US NAIC Fall 2024 National Meeting Highlights: Life Actuarial (A) Task Force – Asset Adequacy Testing for Reinsurance

On November 15 and 16, 2024, the Life Actuarial (A) Task Force (LATF) met at the Fall 2024 National Meeting of the US National Association of Insurance Commissioners (NAIC) in Denver, Colorado. This Legal Update reports on LATF’s consideration of comments received on a draft Actuarial Guideline requiring asset adequacy testing (AAT) for reinsurance transactions.

Asset Adequacy Testing for Reinsurance

Prior LATF Meetings

As previously reported, some US state insurance regulators have grown concerned about asset-intensive reinsurance activity (particularly business ceded to offshore reinsurers), in which reserves are potentially being held at a lower level than that required under US statutory standards, and the assets held to support such reserves are potentially inadequate (e.g., illiquid). Responding to these concerns, at the NAIC Spring 2024 National Meeting, LATF exposed for comment a proposal (the “AAT Proposal”) to require AAT using a cash-flow testing (CFT) methodology to help state regulators better understand the assets and reserves supporting business ceded by US-domiciled life and annuity insurers, and to ensure that there are sufficient assets (both in amount and kind) to meet policyholder obligations.

At the Summer 2024 National Meeting, following discussion of comments received on the AAT Proposal, LATF exposed for comment a preliminary proposal for an Actuarial Guideline on AAT for Reinsurance (the “Actuarial Guideline”).¹ LATF also determined that regulators and interested parties broadly agreed that the final Actuarial Guideline should:

• provide US state regulators with the information they need to verify reserve adequacy of US life and annuity insurers;
• steer clear of issues arising from Covered Agreements² and the NAIC’s framework for recognizing “Reciprocal Jurisdictions;” and
• avoid imposing unnecessary reporting demands on insurers or reinsurers when risk is immaterial.

Fall 2024 National Meeting

At the November 15 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. The presentation included (i) a proposed sequence for addressing remaining disagreements about the Actuarial Guideline’s treatment of affiliated versus non-affiliated transactions; (ii) the feedback that LATF has received on the Actuarial Guideline in comment letters and during interim public meetings held since the Summer National Meeting, including a summary of the new areas of consensus among regulators and interested parties as well as the progress made so far in areas expected to require further consideration and discussion; and (iii) options and considerations for addressing certain remaining concerns about the content to appear in a finalized Actuarial Guideline expected to be adopted in 2025.

Affiliated vs. Non-affiliated

Regarding affiliated versus non-affiliated transactions, Andersen explained that a common theme among comment letters LATF has received on the Actuarial Guideline has been concern about lack of available data when reinsurance treaties are between non-affiliated companies. Andersen proposed that, to avoid getting sidetracked by specific issues applicable only to treaties between non-affiliated companies, LATF and interested parties should focus discussions and comments on resolving issues related to affiliated treaties through at least the end of the year, and turn to addressing non-affiliated treaties afterward. Andersen also noted the need to consider the definition of “affiliate” for such purposes, as the 10% ownership definition may be insufficient for identifying affiliated reinsurance transactions for this purpose.

Areas of Consensus

As to areas of consensus, Andersen highlighted general agreement among regulators that the final Actuarial Guideline should:

• be narrow in scope with a focus on large, asset-intensive reinsurance transactions, the definition of which is to be determined at a later date;
• restrict consideration of CFT requirements to asset-intensive reinsurance;
• with respect to its application to transactions as of certain dates, likely apply (i) to a wider scope of dates in the case of transactions between affiliated companies; and (ii) to a narrower scope of dates in the case of transactions between non-affiliated companies.

Areas Requiring Further Consideration

Regarding areas that will require further consideration and discussion, Andersen discussed the progress made so far, noting that many of these efforts are focused on avoiding creating more work for ceding insurers and for insurance regulators in situations where the risk involved is small:

Exclude from scope if assuming company files a VM-30 report

• Andersen explained that there is much support for the idea that the new Actuarial Guideline should not impose any new requirements (such as CFT) when a VM-30 actuarial memorandum has been provided by the assuming company to a US regulator. However, he noted that issues remain to be worked through before a final decision is made as to this exclusion from scope.

Reliance on reports similar to VM-30 / AG-53

• There is not yet a consensus as to whether to accept, as the basis for an exclusion from the Actuarial Guideline, a report similar to VM-30 or AG-53 that has been filed with an assuming company’s offshore regulator and then provided to the ceding company’s domestic regulator.
• At LATF’s previous public meeting on October 24, Andersen had indicated that LATF was open to this type of alternative analysis so long as it meets certain standards, indicating that LATF would want to see some specific examples in a regulator-only setting in order to assess some of these potentially comparable reports.
• Specifically, concerns about adopting a VM-30 equivalent included the need for transparency regarding the assumptions made in such reports, the standard used in such a report (e.g., how moderately adverse conditions are determined), and the type of data included in such a report (e.g., is there a breakdown between affiliated versus non-affiliated transactions).

Size

• Andersen noted that discussion is ongoing as to how to define size requirements – i.e., how to set a size threshold and how to measure the size of a transaction for which CFT should be required. He noted that the Missouri Department of Commerce and Insurance has proposed a procedure that LATF has not yet had a chance to consider. Andersen noted that there would be a regulator-only discussion to determine how best to set the size requirements. Specifically, he raised the issue of whether reserve credits should count against the size thresholds.

Andersen then solicited comments from regulators and interested parties with respect to “aggregation.” As he explained at the Summer 2024 National Meeting, “aggregation” in this context 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 and several interested parties on the topic of aggregation, including aggregation for treaties issued by a single counterparty and consideration of the relevant lines of business,³ Andersen observed that “we’re mainly on the same page,” and indicated that “we can leave the language in the [draft Actuarial Guideline] as is, permitting aggregation of a counterparty, and then just fine-tune the language” to address concerns raised by Rachel Hemphill, Chief Actuary at the Texas Department of Insurance, that—to the extent aggregation is permitted—it should be consistent with other regulatory requirements, such as principle-based reserving.

Disclosure-Only Requirements in the AAT Actuarial Guideline

Andersen presented two broad options for the content of the Actuarial Guideline and solicited comments from regulators and interested parties:

• Option 1 would impose new requirements beyond disclosure, meaning that LATF could try to anticipate the problems that will be uncovered through reinsurance AAT and define in the Actuarial Guideline what the required corrective action should be for such problems. For example, if it is found that reserves have decreased to such a degree that a regulator believes liabilities are not going to be adequately supported, then the Actuarial Guideline might require additional reserves.
• Option 2 would have the Actuarial Guideline impose new disclosure requirements only (at least for the first year after adoption of the Actuarial Guideline). Regulators would then work to amend the Actuarial Guideline to address the steps to be taken if issues are identified. In the meantime, state insurance regulators would retain discretion to impose additional requirements, such as additional reserves, on their domestic insurers.

LATF members and interested parties expressed general consensus that Option 2 was the best approach, although there was some discussion regarding whether the two options were really different, given that under either option insurance regulators would be able to impose additional requirements, such as additional reserves, if testing revealed deficiencies. Andersen said he, too, favors Option 2, noting that “collecting that information and understanding the reasons for reserve decreases will be very helpful. We can then figure out what to do if there are unjustified reserve decreases that we find.” Andersen compared the proposed AAT to VM-30, characterizing the analysis associated with VM-30 as “a fairly clear-cut process” whereby it is relatively straightforward to determine that additional reserves need to be posted, with or without the pushing of a regulator. In the case of the proposed AAT, the analysis “is a little murkier for both regulators and the companies’ appointed actuary,” and any particular conclusion—such as that a reserve decrease is based on optimistic assumptions—does not necessarily mean that it is necessary to post additional reserves.

Materials Exposed for Comment

During its November 16 session the following day, LATF decided to expose the following materials for comment for a 58-day period ending on January 15, 2025, in order to gather more regulator and industry feedback:

• A summary of tentative agreements with respect to certain issues and requests for comments in relation to the slide deck presented on November 15, 2024.
• The slide deck, including the case studies starting on page 8.
• An updated version of the draft Actuarial Guideline.

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

¹The draft Actuarial Guideline has since been updated. The latest draft has been exposed for comment until January 15, 2025.
²That 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.”
³During the discussion it was proposed that certain lower risk lines of business such as term life should be more readily aggregated, whereas more volatile lines of business such as variable universal life should have a different threshold for aggregation.