A.M. Best Briefing

NAIC Moves Closer to Implementing New Reserve Financing Framework

Pricing implications for level term and UL

OLDWICK, N.J., September 4, 2014—Stronger collateral requirements and greater transparency anticipated under the National Association of Insurance Commissioners’ (NAIC) new captive reserve financing framework would likely be viewed as credit positive for the industry, according to a
new briefing from A.M. Best.

The Best’s Briefing, titled, “NAIC Moves Closer to Implementing New Reserve Financing Framework,” states that the NAIC’s new framework could also carry pricing implications for level term and universal life products with secondary guarantees (ULSG) given the expected higher costs associated with
new financing restrictions. The NAIC appears poised to move ahead with this reserve financing framework, which may be in place for transactions occurring as early as Jan. 1, 2015, despite the objections of certain state regulators, most notably the New York Department of Financial Services

The framework is intended to apply only to transactions involving products subject to XXX and AXXX reserve requirements (i.e., level premium term and ULSG) and will be prospective in nature. As a result, it will not require modifications to existing financing transactions, and the framework will not apply to transactions designed to finance other products (e.g., variable annuities with guaranteed living benefits, long-term care).

One of the primary objectives of the new reserve financing framework is the establishment of securitization collateral requirements. The briefing also notes that the framework does not change the existing statutory reserve requirements of the ceding insurers under XXX and AXXX regulations.
Instead, it focuses on addressing the types of security that can back those reserves in connection with a reserve financing transaction.

To access the full, complimentary copy of this briefing, please visit here.

A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.