Actuarial Notes

Impacts of AG 48

By Keith Bucich, Francis Rahil and John Shaw · Society of Actuaries · 2015

Study guide: Exam CP-341

An article in the November 2015 issue (Issue 83) of Reinsurance News, the Society of Actuaries' Reinsurance Section newsletter. It gives an overview of Actuarial Guideline XLVIII (AG 48), effective as of January 1, 2015 for XXX and AXXX business ceded to a captive reinsurer, and an illustrative example of how AG 48 could impact asset requirements and related costs for companies that use captives to finance redundant XXX and AXXX reserves.

On the syllabus

Background

  • Due to perceived redundancies in statutory reserves for level premium term and universal life products with secondary guarantees, some companies have used a captive reinsurance financing structure, which lessens reserve strain.
  • Before AG 48 there was no uniform guidance for the calculation of the economic reserve and no requirements for the types of assets that had to be held to support it.

Actuarial Guideline 48

  • The NAIC Executive Committee and Plenary adopted AG 48 on Dec. 16, 2014, effective Jan. 1, 2015, to establish uniform standards for XXX or AXXX reserve financing transactions utilizing captives or special purpose vehicles.
  • AG 48 introduces the concepts of the Actuarial Method, Primary Security, the Required Level of Primary Security, and Other Security.
  • It applies to treaties entered into, or new business added to existing treaties, after Dec. 31, 2014, and is not limited to transactions involving a captive structure.

Table 1

Table 2

Other Considerations

  • AG 48 addresses the types and amounts of assets that need to be held as security under the reinsurance contract, on a funds withheld, trust, or modified coinsurance basis.
  • It requires the ceding company's appointed actuary to certify that Primary Security and Other Security funds are held in the required amounts.

Conclusion

Endnotes

Sources