New AOMR Draft Eliminates Exemption For Small Companies
Insurance regulators voted up a draft of a model regulation that would require all companies that want to use their domicile state’s actuarial opinion of memorandum in states where they have product filings to perform an asset adequacy analysis test.
Regulators adopted the model after agreeing that they could withdraw their approval if they decided they needed to do so.
The draft of the Actuarial Opinion and Memorandum Regulation that was unanimously adopted by the National Association of Insurance Commissioners’ “A” and “B” committees, one of the final steps before full adoption by the organization, eliminates an exemption for small companies.
The draft model is supported by regulatory actuaries and the Life Practice Council of the American Academy of Actuaries, but is opposed by the American Council of Life Insurers and the National Alliance of Life Companies.
The draft eliminates an exemption for a small company with under $100 million in assets from performing an asset adequacy analysis as part of its AOMR. Instead, small companies would be held to the requirements of Section 8 of the model with large companies.
The actuarial opinion is an actuary’s statement that reserves are adequate based on an asset adequacy analysis and actuarial standards of practice.
Life insurers argued that the requirement would place an undue cost on small companies to hire outside actuarial staff needed to perform the asset adequacy tests. The cost could be a minimum of $30,000 for companies under $100 million, according to Scott Cipinko, NALC executive director.
Cipinko told regulators at the “A” Life & Annuities Committee that benefits from requiring companies to perform such testing would not justify the cost. There has not been a rash of insolvencies, he added. “The cost of overregulation is a cost that we cannot and should not bear.”
He added that they needed to take a cue from NAIC leadership and its effort to simplify regulation to help insurers remain competitive. “They are trying to keep us in business,” he added.
Utah Commissioner Merwin Stewart assured Cipinko that no regulator wanted to burden small insurance companies.
The National Fraternal Conference of America, Naperville, Ill., represented by Douglas Barnert, argued for an exemption for fraternal organizations.
Barnert said fraternals are not subject to guaranty funds. “They don’t look to the government for solutions and they don’t look for expensive solutions to be put on them.”
Responding to concerns expressed by regulators during the draft’s discussion that some fraternal organizations are offering more complex interest-sensitive products, Barnert said those fraternal organizations would not be eligible for the exemption.
Linda Ruthardt, Massachusetts insurance commissioner, said she has not heard any concerns raised by fraternals in her state. “The fraternals in Massachusetts are not shy and retiring,” she added.
Mike Batte, chair of the Life & Health Actuarial Task Force, ventured that the work is being done by many companies already and, consequently, he did not think that there would be an additional expense.
Regulators, Batte added, are not asking fraternals to submit to multi-interest rate tests of stochastic reserves but to guidelines of the AAA. “This is no overkill. This is the best that we can do without changing the Standard Valuation Law.”
William Schreiner, a life actuary with the American Council of Life Insurers in Washington, said the AOMR issue could be addressed by amending one paragraph in the SVL. The wording could be changed by moving away from a state of filing approach to a more uniform approach such as a domestic filing or Codification approach, he said. “It appears that it would be a good time to raise the issue.”
In a time of more products with more flexible features, a fixed methodology for calculating reserves that was created in “simpler times” raises problems, he added.
The whole original purpose of the filing, according to Schreiner, was to move toward a single domestic opinion, but the draft leaves open a number of suggestions about how a commissioner might undertake accepting these opinions.
The ACLI, according to Schreiner, has never formally opposed eliminating the Section 7 small company exemption, although many of its smaller companies are concerned over the issue.
Reproduced from National Underwriter Life & Health/Financial Services Edition, July 6, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.