Regulators opt for narrow scope with offshore reinsurance guideline

State insurance regulators trying to get better control of offshore reinsurance reserves opted for a "narrow scope" with a new guideline.

The Life Actuarial Task Force met Thursday to begin debate on its Asset Adequacy Testing Actuarial Guideline. The so-called "straw man draft" was introduced by Fred Andersen of the Minnesota Department of Commerce and exposed for public comment in August.

Regulators are concerned about the strength of assets backing billion-dollar blocks of life insurance and annuities in offshore reinsurance transactions.

Still, a representative for the American Council of Life Insurers reminded regulators Thursday that the effort is limited.

"Our understanding from regulators that we've spoken with is that this, for now, is intended to be an educational exercise to help inform the regulators about types of information that they're looking for and how companies are thinking about the assets and the reserve reduction associated with reinsurance transactions," said Brian Bayerle, chief life actuary for ACLI.

Healthy asset levels

The issue was first raised in February 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.

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.

The method proposed by the National Association of Insurance Commissioners' task force would use a cash-flow testing method, treating ceded reinsurance as an essential component of asset-intensive business.

Regulators received nine comment letters on the "scope" and "aggregation" sections of the guideline. Comments were accepted on all other sections of the guideline through Friday.

In its lone voice vote, the task force agreed to move forward with "option one," a narrow scope of applicability. Under this option, the guideline would apply to life insurers with:

1. Reinsurance ceded to entities that are not required to submit a VM-30 memorandum to the U.S. state regulators in treaties established Jan. 1, 2016 or later that meet specific financial criteria.
2. Reinsurance ceded to entities, regardless of treaty establishment date, that results in significant
   reinsurance collectability risk.

'More of an impact'

Andersen explained how he envisions it working when large companies are engaged with smaller companies on reinsurance deals.

"An example is, if the large company has $100 billion in assets, and the small company has $200 million of assets, and it's $100 million treaty, we would contemplate that the smaller company would perform this testing, because it's more of an impact on solvency than the company where the treaty is like point 1% of their business," Andersen explained.

The hurdle for regulators trying to untangle the reinsurance risk is that some companies report asset testing to U.S. regulators and some don't. Some reinsurers have multiple blocks with differing levels of assets. The aggregation point will be next up for discussion among task force members.

"We're trying to get bang for the buck," Andersen said of the guideline goals. "We're trying to identify and prevent insolvencies, first and foremost."

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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 john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.