OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best has released a new report exploring the impact of a new captive reserve financing framework for certain products subject to XXX and AXXX reserve requirements. Actuarial Guideline XLVIII (AG 48), which was adopted by the National Association of Insurance Commissioners (NAIC) in December 2014, defines the rules for new life XXX and AXXX reserve financing transactions executed after Jan. 1, 2015. For the most part, the rules do not apply to transactions executed before that date, and are not intended to apply to “conventional” reinsurance transactions involving XXX and AXXX reserves ceded to accredited reinsurers. However, such insurers still must meet specific criteria to avoid treatment under the new AG 48.
The Best Special Report titled, “New Reserve Financing Rules Unlikely To Eliminate XXX, AXXX Captives,” states that this new framework is effectively a “stopgap” measure intended to regulate captive financing structures until the long-awaited implementation of a principles-based reserving (PBR) framework, which very likely would significantly diminish the need for XXX and AXXX captive financing structures for new business issued after the implementation date. Consistent with that intent, the NAIC’s new XXX and AXXX reserves financing framework includes a sunset provision tied to the implementation of PBR. However, given the uncertain timeframe for adoption of PBR, AG 48 has the potential to be the regulatory standard for XXX and AXXX captives for some time.
Some observers have speculated that the changes currently being implemented by the NAIC will bring an abrupt end to XXX and/or AXXX financing transactions, but the stated goal of the NAIC’s Principle-Based Reserving Implementation Task Force, which oversees this initiative, is not to eliminate the use of such structures.
Rather, its intent is to provide greater transparency and alleviate concern related to certain perceived issues that have arisen with these transactions, such as the use of parental guarantees, letters of credit (LOC) and other LOC-like assets (e.g., credit-linked notes) rather than traditional admitted assets to back reserves.
For a copy of this special report, please visit: http://www3.ambest.com/bestweek/purchase.asp?record_code=233347
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