US NAIC Spring 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 February 26, 2024, in lieu of meeting in person at the NAIC’s Spring 2024 National Meeting. In addition to routine matters such as adoption of the RTF’s 2023 Fall National Meeting minutes, the meeting covered the following matters.

Certified and Reciprocal Reinsurers

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 February 26, 2024, ReFAWG has approved 77 reciprocal jurisdiction reinsurers and 41 certified reinsurers for passporting. ReFAWG reported that 43 states 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 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. In its November 1, 2023 meeting, the Mutual Recognition WG 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.

Proposal to Require Asset Adequacy Analysis to be Performed Using a Cashflow Testing Methodology for Life and Annuity Reinsurance Transactions

The RTF discussed a project that has been initiated by the Life Actuarial (A) Task Force (“LATF”) to consider requiring an asset adequacy analysis (“AAA”) to be performed using a cash flow-testing methodology for life and annuity reinsurance transactions. 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 AAA 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 the Spring National Meeting at the LATF meeting. Our discussion regarding the consideration of this topic at the LATF meeting is found at our Legal Update, US NAIC Spring 2024 National Meeting Highlights: Life Actuarial (A) Task Force.

Ongoing NAIC Projects that Affect Reinsurance

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

• 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 National Meeting.) Further, the information provided to state regulators through the reinsurance worksheet will remain confidential.
• The Valuation Analysis (E) Working Group is completing its first year of reviews of Actuarial Guideline LIII—Application of the Valuation Manual for Testing the Adequacy of Life Insurer Reserves (“AG 53”), which covers asset adequacy testing 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 being conducted by a 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.
• In early 2023, some banks that were on the List of Qualified US Financial Institutions (“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.

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