Regulators dive into reinsurance asset testing, find plenty of blowback

State insurance regulators are moving quickly to address asset reserves held by life insurers involved in reinsurance transactions.

Too quick for some.

Just a week after a pair of regulators issued a proposal to tighten asset adequacy testing for life insurers entering reinsurance agreements, the Life Actuarial Task Force met Thursday to consider exposing an amendment to valuation manual.

The task force is a regulatory body of the National Association of Insurance Commissioners. An NAIC exposure establishes a public comment period.

Mike Yanacheak, chief actuary at the Iowa Insurance Division, advised colleagues to tap the brakes a bit.

"I have a lot of concern about this and not the least of which is the fact that this seems to have been pulled together very quickly," Yanacheak said. "This is such a profound change for life insurance regulation from an actuarial perspective without having ample time to prepare I don't know that exposure right now is the right thing."

The hour-long meeting ended without an exposure voted on, but with enthusiasm for additional dialogue. Fred Andersen, chief life actuary for the Minnesota Department of Commerce, explained the motivation behind the amendment.

"There's a lot of reinsurance activity taking place where reserves lower than U.S. statutory standards are being held," he said. "The question is, are the lower reserve amounts adequate, as demonstrated by appropriately robust asset adequacy analysis using appropriate assumptions?"

"Is reserve adequacy achieved in a certain situations only with aggressive asset return assumptions?"

Goals for reinsurance asset testing

Andersen noted three goals for the amendment:

1. To provide U.S. regulators with what is needed to review the reserves and solvency of U.S. life insurers.

2. To steer clear of conflict with reciprocal jurisdiction and covered agreement issues regarding treating certain reinsurance arrangements differently than others.

3. To prevent work by U.S. ceding companies when there's immaterial risk.

The reinsurance market is bursting with big deals. For example, in November, Lincoln National Life Insurance Co. successfully closed a $28 billion reinsurance deal with Fortitude Re, a global multi-line reinsurer.

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.

Still, Vincent Tsang of the Illinois Department of Insurance is wary of treating offshore reinsurers differently.

"We have to somehow respect that they do know what they're doing and their recent methodology is not completely bad," Tsang said. "I think it tends to have impact in favor of a certain reinsurer over the others. That is my concern about a level playing field for everyone."

The goal is to better protect policyholders, Andersen said, and regulators need transparency to do that. In most of cases, U.S. regulators have access to asset adequacy analysis to make sure an insurer's reserves are adequate and that claims will be paid in under moderately adverse scenarios, he explained.

"But with some of these transactions and it could be U.S. or non U.S. ... We do not have access to that type of analysis," Andersen said. "If one of these situations goes down, I think everyone's going to be looking at the U.S. regulators about why we didn't do our jobs."

Much work to be done

When regulators act as hammers, they see everything as a nail, Yanacheak countered.

"Fundamentally, this seems to be a question as to whether the credit for reinsurance that's being taken is appropriate," he said. "And if that's what's broke, to me, that's what should be fixed. ... I don't know that this is a solution for that problem."

Yanacheak also noted the sheer amount of additional work that would created by the amendment.

"It does encompass a lot of reinsurance transactions," he said. "I think it would be appropriate for us ... to consider how many reinsurance transactions are going to need this detailed analysis done? How voluminous is that going to be for the regulators? And how high are we going to have to staff up to be able to look at all of that?"

Brian Bayerle, chief life actuary at the American Council of Life Insurers, opposed exposing the amendment for comment, suggesting that an unfinished document would unnecessarily restrict future debate. The NAIC already has a regulatory framework to handle improvements to asset testing, Bayerle has said.

"As we move forward, we probably have several questions that we would like the regulators to address, including but not limited to, what will these results mean to the regulators?" Bayerle asked Thursday. "How are they in practice using it?"

LATF meets every Thursday and is expected to continue discussing the proposed amendment.

InsuranceNewsNet Senior Editor John Hilton 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.

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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.