The Three Rs for Variable Products– RBC, Reserving and Regulation

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Variable insurance products with guarantees could be impacted by two actuarial projects to establish capital and reserving requirements.

The American Academy of Actuaries, Washington, is currently working on these projects at the request of the National Association of Insurance Commissioners, Kansas City, Mo.

Work on the C-3 Phase II effort is focusing on interest rate and equity risks of variable products and guarantees associated with these contracts.

Comment letters suggest that concerns are “practical rather than conceptual concerns,” according to Robert Brown, vice chair of the Academys life capital adequacy subcommittee.

For instance, it has become clear that it will be difficult to make changes for year-end 2003 and that a more likely timeframe for Risk-Based Capital changes for product guarantees is year-end 2004, Brown adds.

Companies are also asking questions about how specific products and product features will be affected by any changes. In the case of one comment letter, the question was raised about how a product with a guaranteed minimum withdrawal benefit would be affected, Brown cites as an example.

Insurance trade groups contacted by National Underwriter say they are waiting to see what the final work products look like.

“The NALC still believes this formula is not ready for prime time. It is a leaky formula,” says Douglas Barnert, representing the National Alliance of Life Companies, Rosemont, Ill. However, Barnert notes that the concept is a good one even though tables and simplified factors for the RBC formula still need to be developed.

The American Council of Life Insurers, Washington, has no position at present, says William Schreiner, a life actuary. There is some concern about the potential for volatility associated with the guarantees, he adds.

A related project that the Academy is just starting to work on, according to Tom Campbell, chair of the Academys variable annuity reserve working group, is reserving requirements for guarantees.

A discussion with regulators indicated some difference over approach.

But there was sentiment that work should proceed. It is anticipated that the reserving work can build on the RBC efforts, Campbell says. Scenario testing for RBC can also be used for developing formulas for reserving, he adds.

A report presented last month to regulators during the spring NAIC meeting addressed how changing reserves could interact with tax laws that use current statutory reserves methods, mortality tables and interest rates.

Issues to be discussed further include whether the scope of the project should calculate reserves for the entire contract or only the guarantees associated with the contract. Additionally, the issue was raised regarding whether reserves should be calculated using pre-tax or after-tax income projections and discount rates.

During a discussion of the project, the issue of the impact on current reserving for taxes was raised since, it was explained, it could affect current deductions for all or part of VA reserves that some companies take.

The choice of using a formulaic approach as opposed to an approach allowing the actuary more discretion was also raised by regulators. Four regulators offered opinions on the issue with three favoring permitting more actuarial judgment, while New York favored a more formulaic approach. Reasons cited included the fact that actuaries making the judgment are usually an employee of the company or a paid consultant, as well as the potential for balance sheet volatility.

Even as regulators and actuaries attempt to establish guidelines for variable products with guarantees, insurers are lobbying legislators to take a position that VAs and variable life products should be regulated by state insurance regulators rather than a joint regulation that would include state securities regulators.

The American Legislative Exchange Council, Washington, decided to support regulation of these products by state insurance regulators during its spring task force summit on March 28-29. The resolution is expected to receive full approval at the end of this month.

ALEC joins the National Conference of Insurance Legislators, Albany, N.Y., on this position.

The NAIC is still reviewing the issue and could take a position by its summer national meeting in June. A position would be helpful, says Carl Wilkerson, chief counsel, securities and litigation with the ACLI, who expects that the regulation of variable products at the state level is an issue that will surface again during the next legislative session.

The issue already has been raised three times by Kansas Securities Commissioner David Brant, who has argued that variable contracts should also come under the jurisdiction of state securities regulators. This stance prompted the ACLI and the National Association of Insurance and Financial Advisors, Falls Church, Va., to request that the NAIC assert that variable contracts fall under the exclusive state jurisdiction of insurance regulators.


Reproduced from National Underwriter Edition, April 14, 2003. Copyright 2003 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.