New annuity guidelines: What this means for insurers

Takeaways:

• Reserve requirements now more flexible
• Lowers incentives to send assets offshore
• Some have adopted early, but a majority still have not

A new standard for life insurance and annuity companies that allows them to account for economic uncertainty launched at the start of 2026.

VM-22, developed by the National Association of Insurance Commissioners (NAIC), is intended to be completely adopted by all life and annuity companies by the end of 2028. VM-22 is short for Section 22 of NAIC's Valuation Manual. The new guideline revises interest rate requirements for reserves on single premium immediate annuities and similar contracts.

VM-22 moves the industry away from the deterministic reserving framework it had been using, toward a stochastic asset-liability management (ALM) framework, said Rick Hayes, senior director, insurance consulting and technology at WTW, and co-author of an analysis of the guidelines.

"The intent from the NAIC is that this reserving methodology is more reasonable and might retain more business onshore, as opposed to insurers seeking the Bermuda or the Cayman Islands as an outlet to reduce capital strain and reserve strength," Hayes said.

VM-22 allows insurers to reflect their own assumptions in reserve calculations, in contrast with the previous "very prescriptive, very conservative methodology," said Karen Grote, co-author of the analysis, and managing director, insurance consulting and technology at WTW.

Commissioners' Annuity Reserve Valuation Method (CARVM) and VM-21, previous guidelines from NAIC, use prescribed methods and assumptions. Under VM-22, Hayes and Grote wrote in their guidelines, reserve levels may increase or decrease as markets shift, which can affect capital planning, earnings volatility and asset-liability management.

In its May 6 earnings call, Prudential chief financial officer Yanela Frias acknowledged the flexibility provided. "The current proposed version of VM-22 is definitely a helpful step toward a more economic principle-based standard," she said. "The relative benefits of Bermuda would be lower based on the current proposal. But our current view is that Bermuda continues to be an attractive option for us. We'll continue to assess that over time as the VM-22 rules are finalized."

Although VM-22 has already been introduced, there may still be some changes to the guidelines. VM-22's investment guardrails, which require insurance companies to use conservative investment strategies, may be eased for certain annuity products, according to Grote. "One proposal would apply to pension transfers, which is just one type of product that's incorporated in VM-22," she said.

About one quarter of the companies subject to VM-22 have it in place so far, according to a WTW survey. "They would be considered early adopters, with the rest trickling in later," Grote said. "Most are going to fall somewhere in the middle, probably in that 2027, early 2028 timeframe."

Companies that are holding out need to adjust their practices before committing, according to Hayes. "They are seeing this as less favorable to the business they're writing now, so they're willing to wait a little bit longer before they go effective, or they may not have had the runway to get their models stood up in time," he said. "They're just not there from a modeling complexity standpoint. There are different decision points that companies are taking on this."