Issue: Over the past several years, the NAIC and state insurance regulators have been keenly focused on the life insurance industry’s use of captive insurance companies to finance reserves required under current regulations. These reserves are commonly referred to as “XXX reserves” for certain term life insurance policies and “AXXX reserves” for certain universal life insurance policies. In cases where reserves are viewed as excessive or redundant, life insurers have increasingly turned to captive reinsurers to finance the redundant statutory reserves on these products.
After several years of work, the NAIC and state insurance regulators recently made significant strides towards bringing more uniformity to captive reinsurance transactions. In December 2014,Actuarial Guideline XLVIII (AG 48) was adopted by the NAIC Executive (EX) Committee and Plenary, it was put into effect on January 1, 2015. AG 48 defines the rules for new life XXX and AXXX reserve financing transactions executed after the effective date and is a key item needed to implement theXXX/AXXX Reinsurance Framework (Framework) as adopted in 2014. The Framework sets forth an action plan specific to life insurance reserve financing transactions until principle-based reserving (PBR) requirements become fully effective. Once adopted and implemented, PBR is expected to eliminate the reserving incentive for these transactions.
Moreover, in its 2014 Annual Report, the Financial Stability Oversight Council (FSOC) identified variable annuity and long-term care captive transactions as areas of particular concern, in addition to XXX/AXXX transactions. In response, the NAIC Financial Regulation Standards and Accreditation (F) Committee recently adopted revisions to the Part A: Laws and Regulations Accreditation Preamble. The revisions are currently focused on captive reinsurance transactions for XXX/AXXX, variable annuity and long-term care business. In addition, the NAIC established the Variable Annuities Issues (E) Working Group to “study and address, as appropriate, regulatory issues resulting in variable annuity captive reinsurance transactions.”