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Offshore Reinsurers Back Many of Your Clients’ Life and Annuity Arrangements

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What You Need to Know

  • A Northwestern Mutual risk manager acknowledges that some of the offshore reinsurance deals are helpful.
  • He argues that the deals make the finances of an insurer harder to analyze and suggests the need to establish uniform solvency standards.
  • He says changing U.S. reserving rules beats insurers seeking easier rules offshore.

Northwestern Mutual thinks it’s strange to see U.S. life and annuity issuers making waves of offshore reinsurance deals that “free up capital.”

Andrew Vedder, vice president for enterprise risk management at Northwestern Mutual, told state insurance regulators about the company’s concerns earlier this month, in a comment letter.

“Life insurance should have strong, appropriately conservative reserve and capital requirements for the long‐term promises made to policyholders,” Vedder wrote in the letter. “Industry and regulatory credibility could be questioned if a transaction involving a block of business could meaningfully reduce the total reserve and capital requirements while the risks associated with that business remain substantively the same.”

Northwestern Mutual wants to see the regulators keep use of offshore reinsurance from affecting insurers’ solvency, Vedder said.

What It Means

State insurance regulators may face pressure to ease reserving rules or to add curbs on use of offshore reinsurance to keep life and annuity issuers from using deals with offshore reinsurers to get around U.S. standards.

The Macroprudential Working Group

Vedder sent the Northwestern Mutual letter to the Macroprudential Working Group at the National Association of Insurance Commissioners — a Kansas City, Missouri-based group for state insurance regulators.

The working group is supposed to help regulators reduce the risk that business trends, one company’s strategy or other factors will bring down the whole financial system.

The working group recently posted a note on what it’s thinking about the rise of private equity firm ownership of insurers.

Regulators suggested that they believe that weaknesses in overall regulations are more important than the nature of an insurer’s ownership structure.

Northwestern Mutual is a Milwaukee-based policyholder-owned insurer. Vedder recommended that one priority should be for regulators to establish uniform solvency standards throughout the United States.

“Companies should not have to establish complex and costly structures and rely on disparate solvency standards across jurisdictions to compete on a level playing field,” Vedder said, according to a copy of the letter included in an NAIC meeting materials packet.

He said promoting transparency should be another priority.

“Without transparency, market discipline fails and consumer confidence dwindles, increasing risks to policyholders, the industry, and the state‐based regulatory and guaranty systems,” Vedder wrote.

Vedder acknowledged that many reinsurance deals help insurers reallocate risk.

The regulators in charge of some offshore jurisdictions have argued that their jurisdictions have modern insurance solvency regulations and tough oversight.

But, if insurers use some offshore reinsurance deals to take advantage of lower capital standards and reduce outsiders’ ability to see what’s going on, that could undermine regulators’ efforts to close other solvency regulatory gaps, he said.

“If capital standards are deemed to be too conservative in the U.S., they should be addressed transparently and uniformly through the NAIC and not through the alternate means of offshore reinsurance,” Vedder added.

(Image: Adobe Stock)


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