NAIC Task Force Adopts Key Recommendation On Interest Maintenance Reserve

Life and health insurers in the U.S. should take note of a development from the National Association of Insurance Commissioners (NAIC) regarding their ability to reduce collateral requirements for ceded reinsurance under certain circumstances. At a virtual meeting on June 22, the NAIC’s Reinsurance Task Force (RTF) adopted a recommendation that derecognizing net negative Interest Maintenance Reserve (IMR) should not reduce such collateral requirements. RTF was responding to a request from another NAIC body, the Statutory Accounting Principles Working Group (SAPWG), for comments on this issue. This recommendation could impact life reinsurance activity in a changing interest rate environment.

By way of background, IMR is a reserve on the balance sheet of U.S. life insurance companies that defers recognition of the realized capital gains and losses resulting from changes in the general level of interest rates. These gains and losses must be amortized into investment income over the expected remaining life of the investments sold. IMR is required under Statement of Statutory Accounting Principles No. 7. Historically, even though IMR must be included as a statutory liability, a negative IMR was not allowed to be included on the balance sheet as an asset, but recent NAIC guidance has allowed for limited admittance of such amounts, not to exceed 10% of the current-period unadjusted capital and surplus.

When a U.S. ceding company derecognizes positive IMR in connection with reinsurance ceded to an unauthorized or certified reinsurer (generally, categories of reinsurers, typically offshore, that must post collateral to secure all or part of their reinsurance obligations), existing statutory accounting provides that this derecognition triggers an increase in the amount of required collateral that the reinsurer must post. However, statutory accounting at present does not provide for the opposite scenario — i.e., where net negative IMR is derecognized by the ceding company, does this decrease the amount of collateral required? Allowing such a decrease is referred to as “symmetrical” treatment of the IMR since it would mirror the increase that is required when positive IMR is derecognized. Not allowing such a decrease would be “asymmetrical.”

SAPWG is currently considering this matter and earlier this year referred it to RTF for its views. At its June 22 meeting, RTF decided in favor of the asymmetrical approach — i.e., that derecognizing net negative IMR should not reduce collateral requirements. As a basis for this conclusion, RTF cited the limitation on the admittance of net negative IMR to 10% of capital and surplus, noting that this is a highly technical accounting issue more suited for SAPWG. Interested parties from the life insurance industry have been advocating for a symmetrical approach. 

The next step on this issue will be further consideration by SAPWG.