Term Writers Watching Work On CSO Model Reg
Consistency and flexibility are points of discussion that are being raised as term and universal life insurance writers and regulators discuss the use of a new CSO Table in calculating reserves.
The National Association of Insurance Commissioners draft model, Recognition of the 2001 CSO Mortality Table for Use in Determining Minimum Reserve Liabilities and Nonforfeiture Benefits model regulation, is currently being developed in tandem with a new 2001 CSO Table that is being readied for use.
Under discussion is a proposal that would require the same form of the 2001 CSO Mortality Table to be used for basic reserve and deficiency reserve calculations.
Either an ultimate or an ultimate/select option could be used for both types of reserves. The two options are different because a mortality slope in the ultimate/select table rises more steeply than the ultimate table. Consequently, if the ultimate/select version of the table is used for basic reserves, more reserves need to be set aside.
Companies have been choosing the form of the Table they will use since the 1980s, according to William Carroll, a life actuary with the American Council of Life Insurers in Washington.
Carroll says that, if for instance, companies have been using an ultimate table for basic reserves and select/ultimate tables with X-factors for deficiency reserves, they would now be required to use one table for both types of reserving.
X-factors are used to determine necessary reserves for the Valuation of Life Insurance Policies model regulation, or Guideline Triple-X. They are associated with the select table.
So, if companies are required to use one option, then they could face either higher basic reserves or lose the ability to use the X-factor.
For regulators, the matter is one of consistency, explains Larry Gorski, a life actuary with the Illinois insurance department. If a company is using a select/ultimate table to show that it doesn’t need to maintain deficiency reserves, then it needs to use the same table for basic reserves.
Gorski says that Triple-X is a temporary solution until a more permanent answer is developed. He also noted that some regulators are questioning use of X-factors in determining basic reserves.
Industry representatives will offer their input during a discussion to be held at the spring NAIC meeting that begins this week.
For term products with 10 to 20 year guarantees, there won’t be much impact on reserving but for products with longer guarantees, there could be more of an impact, says Doug Doll, principal Tillinghast-Tower Perrin in Atlanta. UL products with secondary guarantees could also be affected, he adds.
Use of ultimate/select for basic reserves will temper better mortality and lower reserving requirements reflected in the 2001 CSO Table, says Mark Abraham, vice president with Transamerica Insurance and Investment Group in Los Angeles.
Use of the ultimate option for deficiency reserves would “not be viable” because reserves would be so high, Abraham says.
If one option is required, then a 30-year, fully guaranteed product will be harder to offer, he adds.
Jimmy Atkins, executive vice president and chief actuary of the Indpendent Brokerage Group of GE Financial, Richmond, Va., says that if a company uses X-factors to modify the mortality used for alternative minimum reserves, it must use the select and ultimate table.
But different sections of the draft make different requirements including using the same table for both purposes, permitting the use of X-factors for deficiency reserves, and using the same table but reversing out the effect of X-factors, he adds.
If the same tables are used, the basic reserves would be higher at later durations, reducing some of the relief 2001 CSO is targeted to provide, he explains. One table may produce higher early year reserves but lower later year reserves and vice versa, he says.
“In the second case, applying the X-factors to the basic reserve calculation will in some cases substantially lower the basic reserves and make the whole reserve picture fair, reasonable and responsible,” he adds.
“So, until the contradictory language is resolved we cannot speculate on whether the proposed regulation will influence prices higher or lower,” Atkins says.
Reproduced from National Underwriter Life & Health/Financial Services Edition, March 11, 2002. Copyright 2002 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.