US NAIC Summer 2024 National Meeting Highlights: Reinsurance (E) Task Force

The Reinsurance (E) Task Force (“RTF”) of the US National Association of Insurance Commissioners (“NAIC”) held a virtual meeting on July 22, 2024, in lieu of meeting in person at the NAIC’s Summer 2024 National Meeting. In addition to routine matters such as adoption of the RTF’s Spring 2024 National Meeting minutes and minor revisions to RTF’s 2025 Proposed Charges, the meeting covered the following matters.

CERTIFIED AND RECIPROCAL INSURERS

The RTF received and adopted the report from the Reinsurance Financial Analysis (E) Working Group (“ReFAWG”). ReFAWG meets in regulator-to-regulator sessions to assess certified and reciprocal jurisdiction reinsurers for passporting. As of July 22, 2024, ReFAWG has approved 85 reciprocal jurisdiction reinsurers and 41 certified reinsurers for passporting. ReFAWG reported that 49 states and territories have already passported at least one reciprocal jurisdiction reinsurer.

“Passporting” is the process under which a reinsurer applies to an initial or “lead” state for recognition as a reciprocal jurisdiction reinsurer or certified reinsurer, following which ReFAWG evaluates and makes its recommendation concerning the status (and any related rating for the reinsurer). Other states can then choose to defer to the lead state’s determination for recognizing a reinsurer as a reciprocal jurisdiction reinsurer or certified reinsurer, which leads to administrative efficiency in obtaining and maintaining that status in multiple states given the reduced level of information that must be submitted to states other than the “lead” state. The list of passported reinsurers can be found on the NAIC’s Certified and Reciprocal Jurisdiction web page.

MUTUAL RECOGNITION OF JURISDICTIONS (E) WORKING GROUP

The RTF received a status report from the Mutual Recognition of Jurisdictions (E) Working Group (“Mutual Recognition WG”), but did not adopt the status report, as the Mutual Recognition WG now reports directly to the Financial Condition (E) Committee rather than to the RTF. As previously reported, the Mutual Recognition WG last met on November 1, 2023 where it reapproved Bermuda, France, Germany, Ireland, Japan, Switzerland, and the United Kingdom as qualified jurisdictions, and Bermuda, Japan, and Switzerland as reciprocal jurisdictions; the European Union and the United Kingdom qualify as reciprocal jurisdictions based on the existing respective covered agreements between the United States and those jurisdictions. According to the Mutual Recognition WG, Bermuda, Japan, and the United Kingdom are in the process of making changes to their regulatory systems; the NAIC staff are monitoring the implementation of these changes, and will report any findings to the Mutual Recognition WG.

ONGOING NAIC PROJECTS THAT AFFECT REINSURANCE

The RTF heard a report regarding the following current projects at the NAIC that affect reinsurance:

The Life Actuarial (A) Task Force (“LATF”) is considering a proposal to require asset adequacy testing (“AAT”) to be performed using a cash flow-testing methodology for life and annuity reinsurance transactions. The 30-day comment period for a June 20 exposure of concepts for AAT ended on July 20. The aim of the proposal is to address the potential risk that reinsurance transactions may materially lower the total asset requirement (the sum of reserves and required capital) in support of asset-intensive business, such as variable universal life, individual annuities, and group annuities, to facilitate significant releases of capital. The proposal would require a ceding company to use a cash flow testing methodology in its AAT for certain life and annuity reinsurance transactions—performed at the line of business and treaty level. There would be no additional regulatory requirement on the reinsurer, other than the need to provide additional information to the ceding company. The RTF invited interested parties to provide input on this project and noted that it would be discussed further at an LATF meeting on July 25 to discuss comment letters received from the June 20 exposure as well as at the LATF meeting at the Summer 2024 National Meeting. Our discussion regarding the consideration of this topic at the LATF meeting is found at our related Legal Update.
As previously reported, the Macroprudential (E) Working Group adopted a reinsurance worksheet in June 2023. The worksheet is an optional tool for state insurance regulators to understand reinsurance transactions of the insurance companies that they regulate; however, neither the Financial Analysis Handbook nor the Financial Examiner’s Handbook will require the use of the worksheet, and it will not affect the policies or procedures of the RTF. (The Financial Condition (E) Committee adopted the worksheet at the NAIC Summer 2023 National Meeting.) Further, the information provided to state regulators through the reinsurance worksheet will remain confidential. The RTF asked for feedback from those who had used the worksheet.
The Valuation Analysis (E) Working Group is completing its second year of reviews of Actuarial Guideline LIII—Application of the Valuation Manual for Testing the Adequacy of Life Insurer Reserves (“AG 53”), which covers AAT for life insurers. The RTF has focused on this process from the perspective of reinsurance issues for the covered agreements with the European Union and the United Kingdom. The review is ongoing and being conducted by a wide range of people, including actuaries from the NAIC, regulators, investment experts, financial staff, and other subject matter experts. The Valuation Analysis (E) Working Group also sent two referrals to the Statutory Accounting Principles (E) Working Group during the 2023 Fall National Meeting: the first suggested removal of a sentence from Appendix A-791, Section 2C due to misinterpretation and being deemed unnecessary; the second requested clarification on evaluating risk transfer in life reinsurance treaties. These referrals are expected to be addressed by the Statutory Accounting Principles (E) Working Group in the coming months. Relatedly, the Statutory Accounting Principles (E) Working Group is working on a project that proposes to expand reporting of assets subject to a funds withheld or modified coinsurance arrangement.
In 2023, there was an issue with a reinsurance broker generating fraudulent letters of credit that were used for collateral purposes. Several groups at the NAIC discussed the issue and are continuing to monitor the situation.
As previously reported, in early 2023, some banks that were on the List of Qualified US Financial Institutions (the “QUSFI List”) failed. Such bank failures affected reinsurance, as NAIC Credit for Reinsurance Model Law (#785) allows letters of credit from banks on the QUSFI List to be used as reinsurance collateral. However, Section 4 of Model #785 outlines criteria for banks to be approved for the QUSFI List, and a drafting note in Model #785 clarifies actions when a bank loses QUSFI status. The Valuation of Securities (E) Task Force revised the Purposes and Procedures Manual to streamline the process for removal of troubled banks from the QUSFI List. The NAIC will continue to monitor news regarding banks on the QUSFI List for any relevant developments.

To view additional updates from the US NAIC Summer 2024 National Meeting, visit our meeting highlights page.