NAIC regulators: Signs of ‘progress’ getting life insurers to cut spreads

NAIC regulators are working to gain a better handle on life insurance company reserving risk.

By John Hilton

State insurance regulators report “progress” getting life insurers to pull back on overly optimistic investment growth projections.

Those investments form the reserves that underpin the future benefits promised to policyholders. The Life Actuarial Task Force previewed the effectiveness of Actuarial Guideline 53 at keeping future investment gains in the 3% neighborhood.

Created in 2022, AG 53 established uniform standards for how life insurance companies should calculate reserves when applying risk-based capital rules. It is disclosure-based.

So far, so good, said Fred Andersen during a weekend LATF meeting at the National Association of Insurance Commissioners’ summer meeting in Minneapolis.

“[W]e are making really good progress, and at this particular time, there's not a dire need to consider an investment guardrail for AG 53,” said Andersen, chief life actuary at Minnesota Department of Commerce.

AG 53 assigned the Valuation Analysis Working Group to perform “targeted reviews” of industry filings to identify outlier investment projections, Andersen explained. The group identified about 10% of insurers reporting net yield assumptions it considered to be outliers, he added.

Insurers' net spreads cut

In 2023 reporting, 38% of insurers reported north of 3% net spreads on collateralized loan obligations, or CLOs. One year later, that figure dropped to 17%, Andersen noted.

“I kind of saw AG 53 as an exercise in helping ensure that the company is not reliant on overly aggressive asset return assumptions in order to demonstrate adequacy of reserves,” he said.

The other view is that the fat tail risk of actual assets held should be analyzed even if a fairly conservative returns are modeled, Andersen said. A fat tail risk means the possibility of extreme market moves – far bigger gains or losses – happening more often than traditional models expect.

Task force members debated the odds of numbers on paper matching reality.

“We are projecting 40 years forward, and there's no way that the actuary can really guarantee, in any way, shape or form, that the management five years from today would actually stick to whatever you think the strategy is,” said Tomasz Serbinowski, an actuary with the Utah Insurance Department.

A mix of measures are needed, said Rachel Hemphill, chief actuary at the Texas Department of Insurance, and a company’s investment strategy has value.

“Yeah, you can't know exactly what you will do in the future, but you do have a plan, right?” Hemphill said. “I view AG 53 as informative, beyond just seeing whether they're over-relying on high-net-yield assets. I think it gives a lot of broad insight into the investment approach.”

Asset adequacy on reinsurance

The task force also spent time on AG 55, a new guideline designed to track the quality of assets backing offshore reinsurance deals. LATF spent about 18 months creating the guideline, also disclosure-based, to address concerns over the strength of reserves held by reinsurers.

Regulators want to require initial data reporting by April 1, 2026. LATF is finalizing the templates to collect that data. The NAIC Executive and Plenary Committee adopted the guideline on Tuesday during the final meeting of the summer session.

The initial proposal to tighten the reins on reinsurers was made in February 2024 by David Wolf, acting assistant commissioner for the New Jersey Department of Banking and Insurance, and Kevin Clark, chief accounting and reinsurance specialist with the Iowa Insurance Division.

U.S. life insurers have nearly doubled their ceded reserves since 2019, increasing from $710 billion to $1.3 trillion in 2023, Fitch Ratings noted in a recent report. During the same period, reserves ceded to offshore jurisdictions nearly quadrupled, exceeding $450 billion.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.