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Regulators Say Work On CSO Tables Must Reflect Underwriting Gains

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Work on a new actuarial table and a model regulation that would allow the table to be used must reflect the fine-tuning that underwriting has undergone since the development of the last table 20 years ago, regulators insisted during the winter meeting of the National Association of Insurance Commissioners.

The need to reflect more precise underwriting must be considered both in the development of a 2001 Commissioners Standard Ordinary Table and in the development of an accompanying model regulation, according to Larry Gorski, chief actuary with the Illinois insurance department.

The issue is one of fairness, he explained. When the 1980 CSO Table was developed, there were fewer classes. But, today, with more specific risk classes, it is important to make sure that no class is assuming more reserving than is actually needed.

Gorski said that underwriting has been refined and new risk categories such as super select are now commonly used by insurers. While the Table being worked on may be the best possible actuarial table given available experience, Gorski noted that underwriting practices differ by company.

Increasing reserve margins in the Table to account for different underwriting practices would not be a good response because it would raise the cost of insurance for consumers, Gorski said. However, he did say that requiring a company to submit a Section 8 actuarial opinion would be a “linchpin” in addressing this issue.

A Section 8 opinion is an opinion by an actuary that measures the adequacy of a companys reserves using the CSO Table. The opinion can be done in a number of ways, including cash flow testing, a gross premium valuation (a type of cash flow test without assets), or a loss ratio analysis. The opinion is part of a requirement in the Actuarial Opinion of Memorandum Regulation that regulators developed.

During the discussion, it was noted that a Section 8 opinion is important because a lot of companies with super-preferred classes did not contribute data for the Table. In fact, of 16 companies contributing data to the study, four companies provided 60% of the information.

The mix of product may also have changed since work was done on the 1980 CSO Table. For example, Frank Dino, a life actuary with the Florida department of insurance, noted that term insurance is more popular now with consumers. While a consistent approach is being taken in developing the new Table, there is more preferred underwriting, Dino concurred.

Mike Batte, chair of the Life & Health Actuarial Task Force, said that since improved mortality would be reflected in lower reserving margins in the new Table, regulators want to make sure that there is proper reserving by companies and proper use of the Table.

Batte added that he believes that the Table and accompanying regulation could be completed by LHATF and advanced to the Life “A” Committee as early as the NAIC Spring 2002 meeting in March.

Batte said the development of the Table is well along and regulators will now focus on the regulation as work on the Table continues.

Indeed, Faye Albert and Paul Skalecki, who have been spearheading the American Academy of Actuaries development of the CSO Table, outlined the progress.

Albert said she believed the Tables had largely addressed concerns raised by regulators. Among those concerns were the fairness of the margins and resulting premiums by gender, smoking status and issue age.

As the regulation is developed, according to Batte, the large reduction in margins in the new Table is raising concerns about adequate reserving for non- and sub-standard insurance such as guaranteed issue products and products with simplified underwriting.

But Bill Carroll, a life actuary with the American Council of Life Insurers in Washington, said that work on substandard product reserves must be developed very carefully because “the IRS is very leery about substandard reserves.”

Indeed, Jim Van Elsen of Van Elsen Consulting in Pella, Iowa, said the tax implications are just one of several reasons why the CSO Table is such an important project. The Table will have implications for taxes, nonforfeiture values, and reserving as well as the definition of insurance. It affects “virtually every company in the life insurance market,” he added.

On the issue of taxes, Van Elsen said it is important that reserving requirements be done in a way that is tax deductible for companies. “I dont mind setting up the extra reserves as long as they are deductible. There would be a tremendous cost for carrying reserves that cant be deducted.”

Van Elsen added that it is better to require an actuary to come up with an adequate mortality assumption and reserving up front rather than pick up the reserves in a Section 8 opinion where they would not be tax deductible.

Consequently, “it is incredibly important that the Table to be done correctly,” Van Elsen said.

Reproduced from National Underwriter Life & Health/Financial Services Edition, December 17, 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.

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