Asset Adequacy Testing for Reinsurance

During the Summer 2025 National Meeting of the US National Association of Insurance Commissioners (NAIC) in Minneapolis, Minnesota, the NAIC adopted the Actuarial Guideline LV: Application of the Valuation Manual for Testing the Adequacy of Reserves Related to Certain Life Reinsurance Treaties (“AG 55”). This Legal Update reports on AG 55, which requires asset adequacy testing (“AAT”) in connection with certain asset-intensive reinsurance transactions entered into by life and annuity insurers.

Following a vote to adopt AG 55 by the Life Actuarial (A) Task Force (“LATF”) June 5, and by the Life Insurance and Annuities (A) Committee on July 14, the NAIC’s Executive (EX) Committee and Plenary voted to adopt AG 55 on August 13. US insurers subject to AG 55 (as discussed further below) are expected to annually report the results of their AAT to their domestic state insurance regulator with the first reports due April 1, 2026. As a reminder, AG 55 has initially been adopted as “disclosure-only” reporting. Following receipt of the first round of reports, LATF expects to reassess AG 55 to determine whether any changes need to be made with respect to the data being collected as well as whether any requirements beyond disclosure with respect to asset-intensive reinsurance transactions entered into by life and annuity insurers should be incorporated.

Background

As previously reported, US state insurance regulators have been closely examining the use of asset-intensive reinsurance by life and annuity insurers (particularly business ceded to offshore reinsurers), especially cases where reserves may potentially be held at a lower level than would be required under US statutory standards and where the assets held to support such reserves may be potentially inadequate. AG 55 was developed by LATF in response to these concerns. In doing so, LATF kept the following goals in mind:

• Provide US state insurance regulators the information they need to verify reserve adequacy of US life insurers;
• Take into account the Covered Agreements¹ and the NAIC’s framework for recognizing “Reciprocal Jurisdictions;” and
• Avoid imposing unnecessary reporting demands on insurers or reinsurers when risk is immaterial.

Under AG 55, US insurers will be required to conduct AAT using a cash-flow testing (“CFT”) methodology for certain asset-intensive reinsurance transactions and to conduct an “Attribution Analysis,” which is a “step-by-step estimate of the proportion of reserve decrease from the pre-reinsurance US statutory reserve to Post-reinsurance Reserve attributable to factors such as differences in individual key assumptions.”

While much of the discussion during development of AG 55 focused on affiliate reinsurance, some third-party reinsurance transactions also fall within the scope of the guideline, including third-party arrangements where the business ceded comprises a significant portion of the assuming reinsurer’s balance sheet, or where the ceding company or an affiliate owns 1% or more of the reinsurer (see below for further details).

In-Scope Transactions

AG 55 applies to all life insurers with the following types of Asset Intensive Reinsurance Transactions (which are defined as “[c]oinsurance arrangements involving life insurance products that transfer significant, inherent investment risk including credit quality, reinvestment, or disintermediation risk as determined by Appendix A-791 of the Life and Health Reinsurance Agreements Model Regulation”):

(1) Asset Intensive Reinsurance Transactions established January 1, 2016 or later that meet any of the below conditions:

i.  A transaction in excess of $5 billion of reserve credit or modified coinsurance credit;

ii. A transaction with combined reserve credit and modified coinsurance reserve in excess of: (a) $1 billion and (b) 5% of the ceding company’s Exhibit 5 gross life insurance plus Exhibit 5 gross annuity reserves plus Exhibit 7reserves and separate account reserves, to the extent such reserves are included in the combined reserve credit and modified coinsurance reserve;

iii. A transaction with combined reserve credit and modified coinsurance reserve in excess of (a) $500 million and (b) 10% of the ceding company’s 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

iv. A transaction with combined reserve credit and modified coinsurance reserve in excess of: (a) $100 million and (b) 20% of the ceding company’s 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.

(2) Asset Intensive Reinsurance Transactions irrespective of when such transactions were entered into that result in significant reinsurance collectability risk as determined according to the ceding company’s appointed actuary.

Asset Intensive Reinsurance Transactions ceded to entities that are required to submit a VM-30 memorandum to US state regulators are outside the scope of AG 55 because the VM-30 memorandum already includes information on such entities’ AAT. Also, under AG 55, an actuarial memorandum that is not a VM-30 submission which contains certain key elements, including, among other things, clear-asset descriptions, methodology, assumption documentation (a “Similar Memorandum”) may be submitted as appropriate alternative CFT documentation, provided it is easily readable for review of the risk and analysis related to the scope and the ceding company’s domestic regulator finds that it is able to determine asset adequacy under moderately adverse conditions. There is still uncertainty as to how domestic regulators will determine what constitutes a Similar Memorandum.

For transactions established January 1, 2016 through December 31, 2019 that are in-scope based on the requirements described above, life insurers can request from their domestic regulators a waiver from having to conduct CFT on such transactions, provided the transactions meet certain conditions. An exemption from testing can be provided if the following criteria are met:

(1) The assuming reinsurer is:

i. An entity that does not meet the NAIC’s Insurance Holding Company System Regulatory Act (Model #440) definition of an “Affiliate”² or the NAIC classification as a “related party” or has at any point on or after January 1, 2015 met these criteria;

ii. An entity for which 25% or less of the assuming reinsurer’s reserves have been assumed from the ceding company or entities in the same group as the ceding company; or

iii. An entity where the ceding company or other entity in the ceding company’s group has less than 1% ownership of the assuming reinsurer.

(2) Relevant risks, taking into account risk mitigants, as described in Section 4 of AG 55 have been demonstrated to be non-substantial, such that the domestic regulator can reasonably conclude that CFT, if performed, would not result in any unmitigated cash flow deficiencies.

Even if a waiver from CFT is granted, the domestic regulator must be provided with Attribution Analysis of any reserve decrease unless supporting analysis is provided to the domestic regulator that allows the regulator to conclude that each of the relevant risks, as described in Section 4 of AG 55, is immaterial, along with explanatory commentary supporting this conclusion.

In addition, for transactions established January 1, 2016 through December 31, 2019 that would otherwise be in-scope, life insurers can request from their domestic regulators a waiver from having to conduct CFT on such transactions if insurance policies included in those transactions are primarily comprised of older business (i.e., business issued earlier than 2010).

Disclosure-Only Approach and Reporting

As noted above, AG 55 will initially be implemented on a “disclosure-only” basis, with a focus on collection of AAT results rather than the establishment of a framework around what should happen in response to the AAT results (e.g., imposition of additional reserve requirements). This approach is intended to provide regulators additional insight into and data on assets and reserves supporting ceded reserves in asset-intensive transactions. Domestic regulators retain the discretion to take further action with respect to their domestic companies based on the results of the AAT. However, LATF expects to reassess the requirements of AG 55 and consider whether any adjustments may be necessary following receipt of the first year of data, potentially including the addition of requirements that go beyond disclosure.

Preparing for Reporting

As noted above, the first reports arising out of AG 55 are due April 1, 2026, although insurers seeking a hardship extension may submit their reports at a later date, subject to approval from their domestic regulator.

A template for data reporting is currently being considered by LATF. Depending on when the template is finalized, it remains an open question whether use of the reporting template will be encouraged or required.

Given the April 1, 2026 deadline, it will be critical for US-domiciled life and annuity insurers that have reinsurance transactions with reinsurers that do not file a VM-30 memorandum to assess the scope of transactions subject to AG 55 and begin to gather data to conduct AAT and to assess whether to seek exemption from their domestic regulators for transactions that qualify for an exemption.

For our prior coverage of the development of the AAT Guideline, see:

US NAIC Spring 2025 National Meeting Highlights: Life Actuarial (A) Task Force – Asset Adequacy Testing for Reinsurance | Insights | Mayer Brown
US NAIC Fall 2024 National Meeting Highlights: Life Actuarial (A) Task Force – Asset Adequacy Testing for Reinsurance
US NAIC Summer 2024 National Meeting Highlights: Life Actuarial (A) Task Force
US NAIC Spring 2024 National Meeting Highlights: Life Actuarial (A) Task Force

¹ That is, the agreements formally titled “Bilateral Agreement Between the United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance” and “Bilateral Agreement Between the United States of America and the United Kingdom on Prudential Measures Regarding Insurance and Reinsurance.”

² The Model Act defines “Affiliate” as “a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified.” The term “control” (including the terms “controlling,” “controlled by” and “under common control with”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract other than a commercial contract for goods or nonmanagement services, or otherwise, unless the power is the result of an official position with or corporate office held by the person. Control shall be presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, ten percent (10%) or more of the voting securities of any other person.…” Sections 1.A. and 1.C. of Insurance Holding Company System Regulatory Act (Model #440).