US NAIC Fall 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 October 24, 2024, in lieu of meeting in person at the NAIC’s Fall 2024 National Meeting. In addition to routine matters, such as adoption of the minutes from the RTF’s meeting on July 22, 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 October 24, ReFAWG has approved 93 reciprocal jurisdiction reinsurers (up from 85 since the RTF last met on July 22) and 41 certified reinsurers (unchanged since July 22) 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, after 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, leading to administrative efficiency in obtaining and maintaining that status in multiple states, given the reduced amount 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 webpage.

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. The Mutual Recognition WG last met on October 24, when 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 because they are parties to Covered Agreements with the United States¹. 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 Affecting 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 working to develop a new actuarial guideline requiring asset adequacy testing (“AAT”) to be performed using a cash flow-testing methodology for certain life and annuity reinsurance transactions. The aim of this project is to address the risk that reinsurance transactions may reduce transparency regarding the reserves held for the reinsured business, as well as the types of, and risks associated with, the assets supporting those reserves. The project was launched because of concerns regarding the potential use of reinsurance transactions to 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, with a particular regulatory focus on reinsurance ceded offshore. Following discussions over the past several months, LATF has further defined the project’s goals to include: (i) providing US state regulators with the information they need to review the reserves supporting the business of ceding US life insurers domiciled in their states; (ii) avoiding conflicts with reciprocal jurisdiction status and the Covered Agreements; (iii) avoiding unnecessary work by US-domiciled ceding companies when there is immaterial risk; and (iv) adopting a new actuarial guideline regarding asset adequacy testing by mid-2025, to be effective by the end of 2025. It is expected that US-domiciled ceding companies will be required to conduct AAT using a cash flow testing methodology for certain life and annuity reinsurance transactions (both affiliated and unaffiliated)—to be performed at the treaty level, and in some cases on an aggregated basis. The aim of this testing would be to allow US-domiciled ceding companies to produce and disclose relevant information to US state regulators regarding reinsurance reserves and the assets supporting such reserves. The RTF solicited comments from interested parties, several of whom expressed their support of the progress and direction of LATF’s work on the project to date, with one industry representative expressing particular support for the idea that any changes to AAT requirements be targeted at the material treaties causing the greatest concern. Others commented that there needs to be a balance between developing the necessary tools to assess and mitigate reinsurance risks and avoiding disincentivizing insurers from using appropriate reinsurance solutions, which are an effective risk mitigation tool. For more information non the LATF initiative. see our Legal Update, “US NAIC Fall 2024 National Meeting Highlights: Life Actuarial (A) Task Force.”
• 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 governs AAT for life insurers. The RTF is monitoring the AAT process from the perspective of compliance with the Covered Agreements between the United States and the European Union and the United Kingdom. The review is ongoing and is being conducted by a wide range of people, including actuaries from the NAIC, regulators, investment experts, financial staff, and other subject matter experts.
  In 2023, there was an incident where a reinsurance broker generated fraudulent letters of credit that were used as collateral for reinsurance transactions. Several groups at the NAIC discussed the incident and are continuing to monitor the situation. It is NAIC’s current understanding that all of the relevant letters of credit have been replaced.

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

¹These are 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.”