US NAIC Spring 2024 National Meeting Highlights: Life Actuarial (A) Task Force

On March 14 and 15, 2024, the Life Actuarial (A) Task Force (“LATF”) met at the Spring 2024 National Meeting of the US National Association of Insurance Commissioners ( “NAIC”). This Legal Update reports on LATF’s consideration of issues with respect to asset-intensive reinsurance ceded offshore and proposal to require asset adequacy testing for ceded reinsurance transactions.

Presentation on Asset-Intensive Reinsurance Ceded Offshore (With Focus on Bermuda)

The American Academy of Actuaries (the “Academy”) has established an Asset Adequacy and Reinsurance Issues Task Force (the “Academy Task Force”), which has published an issue brief on Asset Intensive Reinsurance Ceded Offshore From U.S. Life Insurers (With Focus on Bermuda) (the “Issue Brief”), At the March 14 session, LATF heard a presentation by Patricia Matson and Alan Routhenstein, Chairperson and Assistant Chairperson of the Academy Task Force, in which they provided an overview of the Issue Brief.

Published in February 2024, the Issue Brief provides an overview of the incentives, common practices, typical procedures, and relevant actuarial guidance for US actuaries involved in reinsurance transactions between a US life insurer and a Bermuda reinsurer. The Issue Brief was published following a notable increase in recent years in the volume of asset-intensive reinsurance ceded by US life insurers to Bermuda reinsurers.

As discussed in the presentation, US life insurers have a variety of motivations to cede business to Bermuda, including a strong regulatory framework; reserving, hedging, and accounting efficiencies; investment flexibility; localized expertise and innovation; and tax efficiencies. The presentation highlighted the existing actuarial guidance for an actuary looking to evaluate the risks associated with asset-intensive reinsurance, such as Actuarial Standards of Practice (“ASOP”) No. 22, ASOP No. 11, ASOP No. 67, and the Academy’s Credit for Reinsurance Practice Note. It then described the potential ways an actuary may perform asset analysis testing—including cash flow testing, leveraging the reinsurer’s scenario-based approach, and assessing the counterparty risk—which is important regardless of which methodology is used by the actuary.

The presentation highlighted considerations surrounding aggregation, which—subject to state-specific requirements—may allow an actuary to aggregate reserves and other liabilities for multiple blocks of business when performing an asset adequacy analysis. The Bermuda Monetary Authority does not allow aggregation unless an insurer can demonstrate that the applicable assets can be used across multiple lines of business (in both normal and adverse scenarios).

Mr. Routhenstein also said that the Academy Task Force would be reviewing the forthcoming proposal on asset adequacy analysis for reinsurance and would be providing comments.

Proposal to Require Asset Adequacy Analysis for Reinsurance Transactions

LATF discussed a proposal to require asset adequacy analysis for ceded reinsurance transactions. To lead the discussion, Fred Andersen, Chief Life Actuary at the Insurance Division of the Minnesota Department of Commerce, presented a slide deck on this topic and solicited comments and questions from both regulators and interested parties.

As explained by Mr. Andersen, the proposal to require asset adequacy testing on ceded reinsurance transactions is being considered in response to regulatory concerns that reinsurance activity is taking place where reserves are being held lower than US statutory standards. Particularly with respect to reinsurance business ceded to offshore reinsurers, US regulators are increasingly relying on non-US regulators to ensure the solvency and financial standing of reinsurers when it comes to determining asset adequacy. US regulators have similar concerns regarding reinsurance ceded to US captive insurers that are not subject to the requirements of the NAIC valuation manual. Asset adequacy testing is therefore being considered as a tool to help US regulators better understand the assets and reserves supporting the ceded business and to ensure that there are sufficient assets to meet policyholder obligations.

The LATF proposal suggests the following criteria to be used to determine whether cash-flow testing should be performed on ceded business:

When the assuming company does not submit a VM-30 actuarial memorandum to a US state regulator;
When the reserves are reduced following the ceded transaction;
When the assuming reinsurer does not have substantially high capital (or other safeguards) in place to minimize collectability risk; or
When the assuming reinsurer is affiliated with the ceding company.

There was discussion among LATF members regarding the proposal. Certain LATF members questioned whether asset adequacy testing is the proper tool to measure the reserve adequacy of reserves, since asset adequacy testing is used more to determine whether the types of assets backing the reserves are appropriate for the types of liabilities they are supporting.

Other topics of discussion included the meaning of “gross of reinsurance” testing, appropriate levels of aggregation and the need for regulatory approval, materiality determinations, and whether asset analysis testing should be performed retrospectively versus prospectively. On the latter topic, it was decided to propose that asset adequacy testing should be applied to all treaties on or after January 1, 2020.

At the conclusion of the discussion, LATF decided to expose for comment (i) the slide deck that Mr. Andersen had presented at the meeting and (ii) a proposal to require asset adequacy analysis using cash flow testing that had been proposed in February 2024 by two LATF members (David Wolf, Acting Assistant Commissioner, New Jersey Department of Banking and Insurance, and Kevin Clark, Chief Accounting and Reinsurance Specialist, Iowa Division of Insurance). The proposal was exposed for a 60-day public comment period ending May 17, 2024.

LATF is specifically requesting comments on the following elements related to asset adequacy analysis:

Terminology: The terminology that will be used to refer to asset adequacy testing and how this process will be described;
Materiality: Narrowing the scope on requirements for the ceding company to test the adequacy of reserves;
Aggregation: What level of aggregation is appropriate to account for the availability of cash flows to support a certain treaty or a certain group of treaties, which was identified as a top issue that LATF hopes to receive comments on;
Retroactive vs. Prospective Application: Consideration of a retroactive period that would apply asset adequacy testing to treatises developed on or after January 1, 2020 and whether language is needed to account for any exemptions; and
Methodology: Whether there any approaches that could serve as an alternative to cash flow testing to appropriately demonstrate the adequacy of reserves, and assets supporting such reserves.

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