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

On August 11 and 12, 2024, the Life Actuarial (A) Task Force (“LATF”) met at the Summer 2024 National Meeting of the US National Association of Insurance Commissioners (“NAIC”) in Chicago. This Legal Update reports on LATF’s consideration of a proposal to require asset adequacy testing (“AAT”) for ceded reinsurance transactions.

ASSET ADEQUACY TESTING FOR REINSURANCE

As previously reported, with respect to domestic insurers ceding business to offshore reinsurers, US regulators have grown concerned about asset-intensive reinsurance activity where reserves are potentially being held lower than US statutory standards. Responding to these concerns, LATF exposed for comment at the NAIC Spring 2024 National Meeting a proposal (the “AAT Proposal”) to require AAT using a cash-flow testing (“CFT”) methodology to help US regulators better understand the assets and reserves supporting ceded business and to ensure that there are sufficient assets to meet policyholder obligations.

At the August 11 session, Fred Andersen, Chief Life Actuary at the Insurance Division of the Minnesota Department of Commerce, presented a slide deck and led a discussion among regulators and interested parties on (i) the feedback that LATF has received on the AAT Proposal, including a summary of the areas of consensus among regulators and interested parties as well as those areas expected to require further consideration and discussion and (ii) LATF’s initial draft Actuarial Guideline on AAT for Reinsurance (the “Actuarial Guideline”). Mr. Andersen characterized this initial draft as a “strawman”, i.e. an imperfect model put forward to invite critique and discussion, rather than a draft that LATF recommends adopting in its present state.
As to areas of consensus, Mr. Andersen highlighted what he said was broad agreement that the final Actuarial Guideline should:

provide US state regulators what they need to verify reserve adequacy of US life insurers;
steer clear of issues arising from Covered Agreements¹ and the NAIC’s framework for recognizing “Reciprocal Jurisdictions”; and
avoid imposing unnecessary reporting demands on insurers or reinsurers when risk is immaterial.

As to areas which will require further consideration and discussion, Mr. Andersen discussed progress made so far on each of the following subtopics, shared LATF’s current recommendation, and emphasized that LATF is continuing to solicit comments and questions on each of the following subtopics over the coming months.

Need for reserve adequacy review beyond or as part of collectability review:

Mr. Andersen explained LATF’s understanding that (i) collectability reviews rely heavily on reinsurer credit ratings and (ii) credit rating agencies are likely not analyzing reserve assumptions carefully. Therefore, LATF has concluded that collectability reviews do not provide sufficient assurances to US regulators as to reserve asset adequacy and reasons for reserve decreases due to reinsurance, and that an Actuarial Guideline on reinsurance AAT should be developed.

Materiality threshold for no additional disclosure, attribution analysis or CFT:

Mr. Andersen indicated that there is general consensus that more rigorous analysis should be expected for larger blocks of business. There was some discussion among LATF members, with no consensus reached, as to whether the most meaningful metric is not the absolute size of a ceded block of business, or the percentage of the domestic insurer’s business that is ceded, but rather the size of a block assumed as compared to the size of the reinsurer assuming it. Finally, Mr. Andersen said that LATF’s current recommendation is to set a materiality threshold that takes into consideration the size of the transaction and the impact on a company’s financials as well as safeguards, with the understanding that further discussion is necessary, including deciding whether CFT should be expected for the largest blocks even when there are safeguards in place.

More rigorous and/or more frequent analysis to the extent there are significant risks:

LATF made no decisive recommendation for this subtopic, indicating instead that it is continuing to solicit input from interested parties to determine which risks are appropriate to consider when determining whether to reduce the analysis required to be performed, and emphasizing that it is continuing to work on identifying risks and matching them to appropriate analysis types. The following were presented as possible risk factors to consider:

VM-30 actuarial memorandum is not provided by the assuming company to a US regulator.
There is a significant reserve decrease due to reinsurance or use of non-primary security to back reserves.
Collectability risk associated with the reinsurer is significant.
The insurer and reinsurer are affiliates.

Analysis considerations:

Mr. Andersen noted that LATF’s position as to the expected type and rigor of analysis has evolved drastically over the past six months. He indicated that LATF has moved away from the position that “for every treaty you need cash flow testing,” but still expects CFT for the most impactful treaties, although there is an open question of whether CFT is needed if a company is able to demonstrate safeguards.
Mr. Andersen indicated that significant areas of disagreement among LATF members in connection with AAT appear to be (i) whether attribution analysis, a qualitative and quantitative technique used to explain the sources driving an investment portfolio’s performance, should have a primary or a secondary role and (ii) the form, if any, of statement to require from Appointed Actuaries.
There was discussion of a template for attribution analysis proposed by LATF. Mr. Andersen said that the American Council of Life Insurers (“ACLI”) had proposed a new template, which he considered to be an improvement of LATF’s proposed template. Mr. Andersen further stated that, although there remains disagreement as to when attribution analysis rather than CFT is appropriate, there does seem to be a common understanding among stakeholders as to how best to conduct attribution analysis.
LATF’s recommendation is to continue working with interested parties to determine when to require CFT.

Aggregation considerations:

As Mr. Andersen explained, this subtopic refers to the idea that, where a standalone block of business shows deficient reserves, but other blocks of business have overly adequate reserves, there should be an offsetting so that when all of those blocks of business are considered in aggregate, the reserves are recognized as adequate. Following discussion among LATF members on this subtopic with no consensus reached, Mr. Andersen indicated that there will be an entire LATF call dedicated to this subtopic (see the below “AAT Actuarial Guideline Draft” section for details on the LATF call scheduled to discuss Sections 5.C and 7, Aggregation).

As to timing of implementation, Mr. Andersen noted that:

Year-end 2025 is the target for a new effective Actuarial Guideline;
It remains an open question whether the Actuarial Guideline should apply to treaties effective from, e.g., January 1, 2021 and later, or a different date; and
LATF expects there will be more flexibility for the first year in which the Actuarial Guideline is effective, with perhaps year-end 2026 an appropriate target for beginning to require greater rigor or prescriptiveness.

AAT ACTUARIAL GUIDELINE DRAFT

Finally, Mr. Andersen presented the draft Actuarial Guideline itself and solicited comments from regulators and interested parties. There was discussion among LATF members and interested parties as to whether the current draft Actuarial Guideline conflicts with Covered Agreements and the Reciprocal Jurisdiction framework. One LATF representative indicated that LATF is aware of these potential issues, and that LATF will continue to work with NAIC legal counsel and interested parties to ensure the final Actuarial Guideline is not in conflict.

At the conclusion of the discussion, LATF decided to expose for comment its strawman draft Actuarial Guideline for a 60-day public comment period ending on October 11, 2024, in order to gather more regulator and industry feedback.

During its August 12 session the following day, LATF decided to expose the following components of the draft Actuarial Guideline for shorter comment periods to allow for discussion at interim meetings of LATF:

Section 2, Scope. LATF requests that comments be provided by September 19 to allow for discussion at a September 26 meeting of LATF.
Sections 5.C and 7, Aggregation. LATF requests that comments be provided by October 3 to allow for discussion at an October 10 meeting of LATF.

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

¹ That is, the agreements formally titled “Bilateral Agreement Between the United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance and Bilateral Agreement Between the United States of America and the United Kingdom on Prudential Measures Regarding Insurance and Reinsurance.”