Key takeaways:

• Rector & Associates, Inc., a consultant to the NAIC’s Principle-Based Reserving Implementation Task Force, issued a report on the use of transactions designed to finance reserves associated with level premium term life insurance policies and universal life insurance policies with secondary guarantees, which are commonly referred to as XXX reserves and AXXX reserves, respectively.
• At the core of the Rector Report is a recommendation that a direct/ceding insurer should only be permitted to finance XXX and AXXX reserves if it holds “Primary Assets” on a funds withheld or reinsurance trust basis in an amount approximately equal to what applicable statutory reserves would be under PBR, with some modifications.
• The Rector Report recommends that a broader category of “Other Assets” be permitted to support the amount by which XXX or AXXX reserves exceed the reserving calculation under PBR.
• The Rector Report recommends that disclosures of reserve financing transactions should be made by ceding insurers to state insurance regulators and the public, via a supplemental reinsurance exhibit to the insurer’s annual statutory financial statement.
• We expect that the Rector Report’s recommendations will be key topics for discussion at the upcoming NAIC meeting to be held from March 29-April 1, 2014.