Regulatory Task Force Adopts Asset Adequacy Testing For Asset-intensive Life Reinsurance

U.S. life carriers engaging in "asset intensive reinsurance transactions" should consider new requirements for reporting and actuarial testing of these arrangements being developed by the National Association of Insurance Commissioners (NAIC). On June 5, the NAIC's Life Actuarial Task Force (LATF) adopted Actuarial Guideline LV (Guideline or AG 55) titled "Application of the Valuation Manual for Testing the Adequacy of Reserves Related to Certain Life Reinsurance Treaties." The Guideline, if adopted by the NAIC, would impose new requirements on life reinsurance arrangements perceived by the NAIC to carry heightened risk of asset inadequacy.

As the Guideline explains,

The Guideline would be effective for asset adequacy analysis of the reserves reported in the December 31, 2025, annual statement and for the asset adequacy analysis of the reserves reported in all subsequent annual statements. It would apply to all life insurers with:

• Asset Intensive Reinsurance Transactions (as defined in the Guideline, generally to mean coinsurance arrangements involving life insurance products that transfer "significant, inherent investment risk including credit quality, reinvestment, or disintermediation risk") ceded to entities that are not required to submit a VM-30 memorandum to U.S. state regulators in transactions established January 1, 2016, or later that meet any of the criteria determined by counterparty in the four subbullets below:
  • In excess of $5 billion of reserve credit or modified coinsurance reserve.
  • Combined reserve credit and modified coinsurance reserve in excess of:
    • $1 billion and
    • 5% of ceding company Exhibit 5 gross life insurance plus Exhibit 5 gross annuity reserves plus Exhibit 7 reserves and separate account reserves to the extent such reserves are included in the combined reserve credit and modified coinsurance reserve.
  • Combined reserve credit and modified coinsurance reserve in excess of:
    • $500 million and
    • 10% of ceding company Exhibit 5 gross life insurance plus Exhibit 5 gross annuity reserves plus Exhibit 7 reserves and separate account reserves to the extent such reserves are included in the combined reserve credit and modified coinsurance reserve.
  • Combined reserve credit and modified coinsurance reserve in excess of:
    • $100 million and
    • 20% of ceding company Exhibit 5 gross life insurance plus Exhibit 5 gross annuity reserves plus Exhibit 7 reserves and separate account reserves to the extent such reserves are included in the combined reserve credit and modified coinsurance reserve.

OR

• Asset Intensive Reinsurance Transactions ceded to entities that are not required to submit a VM-30 memorandum to U.S. state regulators, regardless of transaction establishment date, that result in significant reinsurance collectability risk as determined according to the judgment of the ceding company's appointed actuary.

For transactions established January 1, 2016, through December 31, 2019, otherwise within the scope of the Guideline because of the first bullet above, consideration for exemption can be requested from the domiciliary regulator based on criteria set forth in the Guideline.

The documentation, sensitivity test results and attribution analysis referenced in the Guideline are to be incorporated as a "separate, easily identifiable section of the actuarial memorandum required by VM-30 or as a standalone document," with a due date of April 1 following the applicable valuation date. The domiciliary commissioner may approve a later due date for companies seeking a hardship extension. The separate section or stand-alone document must be available to other state insurance commissioners in which the company is licensed upon request to the company. The confidentiality and information provisions in state adoptions of NAIC's Standard Valuation Law are applicable to the separate section or stand-alone document required by the Guideline.

Required documentation to be provided, "as relevant," includes the following, as set out in more detail in the Guideline:

• Information on treaties.
  • Information from Schedule S of the Annual Statement such as type of reinsurance (e.g., coinsurance, ModCo, etc.), size metrics.
  • Pre-Reinsurance Reserve (as defined in the Guideline).
  • Post-Reinsurance Reserve (as defined in the Guideline), including any explanation of handling of cases, for example where the ceding company reserve may be based on book value and the assuming company reserve may be based on market value.
  • Alternative Run Starting Asset Amount.
    • "Starting Asset Amount" means the amount of assets inserted into the cash-flow testing model at the beginning of the projection.
    • "Alternative Run" means, at the option of the company, additional cash-flow testing projections that could be provided in association with the Guideline and would potentially be in line with the spirit and intent of the Guideline.
  • If applicable and significant to understanding risk and exposure: collateral description and availability of trust account funds to the cedant.
• Cash-flow testing assumption information.
  • Net asset yield assumptions.
  • Mortality assumption overview, as a percentage of a common industry table.
  • Lapse assumption overview, including where applicable, base and dynamic lapse rates impacting reinvestment risk in decreasing interest rate scenarios and disintermediation risk in rising interest rate scenarios.
  • Benefit utilization and other policyholder behavior assumption overview.
  • Overview of other key assumptions impacting reserve adequacy.
  • Description of margins in assumptions.
  • If significant to understanding risk and exposure:
    • Information on assets and related assumptions by asset type consistent with Actuarial Guideline 53 templates (if assets are significantly different than provided in the company's Actuarial Guideline 53 filing).
    • Mortality assumption details such as rates by age and duration and any improvement factors.
    • Lapse assumption details including rates by age and duration.
• Cash-flow testing results.
  • Present value of ending surplus for the level interest rate scenario and a range of other scenarios to capture key risks and cover moderately adverse scenarios.
  • Sensitivity test results.
  • Interim cash-flow testing negative results.
  • Narrative explanation including support for decisions to hold or not hold additional asset adequacy analysis reserves.
• Attribution analysis.
  • A step-by-step estimate of the proportion of Reserve Decrease (as defined in the Guideline) attributable to factors such as differences in individual key assumptions used in the Pre-Reinsurance Reserve versus Post-Reinsurance Reserve.
  • Present the results in a template (to be developed) or in a user-friendly format providing similar information as in the template.
• Risk identification.
  • Explanation of any non-Primary Security supporting the Post-Reinsurance Reserve.
  • Explanation of any concerns regarding reinsurance collectability.
  • Explanation of any risk mitigants if pursuing an exemption from cash-flow testing.
  • Any regulatory solvency ratio standards or related expectations mentioned in the reinsurance contract.
  • If performing other analysis, description of results as appropriate.

The Guideline is expected to be considered by the full Life Insurance and Annuities (A) Committee at a July 2025 virtual meeting.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.