Regulators: Reinsurance asset testing guideline may face legal issues

Regulators are ready to hit the home stretch on an asset adequacy testing guideline for offshore reinsurance. But that does not mean everyone is happy.

In particular, concerns over “covered agreements” are likely to linger for some time. A covered agreement is an international agreement that relates to insurance or reinsurance prudential measures.

How far the states can go to regulate offshore reinsurance is a question that the Federal Insurance Office is considering, said Dan Schelp, chief counsel of regulatory affairs for the National Association of Insurance Commissioners. Covered agreements are the issue, he explained during a Tuesday meeting of the Reinsurance Task Force.

The agreement can preempt a state insurance measure if the FIO determines that the measure results in less favorable treatment of a non-U.S. insurer than a U.S. insurer, Schelp said during a previous meeting.

"The ultimate resolution of any covered agreement issues would probably be done at the joint committee between the EU, U.S. and U.K. and U.S. with respect to these issues," he said Tuesday.

The Life Actuarial Task Force recently concluded a second, 28-day comment period for its proposal for tougher asset adequacy testing on offshore reinsurance deals.

The group first started working on the issue one year ago and hopes to vote on a finished guideline by the summer, said Fred Andersen, chief life actuary for the Minnesota Department of Commerce.

Regulators are concerned about the strength of assets backing billion-dollar blocks of life insurance and annuities in offshore reinsurance transactions. Nearly all major life insurers are looking to make offshore reinsurance deals.

'Duplicative regulatory disclosure'

Industry trade associations reiterated their concerns about the covered agreements. Karalee Morell is senior vice president and general counsel for the Reinsurance Association of America.

"As currently drafted, the most recent proposal would require duplicative regulatory disclosure and scrutiny for some of the RAA's members located in Europe, which would be, in our view, inconsistent with the principles of the covered agreement," she said.

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 one year ago 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.

A small number

Tricia Matson, a partner at Risk & Regulatory Consulting, reminded regulators that there isn't a large number of questionable transactions. She also urged regulators to consider solutions beyond just more disclosures.

"I just wanted to kind of step back and remind folks that the driver of this activity really is ... a small number of transactions where hard assets, in other words, invested assets, decline dramatically pre- and post-transaction," she said.

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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.