NAIC proposal puts offshore reinsurance on the spotlight

NAIC proposal puts offshore reinsurance on the spotlight | Insurance Business New Zealand

Reinsurance

NAIC proposal puts offshore reinsurance on the spotlight

Risks could potentially be shifted to areas with lower standards, regulators argue

Reinsurance

By
Kenneth Araullo

US insurers may face increased scrutiny of their use of offshore reinsurance under a new proposal, as global regulators warn that the practice can obscure risks.

The proposal, set to be debated on July 25 at a meeting of the National Association of Insurance Commissioners (NAIC), would require US-based life insurers to conduct additional tests on reinsurance contracts with counterparties in countries such as Bermuda, Barbados, and the Cayman Islands.

According to a report from Risk.net, regulators are concerned that the growth in asset-intensive reinsurance is shifting risk to countries where reinsurers may hold reserves below US standards, potentially leading to a shortfall in recoverable assets if the foreign counterparty fails.

The NAIC is also concerned about regulatory arbitrage, the use of offshore reinsurance to take advantage of more relaxed capital and reserve requirements, said Daniel Rabinowitz, partner at law firm Kramer Levin. He added that offshore reinsurance is perceived as potentially detrimental to policyholders.

This move by the NAIC follows concerns from other regulators, including the UK’s Prudential Regulation Authority (PRA) and Germany’s Bafin, both of which have expressed worries that asset-intensive reinsurance obscures risk.

The US proposal would require insurers to conduct cash flow analysis for each reinsurance contract, testing the assets that back the contract against seven different interest rate shock scenarios. Insurers may need to set aside additional reserves if their agreements with reinsurance counterparties fail the test.

Fred Andersen, chief life actuary at the Minnesota Department of Commerce, which put forward the proposal alongside Iowa’s state regulator, said that much time is spent ensuring policyholder claims will still be paid even in adverse events using asset adequacy analysis and ensuring appropriate assumptions underlie these models.

The proposal has drawn a mixed reception from insurers, reinsurers, and regulators. Swiss Re, Reinsurance Group of America, and Hannover Re argued in a letter to the NAIC that the proposal is overly broad, would discourage reinsurance, and would contradict other elements of US insurance regulation.

The American Association of Actuaries also suggested modifications to the proposal that would exempt reinsurance contracts from testing if deemed immaterial and allow discretion over how to conduct testing for each insurer’s appointed actuary.

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