The NAIC, through the Principle-based Reserving Implementation Task Force, implemented a new guideline in December 2014 (Actuarial Guideline 48 or AG 48) setting out uniform standards for U.S. Life XXX/AXXX reserves and reserve financing.
The impact of AG 48 is as follows:
- It establishes the approach (known as, VM-20) for calculating a level of reserves that covers the economic risk of XXX/AXXX life business.
- VM-20 includes the traditionally established economic reserve and some amount of excess over the economic reserve.
- It stipulates that the VM-20 reserve must be secured by high-quality securities (i.e., cash or securities listed by the SVO, defined as “Primary Security”).
- It stipulates that any reserve balances in excess of the VM-20 may be secured by lesser quality securities to be agreed with the regulator (defined as “Other Security”).
- It excludes the use of all bank letters of credit, credit-linked notes (e.g., Reinsurer Notes) or contingent notes as Primary Security, although the above may be acceptable as Other Security if approved by the state regulator on a transaction-by-transaction basis.
K-Notes have been approved by a number of US states as qualifying collateral for reserve credit for reinsurance transactions. It is expected that they will continue to be accepted on a case by case basis under AG48 as Other Security to finance excess Regulation XXX and AXXX reserves.
The Karson platform is also able to provide clients with Primary Security to finance their VM 20 excess reserves. Please call to inquire.
K-Notes can be used to support reserve credit for reinsurance for other lines of business outside of AG48.