XXX and AXXX reserve financing
Arrangements through which US life insurers cede to captives the statutory reserves deemed excessive on term and universal life policies, financed with letters of credit or notes.
The US rules known as XXX, for term life insurance, and AXXX, for universal life with secondary guarantees, require statutory reserves calculated on very conservative assumptions. Insurers consider them redundant, since they exceed what their experience justifies, and costly in capital. They therefore ceded them to captives, often domiciled in states with flexible regulation, which fund the redundant portion with a bank letter of credit or a note issuance rather than with real assets. The arrangement frees capital but weakens transparency: the group's reported solvency depends on assets the ceding insurer's regulator cannot see. Regulators first set rules for those assets, then replaced the requirement with principle-based reserves.
In June 2013, the New York State financial regulator published an investigation that identified about 48 billion dollars of such transactions between New York life insurers and affiliated captives, which it called shadow insurance. The NAIC responded with Actuarial Guideline 48, effective January 1, 2015, which defines the assets eligible to back the economic portion of the reserves.
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