Under VM-20 a cedant's reserve credit is one subtraction: the aggregate pre-reinsurance-ceded minimum reserve minus the aggregate post-reinsurance-ceded minimum reserve (NAIC Valuation Manual, VM-20 Section 8.D, 2026 edition). Collateral from an unauthorized reinsurer is set at that credit. An NAIC Life Actuarial (A) Task Force referral open for comment through October 19 would move it to the ceded block's standalone PBR reserve, a larger figure whenever aggregation has shrunk the credit.

Task Force chair Rachel Hemphill's referral to Statutory Accounting Principles (E) Working Group chair Kevin Clark states the gap in one sentence: "Because of the benefit of aggregation reflected in the pre-reinsurance reserve, the reserve credit may be less than a standalone PBR pre-reinsurance reserve for the ceded block" (NAIC LATF, September 2026). It was exposed after the Task Force's September 24 call for a 21-day period that originally closed October 14.

Key Takeaways

  • Two intents are put to SAPWG: collateral that funds the reinsurer's claims under moderately adverse conditions, or collateral that funds the full PBR reserve on recapture. The Task Force calls the first "the most likely intent" and recommends the standalone reserve only under that reading.
  • 45 against 50: in the Academy's 2018 three-block illustration, ceding half of a block whose modeled reserve sits below its net premium reserve yields an aggregate credit of 45 against a standalone reserve of 50, so today's rule collateralizes 90% of what the referral would require.
  • $135 billion of the $2.85 trillion in life reserve credit and modco balances, 4.7%, sits with reinsurers in non-reciprocal jurisdictions, the population that posts collateral at all (Bridgeway Analytics via CIRCA, September 2026).
  • Six components, (a) through (f), make up the paragraph 50 net liability. The redline changes only (a), so a treaty that cedes PBR and formulaic business together carries two collateral bases on one cession.
  • Zero collateral stays the rule for reciprocal-jurisdiction reinsurers, which need $250 million of capital and surplus and a ReFAWG passport; more than 90 held one by October 2024 (McDermott, October 2024).

What the Referral Puts to SAPWG

The referral credits Sheldon Summers of Claire Thinking with raising the concern during the Reinsurance (E) Task Force's discussions of collateral for unauthorized reinsurance. Those discussions produced the IMR rule SAPWG adopted at the Summer National Meeting: derecognized net positive IMR raises the collateral requirement, net negative IMR does not lower it (KPMG, September 2026). That asymmetry now sits in clause (a) of paragraph 50, and the redline leaves it untouched.

Hemphill's memo frames the collateral question as a choice of purpose. If the requirement exists "to ensure there are sufficient funds for the unauthorized reinsurer to cover claims under moderately adverse conditions," it recommends a standalone PBR pre-reinsurance reserve for the ceded block. If it exists to fund the cedant's full PBR reserve on recapture, it recommends no change. "It is the Task Force's understanding that #1 is the most likely intent of the requirement, and that the requirement is not intended to have a collateral level that is dependent on a recapture scenario to be appropriate" (NAIC LATF, September 2026).

Proposed paragraph 50 splits the requirement by valuation basis. Securities or cash would have to equal "the standalone pre-reinsurance reserve calculations for the portion of the business ceded that is valued under Principle-Based reserving and equal to the reserve credit taken for ceded business not valued under Principle-Based Reserving." Components (b) through (f), claim liability credits, other recoverables, less funds withheld under Appendix A-785, less clean letters of credit, less amounts due the reinsurer, are unchanged.

The exposure drafts page shows the deadline extended from October 14 to Monday, October 19 (NAIC, October 2026).

The Aggregation Arithmetic

VM-20 Section 8.D.1 defines the credit as "the pre-reinsurance-ceded minimum reserve, minus the minimum reserve (post-reinsurance-ceded)," and the 2026 edition adds a line older editions lacked: "This credit may be negative" (NAIC Valuation Manual, 2026). Both reserves are computed for the whole product group, so the diversification between blocks that cede nothing and the block that does is inside both figures, and it survives the subtraction.

The worked example that shows the result is Summers's own, co-authored with Arnold Dicke for the Academy Reinsurance Work Group's November 2018 presentation to LATF. Three blocks each carry a net premium reserve of 100; their modeled reserves are 90, 110 and 130, so the group reserve is the modeled total of 330. The company then cedes half of block A, the one whose modeled reserve runs below its NPR (American Academy of Actuaries, November 2018).

Item Block A Block B Block C Group
Net premium reserve, pre-reinsurance100100100300
Modeled reserve, pre-reinsurance90110130330
Net premium reserve after 50% coinsurance of A50100100250
Modeled reserve after 50% coinsurance of A45110130285
VM-20 credit: 330 − 28545
Standalone reserve on the ceded half of A: max(50, 45)50

Figures are the Academy's Example 2; the standalone row applies VM-20's NPR floor to the ceded piece on its own. There the ceded half of block A carries a modeled reserve of 45 and an NPR of 50, so the floor binds at 50. Inside the group, blocks B and C run 40 above their NPRs, which absorbs A's deficit, the floor never binds, and the credit is the modeled 45. The 5 the cedant keeps is diversification between its retained blocks and the one it ceded. Under current paragraph 50 the reinsurer's trust holds 45 against a block whose own cash flows need 50.

The 10% gap belongs to this example. A ceded block whose modeled reserve exceeds its NPR standalone produces none, and the Academy's first example, ceding half of block C, shows exactly that. The uplift lands on blocks the floor makes expensive standalone, in practice term business whose deterministic reserve sits under the net premium reserve. For a coinsurer of such a block the extra collateral is a financing cost that goes into the ceding commission.

On the capital side, the Life Risk-Based Capital (E) Working Group is weighing the same undershoot. Its exposure on the recapture charge offered "a PBR-type of calculation for ceded reserves" as a collateral benchmark. The Academy's Reinsurance Work Group warned in the October 6 packet that it "could end up requiring too little collateral exactly where the risk is highest" (American Academy of Actuaries, October 2026). LATF's referral is the reserve-side answer to the objection the Academy raised against the RBC benchmark.

Counterparty Status Decides Who Posts the Extra Collateral

Paragraph 50 governs unauthorized reinsurers only. A reinsurer domiciled in Bermuda, the EU, the UK, Japan or Switzerland with at least $250 million of capital and surplus can be approved as a reciprocal-jurisdiction reinsurer and post nothing. More than 90 had passported through the NAIC's Reinsurance Financial Analysis (E) Working Group by October 2024 (McDermott Will & Emery, October 2024). Certified reinsurers post the rated percentage Model 785 assigns them. The Reinsurance Task Force said of the IMR rule that collateral changes only affect "reinsurers that have not been vetted by the NAIC" (KPMG, September 2026).

Most of the offshore book sits in that vetted set. Fitch counts $1.3 trillion of reserves ceded offshore at year-end 2025, 72% affiliated and 85% in Bermuda (Reinsurance News, September 2026). Bridgeway Analytics puts the non-reciprocal share at about $135 billion, 4.7% of $2.85 trillion in life reserve credit and modco balances, the figure CIRCA cited in its September 23 letter to the Life RBC Working Group. Cayman reinsurers are the core of that population, and Cayman applied for qualified-jurisdiction status in 2026 (Royal Gazette, April 2026).

Commissioner Nathan Houdek's July 27 memo for the Financial Condition (E) Committee describes who cedes there: business ceded to unauthorized reinsurers "generally comes from newer, relatively small annuity writers offering aggressive crediting rates" (NAIC Financial Condition (E) Committee, July 2026). Annuities fall under VM-22, in force since January 1, 2026 with a parallel regime through 2029, per the site's VM-22 coverage. Each annuity block that transitions while ceded to a Cayman counterparty moves from reserve-credit collateral to standalone collateral. SAPWG's summer discussion of that transition "acknowledged that impact to reinsurance will need to be considered, specifically, effect on collateral" (KPMG, September 2026).

Cost depends on the collateral's form. A funds-withheld or modco balance already sits on the cedant's balance sheet, so a higher requirement is a larger withheld balance. Coinsurance secured by a trust or letter of credit has to be funded at the reinsurer's cost of capital or the bank's fee. AG 55's year-end 2026 templates already report the ceded liabilities' standalone statutory reserve as line (4), the number regulators would check paragraph 50 against.

VM-20 does not produce the number the referral names. Section 8.D defines the pre-reinsurance reserve and the credit at the product-group level and says nothing about a reserve for a ceded block on its own. The 2018 Academy deck listed the "standalone impact of a treaty" as one of several allocation bases and asked the Task Force to choose; eight years on, no choice has been made. Paragraph 50 would require, from every cedant with an unauthorized counterparty, a reserve the Valuation Manual has yet to define, and only from the counterparties the NAIC has not vetted.

Further Reading

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