On February 17, 2014, the NAIC Principle-Based Reserving Implementation (EX) Task Force opened for comment a report by Rector & Associates, Inc. (the “Rector Report”) regarding reserve financing transactions.  The Rector Report includes a recommendation of Rector & Associates, Inc. that the NAIC adopt a version of Principles-Based Reserving (“PBR”) while utilizing “Primary Assets” and “Other Assets” as dual means of backing total reserves.  Under the proposed approach, a cedent may take credit for reinsurance only if it retains “Primary Assets” equal to what a “VM-20 PBR calculation” would require.  “Other Assets,” or assets approved by regulators of both the cedent and reinsurer, would support any additional credit for reinsurance.

The Rector Report recognizes that the VM-20 PBR calculation may not provide enough relief for certain insurers to avoid utilizing financing arrangements, and therefore a modified PBR approach may give some insurers more relief while hopefully garnering support with regulators.

While the Rector Report anticipates further tweaking and comments from the public, it recommends that regulators act immediately in implementing a PBR approach, so that new credit requirements will apply to any financing structures created or amended as of July 1, 2014 and for XXX and AXXX businesses written as of January 1, 2015.

The adoption by the NAIC of PBR would increase the ability of certain insurers to adequately address their own unique reserve-funding challenges without (or with lessened) recourse to captive reserve financing structures.  More flexible reserving standards would particularly help those within the life insurance industry in addressing redundant XXX and AXXX reserve requirements.