The American Council of Life Insurance (ACLI) is asking the Federal Insurance Office (FIO) to do what it can to speed up modernization of state risk-transfer or reinsurance regulations.
In its letter, ACLI officials said modernization of the rules governing reinsurance “would give more tools to U.S. life insurers to manager their risks more effectively and efficiently.”
The ACLI comments were contained in an answer to the FIO’s request for industry input for a forthcoming study of the breadth and scope of the global reinsurance market and the critical role such markets play in supporting insurance in the United States.
The letter seeks to enlist the FIO to provide comments on reinsurance regulation in its upcoming report on proposals to modernize current oversight of the U.S. insurance system.
The letter said that the ACLI believes that “modernizing the current limitations on life insurers’ transfer … would support sound supervision of life insurers’ reinsurance programs while also allowing life insurers a wider range of options for managing their risks.”
The letter singles out state rules that make sale of level-term insurance and living benefit riders on variable annuities more costly for insurers in terms of the capital they must maintain against potential loss.
It said limitations on risk transfer created in 1992 and adopted by all states “are outdated.” It said that the American Academy of Actuaries recommended against incorporating them into the draft valuation manual used to implement the proposed “principles-based” reserve framework even as they were being adopted.
The letter also said the limitations are “out of step with international standards,” and are “unnecessary.”
“These limitations deny the ceding insurer any statutory reserve credit for the reinsurance unless the reinsurance contract indemnifies each risk in the underlying direct policy,” the letter said.
If it indemnifies fewer than all of the risks in the direct policy, the ceding insurer cannot recognize the value of that indemnification on its statutory financial statement.
The letter said that the National Association of Insurance Commissioners is looking into the issue as part of its Solvency Modernization initiative.
It also notes that life reinsurance regulation “has not changed dramatically since the 1990s,” and is “overdue for a review.”
The letter was signed by Carolyn Cobb, ACLI vice president and associate general counsel.
In arguing for a substantive revamping of the rules, ACLI officials argue that “the current system does not have the flexibility that a principles-based reserving system has in terms of the broad array of reinsurance agreements that can be accommodated.”
The letter says there are changes “that can be made” to the current system “that would greatly enhance insurers’ ability to properly manage risk.”
A system that allows a reinsurer to provide protection on the risks that insurers need to manage, while leaving behind those that are within the company’s risk tolerance, “would allow insurers to take all the risks they want and not give away profits unnecessarily,” the letter said.