Regulators to vote on disclosure-only reinsurance asset testing guideline

Regulators are set to adopt an asset adequacy testing guideline to add another layer of transparency to major reinsurance deals.

The Life Actuarial Task Force (LATF), comprised of National Association of Insurance Commissioners members, worked for about 18 months to create the guideline. That work included many concessions to insurance industry groups.

The resulting guideline is limited in scope, agreed Fred Andersen of the Minnesota Department of Commerce, and disclosure-only. It will be voted on by LATF at its June 5 meeting.

"There are U.S. reinsurers that will be impacted. It's not just offshore reinsurers," Andersen said. "There have been over a trillion dollars of recent reinsurance transactions on the life and annuity side. It's become apparent that working together across jurisdictions is vital to help ensure death benefits and annuity payments are paid to U.S. policyholders."

The effort is seen as regulators seek to get a handle on a life insurance industry that has become more financially complex. Once private equity firms took an ownership interest in life insurers, offshore reinsurance deals boomed.

U.S. life insurers have nearly doubled their ceded reserves since 2019, increasing from $710 billion to $1.3 trillion in 2023, Fitch Ratings noted in a recent report. During the same period, reserves ceded to offshore jurisdictions nearly quadrupled, exceeding $450 billion.

Product-level analysis

LATF members have acquiesced to industry on several points throughout the guideline development. However, members drew the line on Thursday on language that would give them the option to require a "product-level analysis" after 2025.

"When we receive cash flow testing filings, we're used to seeing the life insurance [and] annuity analysis done separately," Andersen explained. "They tend to have different risks. They have different types of assets backing them, so on and so forth."

In recognition of the work already required by the asset testing guideline, LATF opted not to include the product-specific analysis for the initial year 2025. LATF's timeline calls for the guideline to be adopted and the first reinsurance asset testing reports due on April 1, 2026.

Brian Bayerle, chief life actuary for the American Council of Life Insurers, balked at the inclusion of product-level analysis.

"We are concerned that over time, it's going to create even more work for companies that, at least from our perspective, we don't see how that will provide value to regulators," he said, "particularly for the level of effort required to do this activity for some companies."

Bayerle suggested that regulators could revisit the idea for a deeper analysis with companies in the future. None of the regulators liked that idea.

"I just don't like the idea that states should have to follow up for the information we're trying to get by casting this net in the first place," said Joshua Blakey of the Oregon Division of Financial Regulation.

Under $100 million

Which reinsurance treaties will be covered by the guideline also generated extensive discussion during Thursday's 90-minute LATF meeting. The task force voted to exclude reinsurance treaties under $100 million in reserve credit.

Andersen found that companies he is most concerned about – newer entrants aggressively selling annuities, for example – are all "well above" the $100 million barrier.

"When I listed the treaties that I thought would be in the scope, none of them are under $100 million, so I don't think this will actually have any impact," he said.

The initial proposal to tighten the reins on reinsurers was made in February 2024 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.

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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.