Regulator group aims for reinsurance asset testing guideline by June

The Life Actuarial Task Force exposed a new version Thursday of its proposal for tougher asset adequacy testing on offshore reinsurance deals.

LATF will accept comments on the latest version of the document for 28 days, regulators said on a conference call. The group first started working on the issue one year ago and hopes to vote on a finished guideline by “late May,” said Fred Andersen, chief life actuary for the Minnesota Department of Commerce.

Regulators are concerned about the strength of assets backing billion-dollar blocks of life insurance and annuities in offshore reinsurance transactions. Nearly all major life insurers are looking to make offshore reinsurance deals.

Just last week, Prudential Financial finalized a deal to reinsure a $7 billion portion of Japanese whole life policies with a subsidiary of Prismic Life, a Bermuda-based life and annuity reinsurance company sponsored by Prudential and Warburg Pincus.

Some insurers control their own reinsurer. Others are striking reinsurance deals with offshore companies domiciled in places like Bermuda or the Cayman Islands. Those places offer lighter regulation, critics say, and less transparency.

The initial proposal to tighten the reins on reinsurers was made one year ago 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.

No prescriptive asset testing

During Thursday's call, a discussion ensued about how strong the wording should be if an actuary determines a need for more reserving. The guideline will be disclosure only and not "prescriptive," Andersen noted.

"My concern is if we say it's disclosure-only that down the road if you determine that there are some prescriptive guardrails that really ought to be in place here on a nationwide basis, as a model, that there'll be a lot of momentum against that by the wording," said Peter Gould, a Bloomington, Ind. resident and annuity owner following the issue.

Covered agreements are an issue to consider, Andersen responded. A covered agreement is an international agreement that relates to insurance or reinsurance prudential measures.

The hope is that a disclosure-based guideline reveals 95% of reinsurance agreements are actuarily fine, Andersen added, leaving regulators to deal with the remaining 5%.

"If there is clear evidence that something additional needs to be done, we can reconvene this group, and potentially at that point, say, you know, 'We really need to prescribe something,'” he said.

'Moderately adverse' conditions

Standard asset adequacy analysis requires reserves to be held at a level that meets "moderately adverse conditions, or approximately one standard deviation beyond expected results," the Wolf/Clark proposal noted.

"When a reinsurance transaction lowers the ceding insurer’s reserves, the new reserves established by the reinsurer could be materially less than what would be needed to meet policyholder obligations under moderately adverse conditions in addition to providing an appropriate level of capital," the proposal continued.

During Thursday's call, Wolf pointed out that regulators have other oversight options.

"In most state laws, including New Jersey's, the department has always the ability to require a company to post additional reserves if there was a situation that warranted it," he explained. "I don't want there to be a perception that this guideline is being watered down at all."

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