MMMM Good, Regulators Say, As VA Benefit Guideline Simmers

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Four years and numerous drafts later, an actuarial guideline that regulates reserves for guaranteed living benefits in variable annuities looks like it finally has legs, according to those working on the project.

The draft, formally known as actuarial guideline MMMM or quad M, is being put on a fast track by regulators at the National Association of Insurance Commissioners, Kansas City, Mo., with a conference call scheduled in the next few weeks. The tentative plan is to move the model through both the Life & Health Actuarial Task Force and the Life “A” Committee during the call and then fully adopt the guideline during the winter NAIC meeting in December.

The draft seeks to establish reserving guidelines for variable deferred and immediate annuities. However, it does not apply to group annuity contracts that are not subject to the Commissioners Annuities Reserve Valuation Method.

Guarantees that are covered under the guideline include guaranteed minimum accumulation benefits, guaranteed minimum income benefits, guaranteed minimum withdrawal benefits and guaranteed payout annuity floors benefits.

The interpretation of the NAICs Model Standard Valuation Law is intended to be temporary until a permanent solution is implemented. If all goes as intended, the guideline would become effective on Dec. 31, 2002 and be in effect until Jan. 1, 2006 at the latest.

Interviews suggest that a key part of the guideline is an asset adequacy analysis requirement in the draft. In addition to a general asset adequacy test, there is also a stand-alone asset adequacy analysis of the VAGLB reserve.

The NAICs valuation law was written at a time during which the development of todays products was not contemplated, says Steve Preston, chair of the American Academy of Actuaries Life Practices Council, Washington, and a co-chair of the project with Tom Campbell.

Preston says making sure that reserves are adequate is important to regulators and that there is more comfort with an asset adequacy approach than with formulaic reserving requirements.

If the model is adopted by year-end, more focus can be placed on developing a solution for risk-based capital requirements for VAGLBs and related features, he adds. RBC is a capital requirement that insurers must follow to ensure that they have the financial wherewithal to meet any risks that arise.

Donna Claire, a life actuary with Claire Thinking, Port Salonga, Long Island, says important features of the draft include testing the benefits themselves on a stand-alone basis and the flexibility of reserving depending on the benefit being reserved for in each contract form.

However, the draft may be a de facto guideline for many insurance companies, according to interviews. The reason is that the California insurance department has bulletin 2000-3 on its books, that states that the latest draft of the actuarial guideline is the guidance that insurers need to follow. So, if the model is adopted, it will be followed. Until that point, the draft is the guidance that insurers must follow, the bulletin states.

The reserves set forth in the guideline bring “adequate comfort,” according to Sheldon Summers, a life actuary with the California insurance department.

The California bulletin does not include no-lapse guarantee provisions contained in variable life insurance policies.


Reproduced from National Underwriter Life & Health/Financial Services Edition, September 30, 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.