Weighting the new life reinsurance recapture charge by the likelihood of recapture is "outside of the purview of the Working Group for the first directive," the NAIC's Life Risk-Based Capital (E) Working Group wrote in the packet for its October 6 call (NAIC, Oct. 6, 2026). With probability off the table, the size of the charge comes down to the collateral benchmark, where the six comment letters disagree most.
The charge comes from a July 27 referral by the Financial Condition (E) Committee, chaired by Wisconsin Commissioner Nathan Houdek, ordering a factor on ceded reserves and modified coinsurance balances "for all reinsurance located outside of reciprocal jurisdictions," in place for year-end 2027. Bridgeway Analytics, the NAIC's consultant, counts about $135 billion, roughly 4.7% of $2.85 trillion in life reserve credit and modco balances, in non-reciprocal jurisdictions (CIRCA letter citing Bridgeway, Aug. 13, 2026).
Key Takeaways
- 31 comment items, six letters: Northwestern Mutual, CIRCA, Everlake, Athene, ACLI and the American Academy of Actuaries responded, and the working group's grid ruled probability weighting, diversification credit and stress-test-only charging out of the first directive.
- 100 percent of the recapture strain: Everlake, which cedes to affiliated Cayman reinsurers, says that calibration "assumes recapture occurs with certainty," unlike C-1 bond factors, which sit below par because default is possible.
- Two benchmarks, both faulted: the Academy says a statutory-reserve test penalizes intentionally conservative XXX/AXXX blocks, and an AG 48-style PBR test "could end up requiring too little collateral exactly where the risk is highest."
- C-1, C-2 and C-3: Athene wants the factor calibrated to every risk that returns on recapture, with the statutory reserve as the floor and letters of credit, guarantees and excess-of-loss cover denied full credit as collateral.
- 18 months to adopt AG 55: plus about a year more for preliminary analysis, by the Academy's count, against a year-end 2027 target the Academy calls "aggressive."
What the Six Letters Ask and What the Working Group Ruled Out
The exposure posed two questions. Question 1 asked for a method: an additional factor on ceded reserves and modco balances reduced for overcollateralization, outright non-allowance of RBC reinsurance credit, or something else. Question 2 asked which assets offset the charge, comparing permitted assets either to the US statutory reserve credit or to "a PBR-type of calculation for ceded reserves," with AG 48 Primary Security and AG 55 non-Guideline Excluded Assets offered as definitions of permitted (NAIC, Oct. 6 packet).
The packet's Attachment 2 logs 31 comment items. Several asked that the factor vary with the probability of recapture, with counterparty diversification, or only where cash flow or stress testing finds material risk. The working group answered that the referral's wording, "the additional capital that would be required if a ceding company had to recapture those reserves," limits its scope, and that those factors may belong to the second directive, a P&C-style recoverability charge keyed to reinsurer ratings.
| Commenter | Method | Collateral benchmark and offsets |
|---|---|---|
| Everlake | Probability-weighted strain; model it like C-3 | Zero factor where collateral is funds withheld, modco or a cedent-controlled trust and the block is valued on US statutory basis; delay to year-end 2028 |
| CIRCA | Reflect recapture likelihood beyond the current C-1 factor | Charge only where cash flow or stress testing shows material risk; test before calibrating |
| Athene | Factor calibrated across C-1, C-2 and C-3 | Statutory reserve as floor; no credit for letters of credit, guarantees or excess of loss; look through retrocessions |
| Academy | Tiered factor, or a stress-based charge | Use the AG 55 asset shortfall; two-to-three-year phase-in |
| ACLI | Reflect counterparty diversification | Clarify reciprocal versus qualified jurisdiction treatment |
| Northwestern Mutual | Charge underlying economic risk rather than jurisdiction alone | Similar concerns arise in reciprocal jurisdictions and captives |
Source: NAIC Life RBC Working Group, Oct. 6, 2026 packet, Attachments 1A to 1F and 2.
Why the Collateral Benchmark Now Sets the Charge
A full-strain factor makes the charge on a treaty equal to the shortfall between permitted assets and whatever liability the benchmark says returns on recapture. Each option in Question 2 moves that liability. Under option (a), the yardstick is the statutory reserve credit. The Academy's Reinsurance Work Group calls that "too blunt": XXX and AXXX reserves are "intentionally conservative" by design, so a well-collateralized term or universal life block would be charged like the "handful of risky outliers" that prompted the referral (Academy, Oct. 6 packet).
Option (b) fails in the other direction, and the Academy uses the regulators' own memo against it. Houdek's July 27 memo says transactions with unauthorized reinsurers "tend to produce larger reductions in total asset requirements than comparable business ceded to Bermuda." A PBR-type benchmark built on AG 48 assumptions would accept those reduced requirements as the measure of what comes back, which is how the Academy concludes it could demand the least collateral on the treaties regulators worry about most.
The letters split along jurisdiction lines. Everlake, an Illinois company ceding to Cayman affiliates, and CIRCA, the Cayman reinsurers' association, ask for probability weighting and a path to a zero factor. Athene, whose letter says Bermuda cessions "should be treated accordingly" as reciprocal-jurisdiction business, wants the strictest version: the statutory reserve as floor, and no diversification credit because diversification "tends to fail precisely in the stressed conditions that produce a forced recapture."
For a funds-withheld or modco block, Everlake's zero-factor criteria and Athene's character test converge, since the assets already sit on the cedent's balance sheet. Where they diverge is coinsurance backed by a letter of credit or a parental guarantee, which Athene would not credit the way it credits high-quality admitted assets: "Nominal collateralization with instruments that would not survive a recapture is not collateralization at all."
Calibrating a Charge With No Recapture History
Ruling out probability spares the working group a frequency estimate it could not have made. The Academy writes that "there have been very few instances" of forced life and annuity recapture over several decades, and Everlake that "meaningful loss experience base for offshore life and annuity recapture does not exist," leaving "effectively no severity distribution, and no frequency data." A full-strain factor needs only severity, the asset shortfall at recapture.
The Academy's preferred source for that severity is the AG 55 asset shortfall, which insurers already report. Its own letter limits what that data can carry: AG 55's insights "focus on reserves, with capital implications being a secondary concern," and the guideline "explicitly does not analyze the total assets supporting a transaction." A charge based on the AG 55 shortfall would therefore measure reserve adequacy on a block whose recapture cost, by the Academy's account, also includes assets AG 55 does not examine.
Building that data took AG 55 18 months to adoption and another year to preliminary results. The referral wants the charge in the formula for year-end 2027.
Further Reading
- NAIC Aims Cross-Border Reinsurance RBC at a Charge That Nets to Zero – the referral itself and why life RBC's existing counterparty charge offsets to zero on these treaties.
- NAIC Drafts AG 55 Guidance That Recomputes RBC Without the Treaty – the year-end 2026 AG 55 reporting that would feed an AG 55-based charge.
- NAIC Flags an RBC Formula That Undercharges $150B in Loans – the Bridgeway gap list behind the $2.85 trillion reinsurance figure.
- Offshore Life Reserves Hit $1.3T, and 72% Stay Inside the Group – how much of the offshore book is affiliated, as Everlake's is.
- AG 55 Goes Live as NAIC Eyes More Offshore Life Reinsurance Controls – the cash-flow testing requirement the Academy wants to reuse.
Sources
- NAIC Life Risk-Based Capital (E) Working Group, Oct. 6, 2026 agenda and materials (E Committee memo of July 27, 2026; comment letters, Attachments 1A to 1F; discussion questions and comment grid, Attachment 2)
- American Academy of Actuaries Reinsurance Work Group, comments on the reinsurance recapture charge, September 2026