Regulators proceed with asset testing proposal for reinsurance deals

State insurance regulators are trying to get a firm handle on the assets backing insurers involved in often multi-billion-dollar reinsurance deals with offshore companies.

The details are tricky, but important, said Mike Yanacheak, chief actuary at the Iowa Insurance Division.

"When you're looking at a block of liabilities, whether it's $5 billion of [multi-year guaranteed annuities] or $10 billion of a PRT [pension risk transaction] block or anything else, the assets need to be there," Yanacheak said. "We are living in a world right now where there is no longer an obligation for those assets to be there potentially, because certain reinsurance transactions can get full credit without actually having a funds withheld account."

Yanacheak spoke Thursday during an all-day, in-person Life Actuarial Task Force meeting in Phoenix. LATF met during the spring meeting of the National Association of Insurance Commissioners.

The reinsurance issue emerged in February after a pair of regulators issued a proposal to tighten asset adequacy testing for life insurers entering reinsurance agreements

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.

A reinsurance checklist proposed

Yanacheak suggested a checklist approach for regulators to go over each block of business. Insurers would have to explain "why they have reason to believe there are sufficient reserves being held," Yanacheak said.

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.

While discussing how far back to retroactively apply any new asset testing rules, Fred Andersen of the Minnesota Department of Commerce, suggested all reinsurance agreements since 2020.

"I think that's when the type of activity [began] that raised the alarms all through the NAIC," he said.

Alan Routhenstein is president and consulting actuary for Routhenstein & Co. He questioned whether the problem has been adequately identified.

"This is one approach, but I don't think there's been a vetting of other possible approaches," he said. "That's sort of the sense that I get is that we're sort of overcommitting to this one at this point before really evaluating whether there might be something better that that achieves the regulatory goals."

Concern about covered agreements

Brian Bayerle, chief life actuary at the American Council of Life Insurers, opposed the approach on similar grounds. The NAIC already has a regulatory framework to handle improvements to asset testing, Bayerle has noted in previous meetings.

LATF members are concerned about running afoul of covered agreements, a point Bayerle picked up on. The Treasury Department defined a covered agreement as "an international agreement that relates to the recognition of prudential measures with respect to the business of insurance or reinsurance that achieves a level of protection for insurance or reinsurance consumers that is substantially equivalent to the level of protection achieved under state insurance or reinsurance regulation."

He asked task force members to share any analysis done showing how any new asset adequacy testing regulation would work with covered agreements.

"I think we would all appreciate to understand what analysis was done," he said. "Because if that analysis maybe would call into question whether this approach is really viable, I think it would really be beneficial for everyone to know that."

The task force agreed to expose its PowerPoint with several points for discussion. Comments are being accepted for 60 days.

Rachel Hemphill, chief actuary at the Texas Department of Insurance and chair of LATF, reminded participants of how difficult the topic is for regulators.

"This is one of those areas where we're being very transparent that we do not have a perfect answer right now," she said. "This is something that we are attempting to work out very publicly as as we should, very publicly and transparently."

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.