1. Life and Health Reinsurance Overview
Leslie Jones, ASA, MAAA
Sheldon Summers, FSA, MAAA

2. Life Reinsurance Types of life insurance reinsurance agreements
Risk transfer
Proposed changes to SSAP 61R
Principle-Based Reserves
Reserve Financing Model Regulation

3. Some Types of treaties Yearly Renewable Term Coinsurance
Coinsurance with funds withheld
Modified Coinsurance (Modco)
Combination Coinsurance and Modified Coinsurance (Co-Modco)
Stop-loss; catastrophe; assumption

4. Yearly Renewable Term (YRT)
Cession of only the mortality risk
Current/Maximum reinsurance rates
Current rates typically guaranteed for one year
Only subject to some risk transfer requirements per SSAP 61R

5. Coinsurance Risks shared proportionally
Reinsurer receives proportionate share of gross premiums and pays proportionate share of benefits
Renewal expense allowance
If existing block of business, reserve transfer
Initial ceding commission

6. Coinsurance
Example
70% of a block of universal life policies is reinsured
A universal life policy provides a $100,000 death benefit, a reserve of $4,000, and a cash surrender value of $3,000
Company pays Reinsurer 70% of the gross premiums it collects from policyholders
Reinsurer pays Company 70% of all claims (death, surrender)
Company takes reserve credit of $2,800
Reinsurer pays a renewal expense allowance

7. Coinsurance with funds withheld
Supporting assets typically in an amount less than the reserve credit are held by the Company
The Company reports a payable in the amount of the funds withheld
The Reinsurer reports a receivable
Settlement also involves a Funds Withheld adjustment

8. Modified Coinsurance
Difference from coinsurance is that reserves (and therefore supporting assets) are held by the ceding company
The reserves of $2,800 in the example for the portion ceded are held by the Company as Modco reserves
Settlement also involves a modified coinsurance reserve adjustment

9. Combination Coinsurance and Modified Coinsurance
Modco reserve is less than reserves for ceded business
Difference is reported as a reserve credit, similar to the treatment of coinsurance

10. Risk Transfer Important references Reason for reinsurance not relevant
Life and Health Reinsurance Agreements Model Regulation
SSAP 61R
Appendix A-791 of the APPM
Reason for reinsurance not relevant
All or Nothing deal

11. Life and Health Reinsurance Agreements Model Regulation
All significant risk must be transferred
“Step into the shoes”
“Follow the fortunes”
Surplus enhancement must be permanent
Timely settlements
Avoid language that allows Reinsurer to get out of the agreement

12. L & H Reinsurance Agreements Model Regulation
Subsection 3: Regulation excludes assumption reinsurance, YRT, stop loss, and catastrophe reinsurance
SSPA 61R: YRT is subject to certain provisions in the Regulation
Appendix A-791: Q&As
Subsection 4.A. – list of conditions that would prevent reinsurance credit (all or nothing)
SSAP 61R: deposit accounting

13. Accounting Rules – all significant risk transfer
Subsection 4.A.(6): All significant risk inherent in the reinsured business is not transferred
Risk table in regulation
Risk categories identified: morbidity, mortality, lapse, credit quality, reinvestment, and disintermediation
Subsection 4.A.(7)(a): Assets held by Company not segregated when an asset risk is significant

14. Accounting Rules – all significant risk transfer
Subsection 4.A.(11) – The treaty is entered into to provide significant surplus relief without transferring all significant risk

15. Is the treaty provision compliant?
A reinsurance agreement covering Long-Term care policies contains limits (caps) on the reinsurer’s exposure.

16. Is the treaty provision compliant?
A company has a block of whole life policies that allow policyholders to take out policy loans at 4% interest. This block is ceded to a reinsurer. The reinsurer does not participate in the policy loans.

17. Accounting Rules - permanent surplus relief
Subsection 4.A.(1): insufficient renewal expense allowances; based on expenses expected on effective date of treaty and no reserve set up for deficiency
Subsection 4.A.(2): Deprivation of ceding company surplus or assets at the reinsurer’s option or automatically upon the occurrence of some event
Subsection 4.A.(3): Reimbursement by the ceding company for negative experience of the reinsured business

18. Accounting Rules – related to permanent surplus relief
Subsection 4.A.(4): Scheduled treaty termination
Subsection 4.A.(5): Possible payment by the ceding company of amounts other than from income realized from the reinsured policies
Subsection 4.A.(10): The ceding company makes representations or warranties about future performance of the business being reinsured

19. Is the treaty provision compliant?
A reinsurance agreement allows the reinsurer to terminate the reinsurance agreement if 2 out of the 4 ratings agencies lower the ceding company’s rating by two notches or more. If this occurs, then upon termination the ceding company must reimburse the reinsurer for any past losses.

20. Is the treaty provision compliant?
A reinsurance agreement allows the ceding company to terminate the reinsurance agreement if 2 or more of the 4 ratings agencies lower the reinsurer’s rating by two notches or more. If this occurs, then upon termination the ceding company must reimburse the reinsurer for any past losses.

21. Is the treaty provision compliant?
A company cedes XXX business to a captive affiliate. The treaty states that financing fees paid to outside investors providing the financing are the responsibility of the ceding company.

22. Accounting Rules – timing
Subsection 4.A.(8): Settlements are made less frequently than quarterly or payments by Reinsurer are not made within 90 days of settlement

23. Accounting Rules – other
Subsection 4.A.(9): The ceding company is required to make representations or warranties that are not reasonably related to the business reinsured

24. Life and Health Reinsurance Agreements Model Regulation
Subsection 4.B: Commissioner discretion to recognize reinsurance credit
Not in Appendix A-791
Subsection 4.C.(2): Surplus relief, net of income taxes, is recognized as income as earnings emerge from the business reinsured

25. Revisions to SSAP 61R Background
Statutory Accounting Practices Working Group proposed revisions to SSAP 61R aimed at short-term health reinsurance agreements, over concern that there was no risk transfer or reserve credit exceeded the risk transferred.
Comments were received regarding concern over unintended consequences of proposed revisions.
Informal drafting groups, one life & health and one p&c, were formed to work on revisions.

26. Treatment of Reinsurance in PBR*
*PBR denotes Principle-Based Reserves as set forth in VM-20 for Life Products

27. General Considerations
Requirements in Section 8 of VM-20
Minimum VM-20 Reserve = max (NPR, *DR, *SR)1
Minimum reserves under VM-20 are net of reinsurance provided that the reinsurance agreement qualifies for credit for reinsurance under the NAIC’s AP&P manual.
If a reinsurance agreement does not meet the requirements for credit for reinsurance but treating the agreement as if it does qualify would result in a reduction in surplus, then the reserve is increased by the amount by which surplus is reduced.
Minimum reserve “net” of reinsurance is referred to as the “Post-Reinsurance-Ceded Minimum Reserve”
1NPR = Net Premium Reserve, DR* = Deterministic Reserve (DR) + Due & Deferred Premium Asset (DDPA); SR* = Stochastic Reserve (SR) + DDPA; DDPA is post- or pre-reinsurance-ceded

28. NPR - Credit for Reinsurance
Determine the credit to the net premium reserve (NPR) to reflect reinsurance in accordance with SSAP 61R:
Coinsurance – Credit is calculated using the same methodology and assumptions used in determining its NPR, but only for the percentage of the risk that was reinsured.
YRT - Credit is calculated using the assumptions used in determining the NPR, but for the net amount at risk.

29. Reflecting Reinsurance Cash Flows in the Deterministic Reserve (DR) and Stochastic Reserve (SR)
The company must include the effect of projected cash flows received from or paid to assuming companies under the terms of ceded reinsurance agreements in the cash flows used in calculating the DR and SR .
Assumptions and margins must be: appropriate for the company (i.e., the ceding and assuming companies are not required to use the same assumptions and margins for the reinsured policies); consistent with other assumptions used in calculating the DR or SR for the reinsured policies; and reflect the terms of the reinsurance agreements.
Assuming company must use assumptions that reflect the assuming company’s experience for the business segment to which the reinsured policies belong, and reflect the terms of the reinsurance agreement.

30. Reflecting Reinsurance Cash Flows in the Deterministic Reserve (DR) and Stochastic Reserve (SR)
The Company must assume that the counterparties to a reinsurance agreement are knowledgeable about the contingencies involved in the agreement and likely to exercise the terms of the agreement to their respective advantage, taking into account the context of the agreement in the entire economic relationship between the parties. Examples of items that must be considered include but are not limited to:
Usual and customary practice
Any limits placed upon either party’s ability to exercise contractual options
Ability of the direct-writing company to modify the terms of its policies
Actions that might be taken by a party if the counterparty is in financial difficulty
Actions that the assuming company has taken or is likely to take that could affect the expected cash flows of the reinsured business
Any option for the ceding company to recapture or the assuming company to terminate (may be scenario dependent)

31. Reflecting Reinsurance Cash Flows in the Deterministic Reserve (DR) and Stochastic Reserve (SR)
If some of the assets supporting the reserve are held by the counterparty or by another party, the Company must consider the effect of the portfolio performance on results to determine whether to model these assets for purposes of projecting cash flows.
If a ceding or assuming company has knowledge that the other party is financially impaired, the Company must establish a margin for the risk of default by the company.
In setting any required margins to reflect potential uncertainty regarding the receipt of cash flows from a counterparty, the company must take into account the ratings, RBC ratio or other available information related to the probability of the risk of default by the counterparty, as well as any security or other factor limiting the impact on cash flows.

32. Determination of a Pre-Reinsurance-Ceded Minimum Reserve
A pre-reinsurance-ceded reserve must be calculated using methods and assumptions consistent with those used in calculating the minimum reserve, but excluding the effect of ceded reinsurance.
If, when ceded reinsurance is excluded, a group of policies is not able to pass the exclusion tests, the DR or SR must be calculated in determining the pre-reinsurance-ceded minimum reserve, even if not required for the minimum reserve.
Assumptions must represent company experience in the absence of reinsurance—for example, assuming that the business was managed in a manner consistent with the manner that retained business is managed.
Where a reserve credit for reinsurance may be required, the credit for reinsurance ceded shall be the excess, if any, of the pre-reinsurance-ceded minimum reserve over the post-reinsurance-ceded minimum reserve.
The pre-reinsurance-ceded reserve and the post-reinsurance ceded reserve are disclosed in the VM-20 Supplement.

33. Prior Year Current Year
Prior Year
Current Year 1 2 3
SECTION A
SECTION B
SECTION C 4 5 6 7 8 9 10 11 12 13 14 15
Reported Reserve
Deferred Premium Asset
Net Premium Reserve
Deterministic Reserve
Stochastic Reserve
Number of Policies
Face Amount
1. Post-Reinsurance-Ceded Reserve
1.1. Term Life Insurance
XXX
1.2. Universal Life With Secondary Guarantee
1.3. Non-participating Whole Life
1.4. Participating Whole Life
1.5. Universal Life Without Secondary Guarantee
1.6. Variable Universal Life
1.7. Variable Life
1.8. Indexed Life
1.9. Aggregate Write-ins for Other Products
2. Total Post-Reinsurance-Ceded Reserve (Sum of Lines 1.1 through 1.9)
3. Pre-Reinsurance-Ceded Reserve
3.1. Term Life Insurance
3.2. Universal Life With Secondary Guarantee
3.3. Non-participating Whole Life
3.4. Participating Whole Life
3.5. Universal Life Without Secondary Guarantee
3.6. Variable Universal Life
3.7. Variable Life
3.8. Indexed Life
3.9. Aggregate Write-ins for Other Products
4. Total Pre-Reinsurance-Ceded Reserve (Sum of Lines 3.1 through 3.9)
5. Total Reserves Ceded (Line 4 minus Line 2)
DETAILS OF WRITE-INS
1.902.
1.903.
Summary of remaining write-ins for Line 1.9 from overflow page
1.999 Totals (Lines through plus 1.998) (Line 1.9 above).
3.902.
3.903.
Summary of remaining write-ins for Line 3.9 from overflow page
3.999 Totals (Lines through plus 3.998) (Line 3.9 above).

34. Relationship of AG48* and XXX/AXXX** Regulation to VM-20
Term and Universal Life Insurance Reserve Financing Model Regulation (“XXX/AXXX Regulation” or “Reserve Financing Model Regulation” )
Relationship of AG48* and XXX/AXXX** Regulation to VM-20
*AG48 denotes Actuarial Guideline 48
**XXX denotes reserves prescribed by Section 6 of the NAIC Valuation of Life Insurance Policies Model Regulation (Model 830). AXXX denotes Actuarial Guideline XXXVIII (AG38) – The Application of the Valuation of Life Insurance Policies Model Regulation.
XXX/AXXX Regulation denotes the NAIC Term and Universal Life Insurance Reserve Financing Model Regulation (Model 787)

35. NAIC Adopts “XXX”

36. NAIC Adopts “AXXX”

37. XXX/AXXX Reinsurance Framework
Adopted by NAIC Executive Committee in 2014 to address concerns with reserve financing transactions, primarily related to XXX/AXXX
Key Components:
Generally prospective
Addresses type of security that must be held to back required statutory reserves
Disclosure
Risk-based capital requirements

38. Actuarial Guideline 48 (AG48)
Aspects of the framework related to reserves were codified initially in AG48* in response to a charge to the Life Actuarial Task Force (LATF)
AG48 sets a minimum funding standard for XXX/AXXX business ceded to certain reinsurers
Reinsurers include captives & other reinsurers that are not otherwise exempt (AG48 §3)
Funds consisting of “Primary Security” in an amount at least equal to the “Required Level of Primary Security” (RLPS) must be held as security under the treaty on a funds-withheld, trust or modco basis.
Funds consisting of “Other Security” must be held for the “excess” reserves.
The “Required Level of Primary Security” (RLPS) is determined by an Actuarial Method based on VM-20 with modifications (AG48 §5.A)
*The original guideline was effective January 1, References in this presentation are to AG48 as amended in December 2016.

39. Required Level of Primary Security” (RLPS) is determined by an Actuarial Method based on VM-20 with modifications (i.e., “AG48”)
Funds consisting of “Other Security” must be held for the “excess” reserves (i.e., “Statutory” minus “AG48”)

40. Actuarial Guideline 48
Under AG48, a shortfall in Primary or Other Security results in a “qualified actuarial opinion,” unless remedied per AG48 §6.B
Primary security is a subset of traditionally admitted assets (generally cash or securities listed by the SVO (with exlusions), see AG48 §4.F).
Other security is any security acceptable to the commissioner.
Subject to exemptions, Covered Policies are life policies (other than Grandfathered Policies) with nonlevel gross premiums and/or guaranteed nonlevel benefits (Term) or flexible premium universal life with a material secondary guarantee (ULSG) period.
Grandfathered policies are Term/ULSG policies issued prior to January 1, 2015 & ceded under a treaty that would not have met exemption criteria.

41. XXX/AXXX Credit for Reinsurance Regulation
In December 2016, NAIC adopted a Term and Universal Life Insurance Reserve Financing Model Regulation that implements the captives framework.
State adoptions began in 2017.
Once the new regulation is adopted by a state, AG48 would, in general, sunset in that state.
Requirements in the Model Regulation differ in some ways from the original AG48. In December 2016, NAIC amended AG48 to make it generally consistent with these changes.

42. Risk Transfer Questions for Transactions subject to the Reserve Financing Model Regulation
Is it appropriate for a reinsurance agreement subject to the Reserve Financing Model Regulation to specify that assets categorized as “Other Security” cannot be touched until the Funds Withheld account is depleted of all assets?

43. Risk Transfer Questions for Transactions subject to the Reserve Financing Model Regulation
Is it appropriate for an asset categorized as “Other Security” to be a security with terms which must be renegotiated at a certain duration which is less than the duration of the liabilities (e.g., excess reserves for 20-year term policies funded with a 10-year note)?

44. Risk Transfer Questions for Transactions subject to the Reserve Financing Model Regulation
Is it appropriate for an asset categorized as “Other Security” to be a security issued in an initial amount which is not sufficient to fund the full peak excess reserves (e.g., current excess reserves are $100M, peak excess reserves are $300M and the excess reserves are funded with a $200M note)?

45. Risk Transfer Questions for Transactions subject to the Reserve Financing Model Regulation
Is it appropriate for an asset categorized as “Other Security” to be a security which requires that any draws on the security be reimbursed by the ceding company, the captive insurer or an affiliate of the ceding insurer (e.g., excess reserves are funded by a Letter of Credit (LOC) which requires any draws on the LOC to be reimbursed by one or more of the noted entities)?

46. Risk Transfer Questions for Transactions subject to the Reserve Financing Model Regulation
Is it appropriate for an asset categorized as “Other Security” to be a security which includes Events of Default that could lead to the face amount of the security being reduced to zero and or which may lead to the security being unavailable to be drawn?

47. Questions?