NAIC Panel Approval May Pave Way Towards Elimination of Variable Annuity Captives

A panel of the National Association of Insurance Commissioners (“NAIC”) recently approved a preliminary framework that may pave the way towards eliminating variable annuities captive reinsurance transactions. The framework, which changes parts of the capital and reserve framework that creates incentives to use such captives, is scheduled to be discussed on an NAIC Committee call early next month. An NAIC working group report regarding the framework declared that working group members support the plan, as it is seen as a means to further strengthen risk management among insurers, and “[r]emove the need to reinsure variable annuity business to captive insurers.” However, some industry insiders, including government affairs and actuarial executives, have publicly expressed concern that the framework, as it stands now, may not go far enough.

Variable annuity captives became prominent as a result of interplay between the C3 Phase II standards for capital changes adopted by the NAIC in 2006 and Actuarial Guideline 43, which was adopted in 2009. The issue of managing captive insurers that are reinsuring variable annuities was partially addressed in a framework previously approved by the NAIC’s Financial Regulation Standards and Accreditation Committee. That framework also addressed XXX/AXXX reserves, along with long-term care products.