Regulators set to tackle reinsurance concerns after comment period

State insurance regulators are set to return to the reinsurance issue as soon as Thursday after a two-month comment period on several controversial aspects.

The Life Actuarial Task Force exposed its reinsurance asset adequacy testing guideline for comments in August. Comments were accepted until Oct. 3 on the "scope" and "aggregation" sections of the guideline.

Those issues are expected to be discussed during Thursday's LATF call. Comments are being accepted until Friday on all other sections of the guideline, according to the National Association of Insurance Commissioners.

Regulators are concerned about billions of insurance company funds being reinsured in Bermuda, the Cayman Islands, and other places. Reserve levels have declined with some of these offshore reinsurers.

The ideas are fairly simple and first proposed 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.

New guidelines would strengthen the testing of assets backing blocks of life insurance and annuities in offshore reinsurance transactions.

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.

International concern

Meanwhile, a new reinsurance report authored by global law firm Hogan Lovells notes that concern over reinsurance deals is not limited to the United States. In the United Kingdom, the Prudential Regulation Authority has also published new guidance on its expectations of life insurers party to funded reinsurance arrangements, the law firm notes.

"The regulators are having to find a balance between supporting the market’s desire for investment flexibility and innovation but also ensuring policyholder security," the report states.

Of particular concern, the Hogan Lovells report explains, "is the increasingly credit-focused business models of many reinsurers (particularly new entrants), and the challenges which illiquid assets can present, particularly in a recapture scenario."

At the NAIC summer meeting in August, when LATF met in person and exposed the guideline for comment, the aggregation of reserves led to a lengthy debate.

For example, when a reinsurer with one block lacking reserves, and another block backed by healthy reserves are taken together, the two hypothetical blocks would have enough reserves.

Still, "is that overly sufficient block going to be around when you need it?" said Fred Andersen of the Minnesota Department of Commerce during the August meeting. "Sometimes that block gets reinsured and that company doesn't have that offsetting business anymore."

Regulators seem to have "a comfort level" in allowing aggregation if a ceding company cedes several blocks of business to a reinsurer because all of the blocks can be tied back to the same ceding company, Andersen explained.

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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.