Regulators ponder two options to toughen reinsurance reserving standards

State insurance regulators picked up discussions Thursday on proposals to better test the assets backing billion-dollar offshore reinsurance deals.

The Life Actuarial Task Force meeting agenda included discussion of comments received on a proposal to tighten asset adequacy testing for life insurers entering reinsurance agreements. The reinsurance issue emerged in February after a pair of regulators issued the the proposal.

But the American Academy of Actuaries introduced a second option in its comment letter, an option that divided the academy into two camps. Alan J. Routhenstein is president of Routhenstein & Co. and also co-chair of the academy’s Asset Adequacy and Reinsurance Issues Task Force. He submitted his own comments apart from the academy endorsing the second option, which is based on confidential disclosures.

"My concern is that the exposed approach lacks actuarial credibility because of the excessive reliance on hypothetical assumptions except for a very limited scope of transactions," Routhenstein explained.

In its letter, the academy explained the disclosure option favored by some of its members as “a confidential filing … directing any non-exempt insurer to offer additional disclosures addressing specific areas of concern.”

These disclosures could be used by regulators “as a means to confidentially identify life insurance companies that have reinsurance agreements that may reduce assets to a level that is insufficient to support policyholder obligations or provide inadequate disclosure or insufficiently robust assessment of the reinsurance-related concerns identified by regulators,” the academy said. “In this manner, the disclosure could be used by domestic regulators to encourage improvements.”

Big reinsurance market

The reinsurance market is bursting 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.

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.

Consistent rules

Brian Bayerle, chief life actuary at the American Council of Life Insurers, noted that the National Association of Insurance Commissioners are addressing reinsurance issues with several different initiatives in various committees.

As always, the insurance industry is looking for a consistent set of rules, Bayerle added, and supports amending the existing reinsurance regulatory framework instead of adding significant new rules.

“We have a very different view of addressing the issue that we believe to be more appropriate, focusing more on the value of the reinsurance recoverable and the value of the asset that is contemplated by the appointed actuary in their opinion,” Bayerle said. “We do think it's critical to holistically consider the credit quality of the reinsurance counterparty rather than focusing singularly on one part of the solvency framework.”

Regulators are mainly concerned about the causes behind drops in reserves, said Fred Andersen of the Minnesota Department of Commerce.

“This is what we'd be looking for, at least initially, in a majority of cases where reserves that dropped a lot,” Andersen said. “What are the reasons? Are there market value versus book value reasons? Or are there traditional actuarial assumption reasons for the differences in reserves?”

Regulators received a surprise comment letter from Peter Gould, a variable annuity owner from Bloomington, Ind. NAIC members rarely receive direct comments from consumers. Read more on Gould's comments here.

"I think I'm the reason that you ought to be doing a deep dive into this and the other related issues alluded to earlier to ensure that carriers can meet their contractual guarantees," Gould told regulators.

LATF meets every Thursday and regulators said they will continue to discuss the proposals and comments in the coming weeks.

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.