Annuities' Non-U.S. Reinsurers May Face New Tests

The NAIC's Life Insurance Actuarial Task Force has been working on an effort to update offshore reinsurance rules for more than a year.

U.S. life insurers that cede business to reinsurers continue to be responsible for the business, but some regulators worry that there could be situations when the direct writers and the reinsurers do not have enough combined resources to meet the policy or contract obligations.

Andersen focused attention on the effort in March, by presenting ideas for testing proposals at an NAIC meeting in Phoenix.

Andersen noted that concerns include which reinsurers and reinsurance arrangements to test; whether to look at each reinsurance arrangement on its own, or part or all of the reinsurer's business; and how much the overall strength of the reinsurer matters.

Commenters' perspectives: Brian Bayerle, the chief life actuary at the ACLI, and Colin Masterson, a policy analyst there, suggested in a comment letter that regulators should look mainly at the creditworthiness of the reinsurer and conduct additional tests only when an arrangement is especially important to the finances of the direct writer.

Bayerle and Masterson warned against looking at each reinsurance arrangement on its own, without looking at the reinsurer's other business.

"The long-term adequacy of a company's assets is not determined by a single liability or asset type, but rather the overall performance of the company across all functions," Bayerle and Masterson wrote.

David Self, chair of the Cayman International Reinsurance Company Association, wrote to say that all life and annuity reinsurance agreements between the U.S. direct writers and Cayman Islands reinsurers are collateralized at U.S. statutory reserve levels and held in the United States in credit trusts or custodial accounts.

Aaron Sarfatti, chief strategy officer at Equitable, suggested that regulators should exempt ordinary reinsurance arrangements that are not very large when compared with the direct writer's size but look closely at large, possibly high-risk arrangements.

"Regulators have demonstrated the potential for firms to reduce total asset requirements — and thereby policyholder security — by engaging in asset-intensive reinsurance," Sarfatti wrote.

Peter Gould, a variable annuity owner, wrote to ask regulators to put insurer safety before convenience for the insurers.

"While I understand professional cordiality, mutual respect and common stakeholder concerns, the level of deference to the 'regulated' gives the impression of a relationship that's too 'comfortable,'" Gould wrote. "Don't get me wrong — I'm a believer in insurance products — I just don't want to be a ward of my State Guaranty Fund."

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