NAIC's AG 55 and VM-22 Rules Enhance Reserve Testing for Offshore Life Reinsurance

Life insurers and actuaries in the U.S. are preparing for new regulatory changes impacting the testing and disclosure of reserves related to offshore life reinsurance. The National Association of Insurance Commissioners (NAIC) has enacted Actuarial Guideline 55 (AG 55) to enhance reserve adequacy by requiring asset adequacy analysis to include a cash flow testing methodology specifically evaluating ceded offshore reinsurance as a critical part of asset-intensive business. This guideline affects reserves supporting 2025 financial statements and beyond and aims to better align reserves with the risk profiles of offshore-reinsured blocks, addressing prior inconsistencies with U.S. statutory rules. The regulatory focus on offshore life and annuity reserves is driven by their significant scale, which surpassed $1.1 trillion by the end of 2024, with Bermuda as the dominant hub accounting for over 60% of new cessions. This concentration highlights the need for enhanced supervisory scrutiny to ensure reserve and capital standards are consistent across jurisdictions. AG 55 mandates that ceding insurers disclose asset adequacy testing results for treaties in scope, allowing regulators to assess reserve sufficiency and determine if further investigation or action is warranted. The guideline emphasizes transparency in reserve adequacy practices, with testing outcomes potentially impacting additional reserve requirements depending on the risk profile and actuarial judgment applied. The current low interest rate environment influences guarantees embedded in life and annuity products, though asset managers have strategies to align asset yields with liabilities over time. In parallel, the NAIC is implementing Section 22 of its Valuation Manual (VM-22), introducing a principle-based reserving framework for nonvariable annuities effective January 1, 2026, with optional early adoption until 2029. This update covers immediate annuities, deferred income annuities, and structured settlements, revising statutory reserve approaches including interest rate considerations. VM-22 reflects a broader industry move towards principles-based reserving, integrating actuarial judgment, asset-liability modeling, and enhanced oversight. Early adopters of VM-22 are expected to be those anticipating reserve benefits, but all projections under the new framework must be based on prudent assumptions about investment returns and claims over the contract lifespan. Collectively, AG 55 and VM-22 represent significant regulatory shifts promoting more transparent, risk-sensitive, and principle-based reserve practices in the U.S. life insurance sector, especially in the context of large offshore reinsurance exposures.