VA Reserving Choices Could Have Big Impact On Bottom Line
A dilemma over the letter versus spirit of the law and how it applies to reserving for variable annuities with guaranteed death benefits, could tip the scales of profitability downward for some VA writers, according to concerns expressed during a recent discussion of the issue.
In some cases, the reduction could be by hundreds of millions of dollars to the point of statutory insolvency, some insurance representatives contended.
Other possible effects, according to interviews with National Underwriter, include a reevaluation of acquisition prices for companies selling these contracts or blocks of this business as well as potential liability for accounting firms and actuaries that do not properly account for reserves needed for these contracts.
At issue, are VA s with cash values that have dropped because of stock market losses but which guarantee death benefits that now exceed those values. The concern is both how and whether to reserve for the possibility that large numbers of contract holders will withdraw most of the value of their contracts and maintain a small amount of that value strictly in order to retain the insurance death benefit.
The issue as discussed by regulators of the National Association of Insurance Commissioners, Kansas City, Mo., and insurers broke out into several parts: the likelihood that all contract holders would take such action; the requirement that such a scenario be used in establishing reserves; and the actions regulators should take, and legally are required to take.
During the course of discussion, it was argued that experience was showing that only a small number of policyholders were actually keeping very small portions of the cash value in their contracts in order to retain a death benefit. The ranges mentioned included “less than 1%” to “virtually no one” to 5% for one company.
There is disagreement over how likely it is that producers would recommend such action.
Producers could make such a recommendation, but there could be tax consequences that would offset the benefit, says John Morris, a senior consultant with PriceWaterhouseCoopers, Philadelphia. And, in some cases, companies will not permit partial 1035 exchanges, he says.
But producers could have the incentive to move money out of existing contracts and earn a commission if there are no tax barriers, says Donna Claire, a life actuary with Claire Thinking, Port Salonga, Long Island, New York.
Claire argued that even if reserving for a 100% likelihood may be overreserving, it is still the letter of the law.
Some companies have designed their products to comply with the law and “it is not fair to those companies if you make some companies follow it and others do not,” she said.