The National Association of Insurance Commissioners (NAIC) Statutory Accounting Principles Working Group (SAPWG) has adopted updates that reshape the statutory accounting treatment of combination treaties mixing coinsurance and yearly renewable term (YRT), commonly referred to as co-YRT arrangements. In these structures, the coinsurance and YRT components are interdependent through shared experience refunds or provisions that prevent one component from being terminated without the other and are therefore treated as a single, combined arrangement for statutory purposes. These revisions, identified in the SAPWG agenda as Reference No. 2024-05 (Ref #2024-05)[1] and Reference No. 2024-06 (Ref #2024-06)[2] , clarify statutory expectations and eliminate inconsistent interpretations of existing guidance. While Ref #2024-05 is fully adopted and effective, Ref #2024-06 remains pending approval by the Financial Condition Committee (FCC) and has not yet been formally adopted.
Historically, co-YRT structures were widely used to achieve both risk management and capital efficiency because they allowed insurers to cede a large block of reserves through coinsurance while using YRT overlays to limit the reinsurer’s long term exposure. This design reduced required capital and improved surplus without fully giving up economic control, making it attractive for companies managing RBC and dividend capacity. Existing guidance in Appendix A-791 of the NAIC Accounting Practices and Procedures Manual[3] and in Statement of Statutory Accounting Principles (SSAP) No. 61R[4] created variations in practice, particularly in how YRT premiums were assessed and whether treaty elements could be tested separately for risk transfer. Some companies interpreted Appendix A-791 as endorsing Commissioners Standard Ordinary (CSO) mortality tables as a safe harbor for YRT pricing. Regulators clarified that these interpretations may not fully align with the principle that reserve credit should reflect substantive risk transfer rather than form.
The revisions establish that: 1) coinsurance and YRT components within the same treaty must be tested in aggregate, 2) split testing is no longer permissible, 3) treaties whose reinsurer exposure exists only in tail-loss scenarios will be treated as non-proportional, and 4) YRT premiums must be evaluated for substantive reasonableness rather than simply by reference to statutory mortality tables or safe harbors.
While the FCC exposure draft has not yet been adopted, it provides further clarification on the implementation framework and transitional relief, including the treatment as a change in accounting principle and limited exemptions for previously approved agreements.
These changes carry material implications for financial statements, reserve credit and capital planning. They represent more than a technical clarification and fundamentally reshape how insurers must structure and evaluate reinsurance.
Reinsurance is central to the financial management of life and annuity insurers, allowing companies to transfer risk and optimize capital resources. Over the past decade, many insurers have adopted co-YRT structures, in which a coinsurance treaty is paired with a YRT overlay. These designs often included features such as experience refunds or recapture clauses, intended to balance statutory risk transfer with capital relief.
The statutory foundation for life and annuity reinsurance accounting lies in SSAP No. 61R, supported by interpretive guidance in Appendix A-791. Together, they establish criteria for when a reinsurance contract qualifies for reserve credit and when it must be reported using deposit accounting. Both emphasize that sufficient insurance risk must be transferred before reserve credit can be recognized. This principle underpins the distinction between proportional and non-proportional reinsurance. In proportional arrangements, such as coinsurance, the reinsurer assumes a fixed share of premiums and claims, keeping risk and reward aligned at the policy level. In contrast, non-proportional arrangements, such as stop-loss, provide protection only when aggregate losses exceed a threshold, concentrating the reinsurer’s exposure in adverse scenarios. This distinction is critical because it governs how risk transfer is assessed and whether reserve credit is permitted.
Historically, however, two practices created interpretive gaps. First, some companies deemed YRT premiums reasonable by reference to CSO mortality, effectively using the table as a pricing safe harbor. Second, some applied bifurcated analysis to co-YRT treaties, testing coinsurance and YRT components separately. This approach ignored interdependent features such as combined experience refunds or recapture rights that linked the performance of one component to the other. As a result, some insurers recognized proportional reserve credit on the coinsurance portion even when, in aggregate, the reinsurer’s loss exposure existed only in tail scenarios. The Valuation Analysis Working Group (VAWG) observed that such practices overstated reserve credit, as these treaties functionally operated as non-proportional reinsurance, which require best-estimate assumptions to reflect the risk the reinsurer is genuinely expected to bear.
In response, SAPWG issued two key revisions. Ref #2024-05 deletes language in A-791 paragraph 2.c’s Q&A that has been misinterpreted as providing a CSO-based safe harbor. This change applies retroactively to contracts in force as of January 1, 2021. Ref #2024-06 clarifies that for treaties combining coinsurance and YRT components, risk transfer must be evaluated in aggregate whenever the features are interdependent; for example, when they share a combined experience refund or when contractual provisions prevent independent recapture or termination of one component without affecting the other. Such linkage can occur through shared profit and loss mechanics, offsetting settlement terms, or recapture rights that apply only at the combined contract level. The treaty, viewed in its entirety, must also avoid conditions prohibited by Appendix A 791, including provisions that could deplete surplus, require payments unrelated to the income from reinsured policies, or otherwise limit genuine risk transfer. This eliminates the prior practice of split testing and mandates non-proportional treatment with best-estimate assumptions where reinsurer exposure exists only in adverse conditions. The requirement applies immediately to new and newly amended contracts, with transition relief for existing treaties through December 31, 2026.
While SAPWG has adopted Ref #2024-06, it remains pending approval by the FCC. The FCC exposure draft specifies that the revisions will be treated as a change in accounting principle under SSAP No. 3, effective for new and amended contracts immediately upon adoption, with transitional dates extending through December 31, 2026, or December 31, 2028 for treaties submitted but not yet acted upon by the domiciliary regulator. Agreements already approved or not disapproved before the effective date would be exempt from reassessment. In addition, cash-flow testing (CFT) or a standalone asset adequacy test (AAT) may be used to assess risk transfer by demonstrating that a treaty does not deprive the ceding insurer of surplus.
The revised guidance redefines how insurers must account for co-YRT treaties. A treaty will fail to qualify for reinsurance accounting if it does not demonstrate sufficient risk transfer when evaluated in aggregate (rather than through separate, or bifurcated, testing of the coinsurance and YRT components), including situations where contractual provisions such as combined experience refunds or recapture rights link the performance of one component to the other. This may occur, for example, if coinsurance and YRT components offset each other, if YRT premiums are not reasonable relative to direct premiums, or if reinsurer exposure is limited only to extreme tail-loss scenarios. When risk transfer is deemed insufficient, the treaty no longer qualifies for reinsurance accounting and must instead be reported using deposit accounting. Under reinsurance accounting, when risk transfer is demonstrated, a portion of policy reserves is ceded to the reinsurer and offset on the ceding company’s balance sheet, producing immediate surplus relief. Under deposit accounting, by contrast, the arrangement is treated as if no risk has been transferred: gross reserves remain fully on the insurer’s balance sheet, while funds held by or due from the reinsurer are recorded only as deposits or admitted assets. Since these deposits do not offset reserves, reported reserves are higher, statutory surplus is lower and net income declines.
Interdependent treaty features must be evaluated in aggregate. Co-YRT structures with risk exposure limited to tail-loss scenarios are likely to be treated as non-proportional, meaning reserve credit is recognized only once losses reach the point where the reinsurer begins to assume liability. Where experience refunds operate on a combined basis (rather than separately for coinsurance and YRT), the reinsurer’s exposure can be neutralized by offsetting gains and losses across components, making aggregate testing essential to confirm genuine risk transfer. Similarly, recapture or termination rights that apply only at the combined contract level further reinforce the need for aggregate evaluation. Any prospective credit must be calculated on a best-estimate basis, reflecting the present value of expected recoveries minus guaranteed premiums, so that insurers take credit only for the portion of risk the reinsurer genuinely bears.
While SAPWG initially framed these revisions as a clarification, the FCC draft now confirms that the revisions would apply prospectively and reinsurance agreements already approved or not disapproved by domiciliary regulators before the effective date would be exempt from re-evaluation.
Companies may use CFT to assess risk transfer by demonstrating that a treaty does not deprive the ceding company of surplus. In these cases, assumptions and projections applied in CFT should be consistent with those used for statutory financial reporting, as any misalignment could weaken the credibility of results. However, even if CFT outcomes indicate surplus adequacy, it remains uncertain whether the ceding company would qualify for full reserve credit or whether such arrangements would instead be treated as non-proportional reinsurance when the reinsurer’s exposure is limited primarily to adverse scenarios.Under the revised framework, ceding companies may no longer recognize proportional reserve credit on the coinsurance portion in cases where the reinsurer’s exposure is limited to adverse or tail-loss scenarios. For reinsurers, this could result in blended co-YRT contracts may be treated as stop-loss arrangements, with liability concentrated in adverse mortality blocks. Additionally, cedents must carefully review YRT premium levels to ensure they are reasonable relative to their direct premiums and statutory valuation basis. Reliance on CSO tables or simply staying at or below statutory net premiums is no longer sufficient. Premiums that are excessive, or treaty features that could allow payments from surplus or negative surplus exposure, may result in disqualification for reserve credit, consistent with Appendix A 791’s restrictions on provisions that undermine risk transfer. Proactive review and potential renegotiation of YRT provisions are essential to preserve accounting benefits.
These changes have direct capital implications. Higher reported reserves increase risk-based capital (RBC) charges, while mortality risk that previously qualified as ceded remains on the insurer’s books, raising C-2 capital requirements. Insurers operating near regulatory action levels may face dividend restrictions, capital strain, or limits on growth. Delay in addressing these issues reduces flexibility.
From a reporting perspective, Schedule S will need to reflect reduced reserve credits and separately disclose deposit arrangements. Expanded note disclosures will be expected to explain classifications and document aggregate testing, including actuarial projections of combined cash flows and evidence that prohibited features are absent.
The definition of “newly amended” contracts under Ref #2024-06 remains somewhat ambiguous, creating uncertainty around when existing treaties trigger immediate application of aggregate evaluation. While these impacts may present near-term challenges, the revisions better align statutory accounting with generally accepted accounting principles and International Financial Reporting Standards, where aggregate evaluation is already standard practice.
Immediate action is critical. Companies must coordinate across actuarial, legal, accounting, and technology functions. The first step is a full inventory of co-YRT treaties, flagging interdependent features such as experience refunds, shared recapture triggers or cross-defaults. Actuarial teams must model aggregate cash flows across coinsurance, YRT and refund provisions under both proportional and non-proportional scenarios to determine reserve credit eligibility as well as document whether treaty components are separable. If not, aggregate testing and non-proportional treatment apply.
Robust documentation of risk transfer assessments is essential, especially for older treaties. Insurers should determine whether prior accounting may have overstated reserve credit and assess implications for current statutory reporting and potential audit review. Documentation should clearly demonstrate assumptions, methodology and oversight used to substantiate risk transfer and credit taken.
Legal review of treaty language will be necessary to identify provisions that could cause a treaty to fail aggregate testing. Amendments or restructuring may be needed, particularly in cases where YRT premiums exceed proportional direct premiums or where refund provisions are tied to overall treaty results. Early engagement with reinsurers is critical, as renegotiations can be complex, and recapture or unwind provisions may accelerate adjustments.
System enhancements may be required to integrate coinsurance and YRT administration platforms for combined projections, aggregate testing and disclosure.
Governance processes should be strengthened so that aggregate evaluation is performed at treaty inception and revisited periodically, with clear reporting to boards and senior management to guide capital and dividend strategies. Schedule S, statutory notes and treaty files should clearly document the aggregate testing approach, assumptions and oversight.
In summary, insurers should take immediate action: Begin with high-impact treaties that have significant reserves or are capital sensitive; update models without delay; negotiate amendments where possible; adjust capital and dividend policies to reflect higher reserves and RBC charges; and communicate early with regulators, auditors, rating agencies and investors. Time is of the essence.
Reinsurers may need to redesign offerings to comply with the clarified expectations, adjusting pricing and capital forecast for increased retained risk. Collaborative approaches with cedents can strengthen client relationships and competitive positioning. Advisors and industry associations remain critical for supporting treaty reviews, model validation, governance, and regulator engagement.
The SAPWG’s adoption of Ref #2024-05 and Ref #2024-06 clarifies the treatment of YRT premiums and co-YRT treaties under statutory accounting. Co-YRT treaties with linked provisions must be evaluated in aggregate, with reserve credit reflecting only the risk genuinely assumed by the reinsurer. In many cases, these structures will functionally resemble non-proportional arrangements, where risk transfer occurs primarily in adverse scenarios.
As of this writing, Ref #2024-06 remains under review by the FCC and has not yet been formally adopted. The FCC exposure draft introduces further clarity on effective dates, exemptions for prior regulatory approvals, and treatment as a change in accounting principle. The final version may include refinements to transition timelines or testing expectations, and companies should continue to monitor NAIC proceedings for formal adoption and implementation guidance.
The revisions may increase reserves, reduce surplus and raise RBC requirements for some insurers. The transition requires careful planning, comprehensive treaty review, documentation of risk-transfer assessments (particularly for older treaties), and targeted system and governance enhancements. Early engagement with reinsurers, advisors and auditors is essential to identify potential exposure, support regulatory reporting and implement actionable strategies.
Insurers and reinsurers that act proactively can maintain compliance, strengthen capital resilience and preserve confidence among regulators, rating agencies and investors. Prompt assessment of current co-YRT arrangements, identification of potential exposures and documentation of risk-transfer testing are critical. Delaying action limits time to renegotiate treaties, update models or build documentation, leaving insurers reactive and with less flexibility in regulatory or audit reviews.
