Reinsurance asset testing guideline could run afoul of existing agreements

Regulators seeking to strengthen asset testing requirements for large-scale offshore reinsurance deals ran into a few potential hurdles this week.

After discussing the issue for months, state insurance regulators gathered in Chicago for the National Association of Insurance Commissioners’ annual summer meeting. The Life Actuarial Task Force accomplished its goal Sunday by exposing a reinsurance asset adequacy testing guideline for a 60-day comment period.

But a few issues generated more questions than answers.

“It’s not going to be the last discussion on this,” said Fred Andersen of the Minnesota Department of Commerce. Regulators hope to have an actuarial guideline by the end of 2025, Andersen has said.

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.

“There are other regulators who have identified situations where the reserve level is going down substantially, and we don't have a clear indication of why, and that's what we're doing here,” Andersen said.

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.

Federal Insurance Office inquiry

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 NAIC. Covered agreements are the issue, he explained. A covered agreement is an international agreement that relates to insurance or reinsurance prudential measures.

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.

“Our current understanding of this [proposed reinsurance guideline] is agnostic in nature, that it treats both U.S. reinsurers and non-U.S. reinsurers equally, so that theoretically, it should not be preempted,” Schelp added. “However, we are aware that this is an issue. We don't have a final proposal for us yet, so we're not in any position to give a legal opinion.”

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.

Aggregation of assets a sticking point

An extended discussion over the "aggregation" of reserves took place on Sunday. That is a reinsurer with one block lacking reserves, and another block backed by healthy reserves. Taken together, the two hypothetical blocks would have enough reserves, Andersen noted.

Still, "is that overly sufficient block going to be around when you need it?" he added. "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.

"But there's a general consensus that we don't want to see this type of aggregation between between counterparties, as opposed to within counterparties," he added.

Brian Bayerle, chief life actuary at the American Council of Life Insurers, spoke in favor of aggregation of assets.

"It seems to us that, in theory, maybe you may not be able to have fungibility between portfolios, but at the end of the day, either you have enough money to support the assets, or you don't," Bayerle said. "From our perspective, I think we're a little concerned about why there wouldn't be an allowance for aggregation."

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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.