NU Online News Service, Jan. 16, 2004, 4:43 p.m. EST – Regulations for level-premium term products and universal life products may be creating hidden credit risks.[@@]
A new report from Moody’s Investors Service, New York, says ceding companies and reinsurers that use bank letters of credit to secure reinsurance reserve credit on their balance sheets face significant short-term liquidity and repricing risks
Those risks could lead to credit problems, according to the report, which was prepared by Moody’s analyst Joel Levine.
The potential problem is that the amount of reserves allotted because of Regulation XXX and Actuarial Guideline AXXX becomes more significant after the policy is issued, sometimes 5 years or more later, Moody’s says.
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Regulation XXX, the Valuation of Life Insurance Policies model regulation, was developed so that regulators could make sure that companies properly reserved for level-premium products. Actuarial Guideline AXXX clarifies Regulation XXX as it applies to universal life policies with no-lapse guarantees.
The amount of collateral now in place for a level-premium product may become inadequate as reserve requirements increase, the report says.
If the need for collateral increases at a time when financing is more expensive or collateral is scarce, there could be “enormous pressure on the earnings and capital of ceding companies and their reinsurers,” the report says.
However, new funding structures are improving, Moody’s says, because funding agreements extend the current 1-year renewal risk that accompanies using a letter of credit. The new funding structures are also an improvement over reinsurance trusts because the cost of funding is locked into a specific, fixed term, Moody’s adds.