Could RILAs, Risk Transfers Squeeze Life Insurers in a Crisis?

State insurance regulators are starting to think about whether some types of annuity separate accounts could affect life insurers’ need for quick cash in an economic crisis.

The Macroprudential Working Group, an arm of the National Association of Insurance Commissioners, mentions separate accounts associated with registered index-linked annuities and pension risk transfers in a new draft of the 2023 liquidity stress framework.

The final version of the framework will affect insurers’ analysis of their need for cash and their access to cash, and how those might change during periods of economic stress.

What it means: Adding RILAs and pension risk transfers to liquidity stress testing could affect how regulators or others think about RILA stability.

Regulators could also use any new RILA stress test results to address concerns of the Federal Reserve Board about life insurance company liquidity. The board suggested in a financial stability report posted Friday that insurers may be selling too many products that give customers too much ability to pull cash out quickly during a crisis.

The testing and thinking could affect how well the insurers back clients’ life insurance policies and annuities during a market crash or other crisis.

The background: In the past, regulators have asked insurers to mention only the cash-flow impact of guaranteed benefits in liquidity stress testing, or LST, calculations, because of a belief that only guaranteed benefits could lead to liquidity stress.

Now, in the draft 2023 framework, officials have penciled in a reference both to RILAs and to pension risk transfers.