As reported in our Second Quarter 2014 Global Corporate Insurance & Regulatory Bulletin, the NAIC has made significant progress in addressing reserve financing issues, particularly those relating to the use of captive reinsurers for so-called AXXX and XXX reserve financing transactions. On August 17, 2014, the NAIC Executive Committee formally adopted the XXX/AXXX Reinsurance Framework for financing transactions relating to (1) reserves required for level premium term line insurance policies under Regulation XXX and (2) reserves required for universal life insurance policies with secondary guarantees under Regulation AXXX (the “Framework”) and charged the Principle-Based Reserving Implementation (EX) Task Force (the “PBRI Task Force”) with overseeing the implementation of the Framework. A detailed summary of the Framework and the implementation steps to be undertaken can be found in our prior Bulletin (referenced above). Since the formal adoption of the Framework by the NAIC, the following implementation steps have been taken:

  • At a conference call held on October 9, 2014, the PBRI Task Force exposed for comment an “Updated DRAFT Actuarial Guideline XLVIII: Actuarial Opinion and Memorandum Requirements for the Reinsurance of Policies Required to be Valued under Sections 6 and 7 of the NAIC Valuation of Life Insurance Policies Model Regulation (Model 830)” (“Draft AG 48”) dated October 7, 2014. Draft AG 48 is responsive to the PBRI Task Force’s charge to the Life Actuarial (A) Task Force to develop an actuarial guideline to provide interim guidance for the Actuarial Opinion Memorandum Regulation, specifying that the opining actuary must issue a qualified opinion as to the ceding insurer’s reserves if the ceding insurer or any insurer in its holding company system has engaged in a XXX/AXXX reserve financing transaction that does not adhere to the Actuarial Method and Forms of Primary Security adopted by the NAIC. Draft AG 48 includes options for alternative language on key points, including:

    • Options for the definition of “Primary Security” that vary in whether letters of credit are included in the definition and whether the general inclusion of securities listed by the NAIC Securities Valuation Office in the definition should have a carve-out for synthetic letters of credit, contingent notes, credit-linked notes and similar securities;
    • Options for defining those reinsurance contracts that would be “grandfathered;” and
    • An option for an additional exemption available through joint petition by the ceding insurer and its domestic regulator to the NAIC Financial Analysis Working Group (“FAWG”).

    Comments on Draft AG 48 were due on October 30, 2014. The PBRI Task Force plans to meet on November 6, 2014 to discuss Draft AG 48 and hopes to formally adopt a final version of Draft AG 48 in November.While the requirements for acceptable Forms of Primary Security and the Actuarial Method are ultimately intended to be codified in amendments to the NAIC Credit for Reinsurance Model Law and a new model regulation thereunder, the final version of Draft AG 48 is intended to be an interim measure to provide uniformity and implementation of the Framework’s key principles effective January 1, 2015, pending the lengthy process of finalizing those models and their adoption by the states (Draft AG 48 will sunset with respect to ceding insurers domiciled in a jurisdiction that adopts these models and has them in effect at January 1 of the calendar year preceding the year in which the actuarial opinion is to be filed), and it is expected that the approach taken in the final version of Draft AG 48 will be reflected in the new model regulation.
  • On September 19, 2014 the Blanks (E)Working Group, the Accounting Practices and Procedures (E) Task Force, and the Financial Condition (E) Committee adopted a Supplemental XXX/AXXX Reinsurance Exhibit for insurers to file as par of their statutory annual statements for the year ending December 31, 2014.
  • The Financial Analysis HandbookWorking Group is considering comments to proposed revisions to the Financial Analysis Handbook to address standards for Form D approval of captive reinsurance transactions, review of life insurer reinsurance transactions and group-wide supervision. That Working Group will hold a conference call on November 6, 2014 to discuss those topics.