The NAIC’s Financial Condition (E) Committee (FCC) recently approved (with amendments) guidance on Statutory Accounting Agenda Item 2024-06 (Risk Transfer Analysis of Combination Reinsurance Contracts). These revisions may materially affect the accounting and risk transfer treatment of co-YRT and other combination reinsurance arrangements. This update builds on our previous paper, “Reinsurance risk transfer and reserve credit: Impacts of NAIC revisions on co-YRT and combination reinsurance.
The FCC amendments clarify how Appendix A-791 applies to combination structures and reinforce the principle that all significant risks must be transferred. While the core framework remains the same, the FCC has introduced new expectations for implementation and transition that insurers with impacted reinsurance agreements need to understand.
A critical point emphasized by the FCC is that these revisions represent a clarification of existing statutory accounting principles rather than an introduction of new principles. However, the committee has indicated that applying this clarification to existing contracts is to be treated as a change in accounting principle under SSAP No. 3 – Accounting Changes and Corrections of Errors. Insurers must make this change by December 31, 2026, which means preparing for formal accounting adjustments, disclosures, and potential surplus impacts well ahead of that deadline.
To ease the transition for legacy treaties, the FCC has acknowledged permitted practices and required disclosure. These are temporary, regulator-approved deviations from standard statutory accounting treatment, granted on a treaty-by-treaty basis. They allow insurers time to evaluate, remediate or phase out non-compliant structures without immediate disruption. Importantly, there is no blanket grandfathering, meaning there is no automatic exemption for all existing contracts; each arrangement must be reviewed individually, and any permitted practice must be approved by the domiciliary regulator. Permitted practices are a state-based regulatory mechanism, and not all states have the statutory authority to grant them. In those jurisdictions without such authority, insurers may have limited flexibility and may need to accelerate remediation or restructuring of non-compliant arrangements.
The timeline for full implementation is clear: year-end 2026. That gives insurers a finite window to work with regulators, apply permitted practices where appropriate, and develop plans to bring contracts into compliance. However, the guidance is effective immediately for new agreements and for newly amended agreements entered into on or after adoption of the revised guidance, although the timing expectations for newly amended agreements are not clearly defined. Permitted practices are intended as temporary measures, not permanent solutions, and should be accompanied by plans to bring contracts into compliance over time.
Both SSAP No. 3 accounting changes and permitted practices must be disclosed in statutory financial statements. Disclosures should explain the nature of the change, identify its financial impact and confirm regulatory approval. Transparency is critical so that other jurisdictions and stakeholders can assess solvency implications.
Finally, the FCC reaffirmed that analytical tools such as cash-flow testing, while useful, do not override the statutory risk-transfer requirements. Permitted practices are intended to provide limited flexibility for managing the practical realities of legacy structures during the transition period. They are not a mechanism to circumvent core principles or create inconsistencies across states, and are generally expected to be applied in a manner consistent with the underlying statutory and regulatory requirements.
For insurers, these developments underscore the importance of early engagement with regulators and proactive planning. The revised guidance does not alter the fundamental risk transfer framework discussed in our original paper. As outlined in that paper, the framework requires (i) coinsurance and YRT components to be evaluated in aggregate, with split testing no longer permissible, (ii) YRT premiums to be substantively reasonable, and (iii) functional non proportional features to be assessed using best estimate testing. The revisions instead clarify and reinforce how this framework should be applied in practice, addressing areas where interpretation and implementation had previously varied.
In particular, the updated guidance formalizes how combination treaties should be evaluated as an aggregate arrangement, confirms that these requirements are effective immediately for new and newly amended contracts while providing transitional relief for legacy treaties through year-end 2026, and introduces the structured use of permitted practices as interim measures. Regulators have also been clear that contracts previously filed but not formally approved, such as those submitted for informational purposes or under file-and-use procedures, should be revisited with the domiciliary regulator to confirm whether formal approval or a permitted practice is required under the updated treatment.
Key areas for early review and planning include:
Addressing these areas proactively will help ensure alignment with regulatory expectations, support a smooth transition for legacy and new contracts, and reduce the risk of compliance gaps.
