Regulators hear industry ire over proposals to toughen reinsurance deals

Life insurers are unhappy with proposed tougher reinsurance oversight and let regulators know Monday during a working group call.

The Reinsurance Task Force call served to preview comment letters that will be more fully discussed during an expanded 90-minute call Thursday by the Life Actuarial Task Force. LATF is considering proposals for tougher asset adequacy testing on offshore reinsurance deals.

A second comment period generated pointed commentary from industry trade associations. Letter writers summarized those thoughts for regulators Monday.

"Efforts should encourage responsible use of reinsurance and should take great effort to not disrupt this critical marketplace," said Brian Bayerle, chief life actuary at the American Council of Life Insurers. "We believe it is necessary and appropriate, depending on the degree of additional work, that these requirements be applied prospectively only."

The reinsurance market is teeming with big deals. For example, in February, Global Atlantic Financial Group and Manulife Financial Corp. finalized a $10 billion reinsurance transaction. That deal involves Manulife’s life, annuity, and long-term care insurance business originating from the United States and Japan.

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 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.

Signs of trouble

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.

Tricia Matson, a partner at Risk & Regulatory Consulting, said the concerns are real.

"Our firm has been involved with many of the transactions that involve moving business offshore, and based on that, have seen first-hand instances in which the amount of assets that back the policyholder obligations declined significantly," she said. "Because of that, we strongly believe that there does need to be a solution to address that decline in assets."

R&R's comment letter proposes "requirements for the appointed actuary to directly assess the adequacy of the invested assets that back reserves in order to make sure that the assets are sufficient to support the policyholder obligations, even after a reinsurance transaction," Matson said.

The consultants cautioned against a soft rollout of standards, "since we believe this may result
in a 'race' to get treaties in place before the tougher requirements are implemented," the R&R comment letter states.

'A disclosure-based framework'

Industry representatives shared very different ideas about how to better monitor reinsurance transactions.

"We'd support a disclosure-based framework that leverages the good work that companies are already doing when they enter a reinsurance transaction," Bayerle said.

Kara Morell, senior vice president and general counsel for the Reinsurance Association of America, disagreed on what is the true problem.

"We continue to believe that the current proposals being considered by LATF would create some unnecessary obstacles that will negatively impact the insurance marketplace without addressing what we think is the regulator's fundamental concern," she said. "We believe the core regulator concern is collectability, not reserving levels, and so therefore, any solutions should be directly targeted at that issue."

The RAA partnered with Swiss Re on a nine-page comment letter to LATF.

The Reinsurance Task Force also heard from Peter Gould, a variable annuity owner from Bloomington, Ind. NAIC members rarely receive direct comments from consumers, but Gould participated in several recent calls on the reinsurance issue. Gould has said he is concerned about the financial strength of companies that administer products like the VA he owns.

"I'd suggest that staff begin now to start testing those proposals on real-life data from companies who are currently or previously failing, or in rehabilitation, because you really need an early warning of these problems to fix them," he said. "So that policy owners aren't going to be dependent on state guarantee associations."

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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.