or series of actions that would result in a deficiency under
subdivision c of subsection 1 or subdivision d of subsection 1 with respect to any
reinsurance treaty under which covered policies have been ceded, and in the event that
a ceding insurer becomes aware at any time that such a deficiency exists, it shall use its
best efforts to arrange for the deficiency to be eliminated as expeditiously as possible.
b. Before the due date of each quarterly or annual statement, each life insurance company
that has ceded reinsurance within the scope of section 45-03-26-03 shall perform an
analysis, on a treaty-by-treaty basis, to determine, as to each reinsurance treaty under

which covered policies have been ceded, whether as of the end of the immediately
preceding calendar quarter, the valuation date, the requirements of subdivision c of
subsection 1 and subdivision d of subsection 1 were satisfied. The ceding insurer shall
establish a liability equal to the excess of the credit for reinsurance taken over the
amount of primary security actually held pursuant to subdivision c of subsection 1, unless
either:
(1) The requirements of subdivisions c and d of subsection 1 were fully satisfied as of
the valuation date as to such reinsurance treaty; or
(2) Any deficiency has been eliminated before the due date of the quarterly or annual
statement to which the valuation date relates through the addition of primary
security or other security, or both, as the case may be, in such amount and in such
form as would have caused the requirements of subdivision c of subsection 1 and
subdivision d of subsection 1 to be fully satisfied as of the valuation date.
c. Nothing in subsection 2 shall be construed to allow a ceding company to maintain any
deficiency under subdivision c of subsection 1 or subdivision d of subsection 1 for any
period of time longer than is reasonably necessary to eliminate it.
History: Effective April 1, 2022.
General Authority: NDCC 26.1-31.2-04
Law Implemented: NDCC 26.1-31.2-01, 26.1-31.2-02
### § 45-03-26-08. Severability.

If any provision of this chapter is held invalid, the remainder shall not be affected.
History: Effective April 1, 2022.
General Authority: NDCC 26.1-31.2-04
Law Implemented: NDCC 26.1-31.2
### § 45-03-26-09. Prohibition against avoidance.

No insurer that has covered policies as to which this chapter applies as set forth in section
series of transactions or arrangements if the purpose of such action, transaction or arrangement, or
series thereof is to avoid the requirements of this chapter, or to circumvent its purpose and intent, as
set forth in section 45-03-26-02.
History: Effective April 1, 2022.
General Authority: NDCC 26.1-31.2-04
Law Implemented: NDCC 26.1-31.2
