US NAIC Spring 2025 National Meeting Highlights: Life Actuarial (A) Task Force – Asset Adequacy Testing for Reinsurance
On March 22 and 23, 2025, the Life Actuarial (A) Task Force (LATF) met at the Spring 2025 National Meeting of the US National Association of Insurance Commissioners (NAIC) in Indianapolis, Indiana. This Legal Update reports on LATF’s consideration of comments received on a revised draft of an Actuarial Guideline that would require asset adequacy testing (AAT) in connection with asset-intensive reinsurance transactions entered into by life and annuity insurers.
Prior LATF Meetings
As previously reported, some US state insurance regulators have grown concerned about the use of asset-intensive reinsurance by life and annuity insurers (particularly business ceded to offshore reinsurers) in which reserves are potentially being held at a lower level than would be required under US statutory standards, and where the assets held to support such reserves are potentially inadequate (e.g., illiquid). Responding to these concerns, LATF has been working on developing an Actuarial Guideline that will require AAT using a cash-flow testing (CFT) methodology for certain asset-intensive reinsurance transactions (the “AAT Guideline”). The LATF effort is focused on increasing transparency and helping state regulators better understand the assets and reserves supporting businesses 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.
LATF has determined that the AAT Guideline, at least initially, will impose only testing and disclosure requirements1 (at least for the first year after its adoption). As information becomes available to state regulators through the disclosures required by the AAT Guideline, it is possible that the AAT Guideline could subsequently be amended to address any concerns that regulators may have based on that information.
At the end of January, LATF exposed a revised draft of the AAT Guideline for public comment. Revisions from the prior draft included:
- Introducing the term “associated party” to identify reinsurance transactions in which the parties are in some way affiliated with each other (with the expectation that regulators might choose to exempt transactions that do not involve associated parties from AAT requirements);
- Adding language to note that the AAT Guideline would not define a prescriptive amount of additional reserves to be held but rather allow for actuarial judgment;
- Defining a starting asset amount for mandatory CFT;
- Adding additional requirements for similar memorandums, which could be submitted as an alternative to CFT in some cases;
- Requiring CFT to be performed under certain defined circumstances; and
- Requiring that the New York 7 Treasury Rate Scenarios (NY7) be included in the CFT.
Following the end of the exposure period, LATF met by teleconference on March 6 to discuss the comments that had been received. Some of the topics raised during these discussions included whether affiliated transactions should be treated differently, consideration of assets other than primary security, requiring inclusion of the NY7 scenarios as part of the testing, and the permissibility of using alternative analyses and reinsurance collectability versus reserve adequacy risk. Many of these topics were discussed further at the Spring 2025 National Meeting.
LATF intends to continue revising the draft AAT Guideline with the aim of being in a position to consider adoption of the AAT Guideline by LATF on May 29, so that it can be considered for adoption by LATF’s “parent” committee, the Life Insurance and Annuities (A) Committee, during the summer and by the NAIC Executive Committee (EX) and Plenary during the NAIC Summer 2025 National Meeting. Once that process is completed, LATF expects that the first AAT reports will be due April 1, 2026.
Spring 2025 National Meeting
At the March 22 session, Fred Anderson, 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 the comments received on the most recent draft of the AAT Guideline. At the outset, Mr. Anderson identified the following goals for the AAT Guideline:
- Provide US state regulators what is needed to review the reserves and solvency of US life insurers.
- Steer clear of conflict with reciprocal jurisdiction / covered agreement issues.
- Prevent work by US ceding companies where there’s immaterial risk.
The discussion then focused on the following provisions in the revised draft of the AAT Guideline:
- NY7 Testing: The revised draft provided that testing must include projection on interest-rate scenarios, such as through the use of NY7, to allow regulators to assess reinvestment and disintermediation risk. Following interested parties’ comments expressing concern about imposing the use of NY7 as a strict requirement, several LATF members indicated that this language was intended to demonstrate flexibility to use similar scenarios (at least for the first year). That being said, there was support to add language that if a company is already using NY7, it is highly encouraged to provide those results as part of the AAT reporting.
- Associated Party: For purposes of determining when exemption requests would not be considered, the draft included the concept of an “Associated Party,” which is defined to mean:
1. An entity that otherwise meets the NAIC Model Act 440 [(Insurance Holding Company System Regulatory Act)] definition of an Affiliate or meets the NAIC classification as a related party.
2. For which greater than 25% of the assuming reinsurer’s reserves have been assumed from the ceding company or entities in the same group as the ceding company.
3. An entity that has one percent or higher ownership of the assuming reinsurer.
Interested parties expressed concerns that this “Associated Party” definition would be a deviation from the current understanding of concepts such as “affiliated” and “ownership.” Concerns were also raised that this broad definition could disincentivize parties from entering into reinsurance transactions. It was decided to eliminate the use of the term “Associated Party” and move the concept into the description of qualifications for an exemption from mandatory CFT.
- Starting Asset Amount – Mandatory Run/Post-reinsurance Reserve: The draft AAT Guideline provided that for one mandatory run of CFT, the Starting Asset Amount shall be equal to the Post-reinsurance Reserve. There was little consensus among regulators and interested parties regarding which term should be used with respect to the Starting Asset Amount for the mandatory run. Some interested parties commented that the term “tested reserve amount” is clearer. Ultimately, it was decided to maintain the term “Post-reinsurance Reserve,” which is defined as “[f]ollowing a reinsurance transaction, the amount of reserves held by the ceding company plus the amount of reserves held by the assuming company minus the amount of reserves held by the assuming company supported with assets other than Primary Security.”
- Use of Conservative Asset Returns: It was stated that in CFT scenarios where ceding companies are unable to model actual assets, the modelling should be based on reasonably conservative assumptions, rather than unreasonably optimistic assumptions. LATF members also agreed to add language that would require ceding companies to share the information that they have available regarding the actual assets and investment strategy, even if actual assets cannot be modelled.
- Primary Security Terminology: There was discussion of whether subtraction of assets not supported by Primary Security from Post-reinsurance Reserves is appropriate or feasible (e.g., what happens if a ceding company doesn’t know if the assets held by the reinsurer are Primary Security). It was decided that after regulators receive the first year of AAT reporting results, they will be in a position to consider whether further action is required to furnish regulators with additional information, such as creating a requirement for reinsurers to provide information to ceding companies necessary to complete the AAT reporting.
Discussion regarding aggregate testing for similar treaties with the same counterparty and the disclosure template was tabled for a later time.
Exposure of Revised Draft of AAT Guideline
On March 23, LATF exposed for public comment a revised draft of the AAT Guideline, reflecting the discussion at the LATF meeting on March 22. Comments on this revised draft are due by April 24.
For our prior coverage of the development of the AAT Guideline, see:
US NAIC Summer 2024 National Meeting Highlights: Life Actuarial (A) Task Force
US NAIC Spring 2024 National Meeting Highlights: Life Actuarial (A) Task Force
To view additional updates from the US NAIC Spring 2025 National Meeting, visit our meeting highlights page.
1 At the Spring 2025 National Meeting, LATF agreed to include the following provision in the AAT Guideline to clarify that the analysis is being conducted for disclosure purposes only:
For year-end 2025, the Appointed Actuary should consider the analysis required to be performed by this Actuarial Guideline, along with other relevant information and analysis in forming their opinion regarding the potential need for additional reserves. In the event that the Appointed Actuary believes that additional reserves are required (based on their application of appropriate actuarial judgment), then the Appointed Actuary should reflect that in their Actuarial Opinion.
This Guideline does not include prescriptive guidance as to whether additional reserves should or should not be held. Such determination is up to the Appointed Actuary, and the domestic regulator will continue to have the authority to require additional reserves as deemed necessary.
