Moodys Warns Of Hidden Credit Risks Tied To Re Programs

Regulation XXX, the Valuation of Life Insurance Policies model regulation, was developed to make sure that companies properly reserved for level term products. Actuarial Guideline AXXX clarifies Regulation XXX as it applies to UL policies with no-lapse guarantees.

Consequently, the amount of collateral now in place may become inadequate as reserve requirements increase, Moodys says.

Thus, if the need increases when there is a rising cost of financing or a scarcity of collateral, there could be "enormous pressure on the earnings and capital of ceding companies and their reinsurers," the report says.

However, new funding structures are improving, Moodys says, because they extend the current 1-year renewal risk that accompanies using a LOC. They are also an improvement over reinsurance trusts because the cost of funding is locked into a specific fixed term, Moodys adds.

Among the remedies in the Moodys report are: A redesign of products to reduce the level of the XXX/AXXX reserves, particularly with respect to UL no-lapse guarantees; slower new business growth; lower reserves through the adoption of the 2001 CSO Table; and, seeking LOC alternatives.

Reproduced from National Underwriter Life & Health/Financial Services Edition, January 23, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.