The National Association of Insurance Commissioners’ (NAIC) Life Actuarial Task Force is continuing its work on developing reserve adequacy testing guidelines for life reinsurance contracts, an issue which will be a key topic during the group’s annual summer meeting, scheduled from Aug. 12 to Aug. 16 at Chicago's McCormick Place.
The task force began considering proposals in February that would require insurers to perform asset adequacy analysis on reinsurance contracts. According to an AM Best report, the proposed approach would use a cash-flow testing method, treating ceded reinsurance as an essential component of asset-intensive business.
Fred Andersen, chief life actuary for the Insurance Division of the Minnesota Department of Commerce, explained during a July task force meeting that the asset adequacy test proposals have three primary objectives: to provide state regulators with better tools for reviewing reserves and solvency, to avoid conflicts with reciprocal jurisdiction and covered agreement issues, and to prevent US ceding companies from entering into agreements where the risk is not material.
Andersen said that regulators can review the assumptions used in asset adequacy testing to ensure that reserves are sufficient. However, when business is ceded to companies not required to file asset adequacy testing memorandums, regulators lose the ability to effectively assess reserve adequacy. The increasing reliance on reinsurance in recent years has heightened these concerns among regulators.
The American Council of Life Insurers (ACLI) has indicated that it is collaborating with regulators on the framework, emphasizing the need to respect existing agreements and recognize the critical role reinsurance plays in risk management.
Brian Bayerle, ACLI’s chief actuary, said that the effort must balance practicality with the actual risks of reinsurance while maintaining the industry's ability to provide essential financial protection and retirement solutions.
Bayerle also noted that ACLI members support a disclosure-focused approach that utilizes existing information and allows insurers to fulfill their commitments.
During the July task force meeting, Andersen said that he expects to present preliminary guidelines at the summer meeting, though he cautioned against appearing to rush the development process. He added that discussions on adequacy testing will likely extend beyond the Chicago meeting and continue into 2025.
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