On April 24, 2024, the New York State Department of Financial Services (NYDFS) published Proposed Rule Making for the 13th Amendment to Insurance Regulation 17, 20 and 20-A (Proposed Amendment), which purports to implement the NAIC Term and Universal Life Insurance Reserve Financing Model Regulation #787 (Model Regulation). The Proposed Amendment also makes a “technical change” to the credit for reinsurance regulations, which has the effect of requiring any “qualified” reciprocal jurisdiction to share information and cooperate with the NYDFS. Public comments on the Proposed Amendment are due by June 24, 2024.
I. AG 48 and the Term and Universal Life Insurance Reserve Financing Model Regulation
If adopted, the Proposed Amendment will require collateral for term or universal life cessions with secondary guarantees to satisfy the requirements specified in NAIC Actuarial Guideline XL VIII (Actuarial Opinion and Memorandum Requirements for the Reinsurance of Policies Required to be Valued under Sections 6 and 7 of the NAIC Valuation of Life Insurance Policies Model Regulation #830) (AG 48) where (a) the reinsurance agreement is entered into on or after January 1, 2015, or (b) the reinsurance agreement was entered into prior to January 1, 2015, but cedes term and universal life insurance with secondary guarantees issued on or after January 1, 2015. Reinsurance credit taken on cessions that do not comply with AG 48 (and are not otherwise exempt from AG 48 requirements) cannot exceed the amount of funds held by or on behalf of the ceding insurer as security for the payment of obligations for such reinsurance.
As background, in 2015 the NAIC adopted AG 48 to set a consistent method for calculating the economic reserve and the level of “primary security” (i.e., higher quality assets) when held by captive reinsurers. Among other things, AG 48 requires cedents’ appointed actuaries to analyze certain reinsurance agreements to determine whether the required amount of high quality assets are being held to back the reserve, and whether the remainder of the reserve is sufficiently backed by other types of assets. If the agreement does not satisfy these requirements, regulators are permitted to require the actuary to issue a qualified actuarial opinion.
The NAIC subsequently adopted the Model Regulation as a new accreditation standard, effective as of January 1, 2023. (The Model Regulation is commonly referred to as the “XXX/AXXX Model Regulation.”) The Model Regulation was drafted to complete the 2014 XXX/AXXX Reinsurance Framework by implementing the concepts of AG 48 as a regulation. In particular, the Model Regulation seeks to establish uniform national standards governing reserve financing arrangements pertaining to term life and universal life insurance policies with secondary guarantees. Like AG 48, the Model Regulation also includes provisions to ensure that funds backing captive reinsurance transactions, which consist of primary security and other security, are held in the forms and amounts that are appropriate.
As of March 2024, 35 jurisdictions had adopted the Model Regulation and an additional 3 jurisdictions were in the process of adopting it. An additional 11 jurisdictions rely on AG 48 to establish compliance with the NAIC accreditation standard. Only Kansas and New York have taken no action with respect to the Model Regulation or AG 48.
II. Proposed Reciprocal Jurisdiction Amendment
The Proposed Amendment also makes a “technical change” to the lead-in paragraph of 11 NYCRR Section 125.4(h)(8)(ii). The current version of the 11 NYCRR Section 125.4(h)(8)(ii) has the effect of requiring any “qualified jurisdiction” for purposes of certified reinsurer status to share, on a confidential basis, information and cooperate with NYDFS in order to be eligible for certification as a qualified jurisdiction. The Proposed Amendment would extend the requirement to qualified jurisdictions for reciprocal jurisdiction status as well. Importantly, the proposed conditions for qualified reciprocal jurisdiction status only apply to NYDFS-approved jurisdictions (currently Bermuda, Japan and Switzerland); the criteria do not apply to jurisdictions that are subject to an in-force Covered Agreement (currently all European Union Member States and the United Kingdom) or NAIC accredited jurisdictions (currently each of the 50 states, the District of Columbia and the US Virgin Islands).
Although the technical change diverges from the language of the corresponding NAIC Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model Regulation #786 (Credit for Reinsurance Models), which only require information sharing and cooperation in the context of certified reinsurer status (see Credit for Reinsurance Model Law Section 2(E)(3) and Credit for Reinsurance Model Regulation Section 8(C)(2), respectively), the Proposed Amendment does not appear to be inconsistent with the corresponding sections of the of the Credit for Reinsurance Models. In addition, Section 9(B)(3)(d) of the Credit for Reinsurance Model Regulation requires qualified reciprocal jurisdictions to “provide written confirmation…that information regarding insurers [and affiliates] shall be provided to the commissioner in accordance with a memorandum of understanding or similar document between the commissioner and such qualified jurisdiction, including but not limited to the [International Association of Insurance Supervisors Multilateral Memorandum of Understanding on Cooperation and Information Exchange] or other multilateral memoranda of understanding coordinated by the NAIC.” 11 NYCRR 125.2(n)(3)(iv) contains similar language for purposes of obtaining to qualified reciprocal jurisdiction status in New York. Accordingly, the Proposed Amendment’s revision with respect to qualified reciprocal jurisdictions would appear to reinforce other existing requirements promulgated under the NAIC Credit for Reinsurance Models (and adopted by New York), rather than establish a new requirement or materially depart from the terms and intent of the Credit for Reinsurance Models.
