What You Need to Know
- Some regulators worry that insurers could use reinsurance to reduce the assets behind annuities to unsafe levels.
- Insurers would prefer to see regulators test the highest-risk reinsurance arrangements.
- An annuity holder asked regulators to put safety before professional cordiality.
Reinsurers based outside the United States could face new financial tests when they assume responsibility for U.S. life insurance policies and annuity contracts.
A panel at the National Association of Insurance Commissioners is considering proposals for testing the offshore reinsurers’ cash flow, to increase the odds that the reinsurers will have the financial strength to make good on life and annuity benefit promises.
Fred Andersen, a Minnesota insurance regulator, told the NAIC panel in March that many U.S. life and annuity issuers are making reinsurance deals with companies in jurisdictions with reserving rules that are different from U.S. rules.
“In some cases, reserves are substantially lower, disappear, or can even be negative,” Andersen said, according to a slide deck for a presentation he gave March 15. “It is important to know if the reserve amounts are adequate.”
Representatives for the offshore reinsurers contend that they are already subject to oversight by their own regulators, and the American Council of Life Insurers has suggested that a poorly designed asset adequacy testing program could lead to high costs for insurers and reinsurers without doing much to verify or improve reinsurance strength.
What it means: You may wonder why so many life and annuity issuers are making reinsurance deals with companies based in Bermuda and other offshore jurisdictions and whether that’s a problem.
State insurance regulators have had the same thoughts.
Offshore reinsurers: A reinsurer provides insurance for insurance companies.
The “direct writer,” or insurance company that originally wrote a block of business, can use reinsurance to change how the business behaves as well as to protect itself against claim risk.
Offshore reinsurance has become much more popular with U.S. life and annuity issuers in recent years due to the effects of new reserving regulations, the pressure on issuers’ earnings caused by dramatic fluctuations in interest rates and stock prices, and changes in accounting rules that have made the earnings of public insurers prepared using U.S. generally accepted accounting principles look more volatile.
Offshore reinsurers have reinsured more than $800 billion in U.S. life and annuity business since 2017, according to Moody’s.
NAIC’s asset adequacy testing project: The United States leaves regulation of the business of insurance, including non-variable annuities, to the states.
The NAIC is a Kansas City, Missouri-based group that helps states share the resources needed to regulate insurance. It helps states develop reserving rules and examination procedures for evaluating insurers’ financial strength.