Annuity writers and reinsurers have a narrow window to comply with new regulations that will reshape how non-variable annuity risk, reserves, and capital are measured. The new framework went into effect at the beginning of the year, with a mandatory full transition by January 1, 2029.
Principles-based reserving for non-variable annuities — VM-22 — mandates comprehensive modeling of assets and liabilities, and the ongoing disinvestment and reinvestment of cash flows as benefits are paid and assets mature. Unless products pass exclusion tests, statutory reserves must be calculated using a stochastic framework — evaluating results across many possible economic scenarios — supported by the newly adopted Generator of Economic Scenarios (GOES).
The rules are part of an ongoing effort by regulators to reassess how companies measure and manage risk. The result is a shift away from one-size-fits-all, rules-based formulas toward frameworks that more closely reflect the economic profile and experience of a company’s business.
This trend has taken shape gradually over the past decade, and will continue with a revised C3 capital framework expected later in 2026 or 2027.
Forward-thinking companies see this new framework not merely as a regulatory mandate but as a strategic opportunity. The shift encourages in-depth strategic analysis and a surge in advanced solutions that reduce asset-liability mismatch, enhance risk-adjusted returns on capital, and facilitate balance sheet transformation.
Three strategic priorities annuity writers and reinsurers must get right under VM-22
Companies must focus on three strategic initiatives to succeed under VM-22: asset optimization, capital management, and product diversification.
Optimize assets to strengthen asset-liability management
Asset and asset-liability management (ALM) modeling capabilities often present a number of challenges. The flow of asset data from investment teams tends to be suboptimal. Complex assets are frequently oversimplified in projection models, while reinvestment strategies are often misaligned with company practices due to modeling limitations. Although the significance of strategic asset allocation and robust ALM has been clear for Bermuda reinsurers, few US entities have ventured beyond the actuarial guideline (AG) 53 framework established in 2022.
Enhanced modeling of ALM strategies is essential under VM-22. Risk costs from asset-liability mismatches now affect the balance sheet primarily through extreme economic scenarios rather than average conditions. Simplified reinvestment and disinvestment assumptions can increase risk, especially given VM-22’s conservative reinvestment constraints and the heightened interest-rate volatility embedded in GOES.
Companies that view asset optimization as a core strategic capability — one that requires close coordination between actuarial, investment, and finance functions — will gain a competitive advantage. By adopting a strategic asset allocation framework, companies can minimize mismatches between asset and liability cash flows, thereby reducing exposure to economic risk and lowering the total assets required to support liabilities. Companies that go one step further and employ a robust hedging strategy will be better positioned to mitigate fluctuations in economic risk and reduce reserve volatility.
Leverage reinsurance and capital strategy via capital management
Onshore and offshore reinsurance has been a critical strategy for risk mitigation and balance sheet management. Currently, fixed annuity products are reserved under AG 33 and AG 35, which are often viewed as punitive for products with significant guarantees due to stringent worst-path testing requirements. This has driven companies to optimize their balance sheets through reserve financing solutions and offshore reinsurance, allowing liabilities to better reflect their expected economic cost.
VM-22 will reshape these practices. It necessitates modeling all cash flows emerging from reinsurance treaties, including experience refunds and recapture provisions. This shift could materially alter the perceived benefits of traditional reinsurance structures.
Companies using offshore affiliates may need to consider VM-22 reserves when determining collateral requirements. Improvements to US statutory reserves could free up trapped capital while preserving other benefits associated with Bermuda or Cayman entities, regardless of reciprocal jurisdiction status.
Given the retroactive potential of VM-22, existing treaties may face challenges; their economic value might no longer hold, yet expensive exit strategies would be untenable. Regulators have expressed interest in adjusting the relief granted by reinsurance through the recent adoption of AG 55 and revisions to risk transfer evaluation for combined reinsurance, emphasizing the need for careful consideration of balance sheet management strategies.
Taken together, these changes require leaders to reevaluate the role of reinsurance in their capital strategy. They must determine whether current treaties and liability blocks remain economically sound, how VM-22 affects trapped capital, and where reinsurance should be redesigned to support balance sheet efficiency for the long-term.
Diversify products to enhance portfolio strategy
VM-22 provides companies with a more nuanced understanding of how different products influence balance sheets, making product diversification a valuable strategic lever. Depending on the business mix, valuing deferred annuities with offsetting risk profiles may reduce aggregate reserves and create meaningful capital efficiency gains.
Realizing these benefits, however, depends on how companies implement VM-22 across modeling and aggregation processes. Under VM-22, inaccurate or overly simplified treatment of renewal rates can unintentionally lead to distorted earnings across business lines and obscure the true economics of the portfolio.
To avoid these pitfalls, corporate risk mitigation practices must be rigorously modeled to reflect how products are managed under stress, across scenarios, and in aggregate. Ultimately, product strategy, pricing assumptions, and modeling decisions should be aligned. Companies need to actively evaluate their sales mix and recognize that VM-22 elevates product diversification from a tactical consideration to a distinct competitive advantage.
Why VM-22 demands modern, integrated modeling infrastructure
A robust and integrated modeling infrastructure is essential for acting on these strategic imperatives. Existing liability models and their surrounding architecture may be inadequate for a principles-based reserving framework. Many companies struggle to seamlessly model liabilities and assets within a unified system, often resulting in overly complex models that cannot efficiently process large datasets and yield meaningful analytical outputs. Under a stochastic ALM framework like VM-22, this may lead to significant runtime costs and a limited capacity for the in-depth analysis required to identify result drivers.
VM-22 exposes the limitations of existing modeling environments and makes modernization essential. Some companies are opting for model conversion, replacing outdated software with solutions better suited for large-scale model runs that integrate asset and liability interactions. However, that can be costly. Homegrown solutions that enhance capabilities without disrupting current operations are also being explored by companies. We anticipate increased interest in innovations that accelerate runtime by transforming how existing models operate and enhancing the interaction between asset and liability frameworks, often leveraging specialized asset models developed in collaboration with investment teams. While these transformative efforts typically have long-term objectives, they can provide value incrementally by prioritizing urgent challenges.
Companies should proactively upgrade their modeling capabilities, not only to meet VM-22 requirements but to support strategic decision-making across asset strategy, reinsurance, and product design. Those that invest early in a scalable, integrated modeling architecture will be better positioned to manage volatility and respond quickly as the regulatory environment continues to evolve.
It is time to act now on VM-22
While VM-22 signifies a notable shift in the insurance landscape, offering industry players the opportunity to modernize capabilities, its real value lies in what organizations choose to build around it. Those that treat this framework as a catalyst for broader modernization efforts and collaboration across various functions will secure a clear competitive edge. If your company has not yet begun evaluating the strategic implications of VM-22 on its overall operations, now is the time to start.